Financial education and advice needed to understand new pension changes

14th October 2014

The Budget changed the face of retirement options for members of defined contribution (DC) schemes, with perhaps the most radical pension proposals of our lifetime.  The new pension changes will come into force from April next year and remove many restrictions on how pension benefits can be taken from age 55.

There are a number of issues which need to be considered with a drastically changing pension landscape. Not least because employee behaviour and that of consumers generally is often flawed when making what for many will be the largest financial decision of their life. Over the last few years there have been a number of research projects and government consultations based on behavioural economics. Results show that in general DC members;

Don’t:

•        understand the implication of information provided
•        translate financial information into rational decision making
•        relate short term decisions to long term consequences

They do:

•        default to the path of least resistance
•        apply simplified thinking to complex decisions
•        vastly over estimate their likely retirement income

The Budget 2014 introduced a number of changes allowing people greater freedom with their retirement income. However, with choice and flexibility comes potential confusion and poor decision making. The key points which the new legislation will introduce include:

Flexi Access drawdown with:

• no maximum cap on income withdrawal
• no minimum income requirements for new drawdown funds from April 2015
• 25%Pension Commencement Lump Sum (PCLS) plus marginal tax rates on income

In essence, a ‘do what you want when you want’ regime for pension savers age 55 and over.

The removal of restrictions on lifetime annuity payments:

• decreasing income payments allowed
• no restriction on guarantee periods
• improved lump sum death benefits

Significant amendment to pensions ‘death taxes’:

• under 75, unused pension funds can be bequeathed entirely free of tax
• over 75, unused funds can be bequeathed as an income subject to marginal rate of tax

The need for those transferring from Defined Benefit (DB) schemes to take advice from a regulated adviser independent of the scheme.

Uncrystallised funds pension  lump sum introduced (UFPLS):

• allows a single or series of lump sums to be taken directly from uncrystallised pension savings e.g. workplace pension schemes
• 25% tax free, balance taxed at marginal rate

• A permissive statutory over-ride to scheme trustees and managers to facilitate the new rules

Jonathan Watts-Lay, Director, WEALTH at work comments, “Greater flexibility to decide how to take income from pension savings is fantastic news for savers, but without the right financial education and advice it could leave them incredibly vulnerable to making poor decisions.”

To talk to Jonathan about the pension changes, please leave your details below.