The headline from an article in The Telegraph may cause some concern. But what should pension trustees do when faced with a request from a member that wants to take advantage of ‘Pensions Freedom’? For a start it may be that your scheme doesn’t allow (or cannot allow) individuals to undertake a pensions freedom transfer, but if your scheme does allow members to undertake a transfer then here is a Q&A about Pensions Freedom, what the basic reforms are and how they may affect your scheme and its members.
- What has changed?
For the first time, individuals will be allowed to take up to 100pc of their pension money, right away.
- When did the change take effect?
From Monday, 6 April 2016.
- Will I have to buy an annuity?
No one will have to buy an annuity – but buying one is still an option.
- What about my company pension?
If you have a “defined contribution” pension, you will be eligible for the pension freedoms when you reach age 55.
- What if my pension is ‘defined benefit’ (otherwise called ‘final salary’)?
Some final salary pensions are eligible for the freedoms, but you will need to transfer the money to a suitable scheme first. Be careful doing this as guarantees will be lost.
- What if I’ve got a ‘final salary’ pension from my work as a civil servant?
In some cases you can transfer the benefits to another scheme, as above. But some public-sector schemes, known as “unfunded” arrangements, will be excluded.
- What if I’m already receiving my work pension – can I make lump sum withdrawals?
Probably not. If you’re already receiving an income that is likely to mean you have already bought an annuity or are taking income from a defined benefit‑type scheme.
- What about my state pension entitlement?
Your state pension will be unaffected.
- What if I want to retire abroad?
In certain circumstances you can move your pension pot with you. It depends on the country, and on the pension.
Brexit update: No one is sure how pensions will be affected when the UK and the EU ‘divorce’
- Which countries offer the most generous regimes?
Cyprus, Portugal and France are examples of where your pension money might be taxed more favourably than in Britain. But you’d need to be resident in your chosen country for tax purposes. Take advice from a specialist.
Brexit update: See above
- What if I’ve already bought an annuity?
Once you’ve bought an annuity you currently cannot get your money back.
- But isn’t there a way to swap my annuity for cash?
The Government has announced that from 6 April 2017 people will be allowed to sell their annuities if they can find a buyer. The secondary annuity market will be a place that pension investors who have previously bought an annuity will be allowed to sell their guaranteed income in exchange for a lump sum.
In its regulatory impact assessment, HMRC has indicated a government expectation that 300,000 people will choose to take up this option. There are around six million annuities in payment, held by around five million retired investors.
As previously stated in the Budget, the Treasury expects a tax windfall of £960m in the first two years of the new secondary annuity market (April 2017 to April 2019), though it also predicts a revenue loss in subsequent years meaning a net gain to the Chancellor of £665m.
Brexit update: Sorry to put a spanner in the works here, but with the uncertainty regarding the UK economy together with George Osborne’s warning that tax rises and more government cuts can be expected as a result of the EU referendum result then we cannot be sure that the secondary annuity market will actually commence as there may not be anyone that wants to ‘buy’. Put simply a marketplace can only exist if there are both sellers and buyers. This has to be a ‘watch this space’ response.
- I’m not yet 55. When will I be able to benefit?
Only people aged 55 and over are eligible for the freedoms.
- I’m in my 20s. Will I be able to take money from my pension at 55 or will this age threshold rise?
If you are under 23 it will be 59, because the private pension age will be linked to the state pension age.
Whatever the trustees decide to do, they:
- must take care that they DO NOT offer financial advice to a member. In fact trustees may wish to insist that a member receives ‘suitable’ financial advice before and during any transfer that they want to undertake.
- MUST adhere to the scheme rules
- MUST ensure that the scheme remains viable. If your scheme is in deficit it may be that you cannot allow transfers as they would put the scheme in financial jeopardy.
As with all things to do with pensions, whilst we may know the questions, the answers are not as easy to find. Brexit has undoubtably complicated matters but, hopefully, this is only a short-medium term issue. In the meantime, its important that trustees keep themselves informed and maintain communication with their members.
Caledonian Trustees Limited is a privately-owned professional independent trustee company, based in Essex, UK. Our clients include household names and some that you may never have heard of but big or small we pride ourselves in offering a flexible, cost effective and relevant service each and every time . The Caledonians have many years of experience in pension, employee benefit consultancies and life companies which means we understand the challenges that you face.
Click here to contact the Caledonians or call us on 01371 829054
Caledonian Trustees Limited. The Sheiling, Oak Hill, Wethersfield, Essex. CM7 4AJ
The Telegraph: Pension freedoms day: 101 questions answered
Pensions World: 300,000 people expected to sell their annuities