Millions of people will benefit from a right to free and impartial guidance on how to make the most of the new pensions choices that come into effect in April 2015, Chancellor of the Exchequer George Osborne announced today. This follows the Westminster government’s consultation on how best to deliver the radical changes to how people access their pensions announced at the Budget.
In total 18 million people will be able to benefit from the changes to pensions should they wish to do so.
From April 2015 300,000 individuals a year with defined contribution pension savings will be able to access them as they wish when they turn 55 – subject to their marginal rate of tax.
This is the biggest change to how people access their pensions in almost a century, removing the effective requirement for many to purchase an annuity.
The consultation since the Budget has shown that these changes have been overwhelmingly well received, with individuals supporting greater freedom and choice, and the pensions and insurance industry ready for the challenge of creating new, flexible products, which better suit individuals’ needs.
The government’s response to the consultation today confirmed that:
- the guaranteed guidance on pensions choices will be provided by independent organisations rather than pensions schemes or providers
- even more people will be able to benefit from the new pensions flexibilities as the government will continue to allow individuals to transfer from private sector defined benefit schemes to defined contribution pension schemes – subject to two important new safeguards
- a new override will be introduced so that pensions schemes are able to offer individuals flexible access to their savings and the pensions tax rules will be amended to allow providers to develop new retirement income products that are tailored to the needs of individual consumers
Chancellor of the Exchequer, George Osborne, said: “It’s right to support hard working people that have taken the long-term decision to save for their future and I’m pleased that the responses we had to our proposals on making pensions more flexible have been overwhelmingly positive.
“We’re making sure that people have the right support to make their own choice about how best to finance their retirement and I’m pleased to confirm that everyone with defined contribution pension savings reaching pension age will get free and impartial guidance on their range of available choices at retirement.”
The government wants to ensure that guidance is trusted by consumers, and the vast majority, including most of the financial services industry who responded, said that consumers would not trust guidance given by a person or organisation with a vested interest in selling a financial product or service. It will bring together a range of delivery partners, including the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS), which already provide guidance and support to consumers.
People with private sector defined benefit savings will continue to be able to transfer to defined contribution schemes (excluding pensions that are already in payment), alongside two new safeguards to protect both pension schemes and the individuals transferring out.
Guidance will be offered through a broad range of channels, including web-based, phone-based as well as face-to-face, and to remain free to the consumer will be funded by a levy on regulated financial services firms.
The Financial Conduct Authority (FCA) have also today published a paper which consults on the elements of the guidance guarantee for which the FCA will be responsible: setting and monitoring the standards with which guidance providers will have to comply, making and enforcing rules on how contract-based schemes signpost to the guidance services, and adjusting the FCA’s existing conduct rules to support the introduction of the guidance guarantee and in response to the new flexibilities.
Two new safeguards are being introduced to protect both individuals and pension schemes in relation to defined benefit to defined contribution transfers: a new requirement for an individual to take advice from an impartial financial adviser regulated by the FCA before a transfer can be accepted; and, new guidance for trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.
HM Treasury also published the following guide today:
Pension Reforms: Eight things you should know
Understanding the pension system can be complex sometimes. We’ve explained how the new system will work and what it means for you.
1. We’re completely overhauling the system so you can take your pension how you like
In order to create greater choice and flexibility for people who have saved hard for their pension, we announced at Budget 2014 a series of changes to how people access their pension.
From April 2015, no matter how much you decide to take out from your pension after retirement, you will be charged the normal rate of income tax you pay on your salary (so either 0%, 20%, 40% or 45%) rather than the previous tax charge of 55% for full withdrawal.
2. 25% of your pension pot will remain completely tax-free, as it was before
You’ll be able to access 25% of your pot in one go without paying any tax.
3. We previously announced this would apply just to people with ‘defined contribution’ pensions
This is a type of pension also known as a ‘money purchase’ scheme.
This is when the money you and your employer pay in is invested by a pension provider chosen by your employers. The amount you get when you retire usually depends on how much has been paid in and how well the investment has done.
4. We’ve now announced that people who have a ‘defined benefit’ scheme will benefit too
A ‘defined benefit’ pension is typically a promise of a certain level of pension in retirement which is linked to your salary.
We’ve now announced that people in the private sector or in a funded public sector scheme will still be able to transfer from a defined benefit pension scheme to a defined contribution one if they want to, meaning they can benefit from the changes.
This means that around 18 million people will ultimately be able to withdraw their pension flexibly should they wish to do so.
5. Everyone who will be able to take advantage of the new reforms will be able to access free and impartial guidance
This will help people make confident and informed choices on how they put their pension savings to best use.
This guidance will be available through a number of different channels – via an online tool, over the phone, or face to face. Individuals will be able to choose the channel, or mix of channels, that they find most convenient.
It will be entirely impartial, so won’t be given by anyone who could be trying to sell you a product.
6. Your pension provider or scheme will be required to tell you about the guidance and how to access it
Accessing the guidance will be arranged by your pension provider, who will be required to tell you about it.
7. The changes will come into effect from April 2015
If you are over the age of 55, or will be from April 2015, you will be able to take advantage of the new system from then.
If you’re younger than 55 then you will be able to take advantage of the new system when you do reach 55.
8. You don’t need to do anything until then
If you’re thinking about retiring soon, you don’t need to do anything in the meantime, but we’ve also made other changes to help you save until then, such as our reforms to ISAs.
You can find more information about the pension reforms by reading our factsheet we published at Budget explaining the differences between the new changes and the old system, or more details on our response to the consultation.
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Ok, great. Free advice. Now how about addressing this:
“It’s official: the British state pension at a maximum £110.15 a week is the most miserable in Europe. Compared to average income, even Hungary and Slovenia better the pension benefits 12.3m British pensioners receive, according to a new OECD report.
British workers on average earnings typically get a state pension worth 32.6% of their working wage. A complete disgrace?
If you compare bald state pension stats, it doesn’t look good. Italian workers, in contrast, can expect 70% of their working salary from the Italian government when they retire. In the developed world, only Mexicans receive less proportionately from the State pension than British workers.
Drilling into the data, the average European State pension is worth 40.6% of average earnings. If you want to retire comfortably on State coffers compared to those in work, one of the best countries is Austria, at 76.6% – or the Netherlands, even better, at 90.7%. Many Europeans also retire earlier than their British counterparts.
If you want to have the longest retirement, head for France. The average French male pensioner will live 22.6 years (27.4 for women) on average after leaving work. The average British male kicks the bucket almost five years earlier (see stats below).