On 19th March 2014, the Chancellor, George Osbourne, announced a series of radical reforms to the pension system, giving members of retirement savings plans more freedom over how they receive their benefits.
The changes have been proposed in two separate stages; the first interim changes are effective from 27th March 2014, and the second from 1st April 2015.
These changes and how they may affect you are detailed below and are also summarised in the Budget 2014 Retirement Changes Factsheet;
Effective 27th March 2014
Trivial Commutation- taking all your retirement savings as a cash lump sum
Trivial commutation allows you to take all your retirement savings as a cash lump sum from the age of 60; the first 25% is paid tax free, and the remaining 75% is taxed as income.
Previously, this option was only available if the sum of all your retirement savings (including your Experian pension) was less than £18,000. From 27th March 2014 this option will now be available to individuals whose retirement savings are less than £30,000, and therefore will be available to many more members.
Small Pot Commutation- taking some of your retirement savings funds as a cash lump sum
This is similar to trivial commutation, and previously allowed members with individual, separate pension pots of less than £2,000 to take each fund as a cash lump sum. The lump sum is taxed as above, and the individual has the option to use small pot commutation a maximum of twice.
The 2014 budget means that small pot commutation can now be used for individual pots of up to £10,000 (a significant increase to the previous maximum pot of £2,000), and individuals have the option to use small pot commutation a maximum of three times (ie up to £30,000 in total).
Drawdown & Flexible drawdown- leaving your funds invested whilst taking some as a cash lump sum
Drawdown allows you to leave your retirement savings invested whilst drawing cash sums on an annual basis from age 55. This works differently to a traditional annuity where your pension pot is used to provide you with a guaranteed income for the rest of your life. The amount you can take from your retirement savings fund each year through drawdown is capped at a figure set by the government; the changes being introduced from 27th March mean that you will be able to take slightly more from your savings each year as a part of a capped drawdown.
Flexible drawdown (as opposed to capped drawdown) places no limit on the amount you can take from your retirement savings fund whilst leaving it invested, however, previously you would need to already have a secure retirement income of £20,000 (including your state pension) per annum for this option to be available to you. Now, you will only need to have a secure retirement income of £12,000 (including your state pension) per annum in order to utilise the option of flexible drawdown.
Effective April 2015
No withdrawal limits!
The most controversial and significant change proposed in the 2014 budget, is that the limits and caps on accessing your pension pot at retirement will be completely removed and members will be able to take their entire retirement savings as a cash lump sum from age 55 (25% tax free and the remaining 75% taxed as income, at their marginal rate). This proposal will require changes to primary legislation and will follow a consultation period before the changes are implemented next year.
As a result of the above proposal the Chancellor has proposed some further changes to the way in which retirement savings are governed. These changes are subject to consultation and may not be enacted in this form or at all.
If you have retirement savings outside of the Experian Retirement Savings Plan (ERSP) which are ‘final salary’ benefits, in future you may be unable to transfer these benefits into the ERSP or similar ‘money purchase’ arrangements. The Government is concerned that members of these schemes could be encouraged to transfer valuable pension benefits to money purchase arrangements to take advantage of the removal of the limits and caps on accessing your pension in these schemes. The Government believes this could have a detrimental impact on schemes which provide final salary benefits and the wider economy.
An increase in the minimum retirement age has also been proposed from the current age 55, to age 57 in 2028. It is proposed that the minimum retirement age will then be maintained at 10 years prior to state pension age going forward.
Help on Retirement
Employers will in future be required to offer members free and impartial face-to-face guidance on retirement.
As a member of the Experian Retirement Savings Plan, the Company currently pays for you to receive advice and guidance on your options on retirement from Hargreaves Lansdown, which as you’ll note from the above, have become substantially more flexible following the 2014 budget!
You will be advised of any changes to the guidance offered to retiring members in due course.