In the future, DC members will be able to take their pension wealth as a lump sum, drawdown, or an annuity.
A range of changes came in to effect from 27 March.
These include: an increase in the maximum lump sum that can be taken from £18,000 to £30,000; an increase in the number of small pension pots from which 100% lump sums can be taken to three; and an increase in the amount a member can drawdown each year from 120% to 150% of an equivalent annuity (that is, the amount an annuity would have paid out in that year).
In addition, in order to be allowed to drawdown from a pension, DC members will have to be earning at least £12,000 a year, down from the current £20,000 a year income limit.
The government has proposed, from April 2015, that people will still be able to take a tax-free lump sum of up to 25% of the value of the pensions pot (as per current rules), however, any cash taken over the 25% tax-free limit will be taxed at the person’s marginal tax rate and no longer at 55%.
The government has also proposed that, from April 2015, pension scheme members will also no longer be required to purchase an annuity.
Andrew Roberts, partner at Barnett Waddingham, said: “There’s been confusion about increasing the capped rate while, at the same time, introducing flexible drawdown for everyone.
“This is because the rules are being relaxed temporarily until 6 April 2015 when the uncapped drawdown rules are introduced. Until then, from 27 March 2014, maximum drawdown rates will increase to 150% of annuity rates and flexible drawdown will be available for those with secure pension income of just £12,000.
“This interim step seems a little unnecessary. Other than placating pensioners a year earlier, it seems to add extra complication for little gain.
”Pension providers will have to update documentation that they know will have a limited shelf life and issue revised drawdown certificates, and advisers may have to revisit drawdown advice for one year only.”
Joanne Segars, chief executive of the National Association of Pension Funds, added: “The idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save. However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making.
“It is concerning that there appears to be little robust modelling to reassure us the government has understood the risk that a number of people will run through their pension pots far too quickly. We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age.”
The age at which DC members can do this will increase from 55 to 57 in 2028.
Further pension reforms announced in the Budget 2014 are set out in the government’s consultation, Freedom and choice in pensions.
Measures that took effect from 27 March 2014
- In order to be allowed to drawdown from a pension, DC members will have to be earning at least £12,000 a year, down from the previous £20,000 a year income limit.
- The amount a DC member can drawdown each year will be increased from 120% to 150% of an equivalent annuity.
- The number of small pension pots from which 100% lump sums can be taken has been increased from two to three, and the size of a single pension pot that can be taken as a lump sum has increased from £2,000 to £10,000.
- The maximum lump sum that can be taken will be increased to £30,000 from £18,000.
Future pension changes taking effect in April 2015
- People will no longer have to purchase an annuity to convert their pension pot into retirement income.
- The government is to guarantee free face-to-face advice for all employees that retire in DC pension schemes from April 2015. It will provide £20 million over the next two years to develop the initiative.
- The increase in the personal allowance to £10,500 a year, from April 2015, could mean fewer employees are automatically enrolled into a workplace pension scheme.