Back to news 15 September 2014

Freedom and choice in pensions - Budget 2014 update

The British Government has unveiled what the Chancellor of the Exchequer, George Osborne, described in this year’s Budget as “the most fundamental change to how people can access their pension savings in nearly a century”. The changes brought in by the Budget are aimed at adding extra flexibility to the way members can receive benefits from ‘defined contribution’ (or ‘DC’) pension arrangements.

As Reuters Pension Fund (‘RPF’) is a ‘defined benefit’ (or ‘DB’) pension arrangement, you may have believed these changes would not affect you – but in fact, as you’ll see below, there are a number of changes which also affect DB arrangements.

Recap of the main changes to defined contribution pensions

To provide a recap of the main changes, at present, members of DC schemes typically take up to 25% of their pension pot as a tax free cash lump sum (the maximum allowed) on retirement, with the remainder used to purchase an annuity from an insurance company.

From April 2015 the Government has confirmed that it will allow members to take all of their pension pot as cash, either in one go or as variable instalments over time, of which 25% would be tax free and the remainder subject to income tax at a member's marginal rate.

Those who want an annuity will still be able to purchase one.

DC members will have a right to free and impartial guidance on financial choices on retirement (a 'guidance guarantee'). The guidance will be provided by independent organisations such as The Pensions Advisory Service (TPAS). The guidance will not recommend specific products or providers, and can be obtained face-to-face, by telephone or online. How does the Budget affect defined benefit pensions? The Government has confirmed that members of defined benefit arrangements (such as RPF) can continue to take advantage of these changes by transferring their benefits to a DC arrangement in line with the current rules. An additional protection will be introduced requiring members to take advice from a professional financial adviser before a transfer can go ahead.

The Budget announcement had other implications for members with small DB pensions:

  • Where the total value of a member's pension rights under all registered pension schemes is less than £30,000, and where the member is aged 60 or over, the entirety of the benefits can be taken as a cash lump sum (increasing from the previous limit of £18,000). This option is currently available under RPF. The Government has recently announced that the age limit will reduce to age 55 in the future although it is not clear when this will take effect.
  • Members aged 60 (reducing to age 55) or over can take a pension with a value of less than £10,000 within a single scheme as a cash lump sum. This option is also available under RPF.

In each case 25% of the lump sum would be tax free.

The minimum age at which pension savings can be accessed (the ‘minimum pension age’) will increase from 55 to 57 by 2028 (with exemptions for the Firefighters, Police and Armed forces schemes), and remain at 10 years below State Pension Age.

If you have any questions about your current options, please contact Thomson Reuters Member Services Centre.