Freedom and Choice
In April 2015 the Government made significant changes to the
ways that people in certain types of pension schemes can take their
Who is affected?
The changes are mainly aimed at members of
Defined Contribution(DC)pension schemes, sometimes also referred to
as Money Purchase Schemes.
Members of Defined Contribution schemes
build up a pot of money consisting of their own contributions and
any contributions that their employer may have paid in. This
money is then invested and the returns from that investment are
also added to the pension pot and re-invested.
Traditionally when a person with a Defined
Contribution pension retires they have generally been required to
use the money they have built up to buy an annuity. The
annuity is an income for life paid by an insurance company and the
bigger the size of the pension pot at retirement a person has the
bigger the annuity they can buy.
It's important to be aware that the Local Government Pension
Scheme (LGPS) is not a Defined Contribution Scheme, so many of the
changes that took place in April 2015 do not apply directly to
members of the LGPS.
Freedom and Choice
The biggest change from April 2015 is that
members of some DC pension schemes will no longer have to buy an
annuity. Instead they will have what the Government refers to
as "freedom and choice" over how they use their DC pension
pots. People with these types of pension schemes will now be
able to use their pension pots in any of the following ways,
1) To take an
annuity in the same way as before
2) To take their
money as cash, either all at once or in a series of separate
3) To take a
mixture of 1 and 2 above, ie to buy an annuity with some of their
pot and take the rest as cash when they wish
Where members choose to take their pension
pots as cash the first 25% of that cash is paid tax free and the
rest is taxed in the same way that any other income, such as a
salary, is taxed.
What about the LGPS?
The LGPS remember is not a Defined
Contribution Scheme, so members will not be able to take all
of their benefits as cash in the same way as members of DC Schemes
The LGPS is a Defined Benefit(DB)pension
scheme. In this type of scheme the benefits you get at
retirement don't depend on how well your investments perform or how
large an annuity an insurance company will sell you. Instead
your LGPS pension at retirement is based on how long you've been in
the scheme and how much you have earned. This means your
benefits are secure and predictable.
The LGPS also has a feature that allows
members who are retiring and want to have access to additional
cash, to swap some of their pension for a bigger lump sum. At
retirement you can usually take a lump sum up to 25% of the total
value of all your LGPS benefits which is paid tax free.
Transferring out of the LGPS
The new Freedom and Choice rules do allow
members of the LGPS to leave the scheme and transfer the benefit
they have built up to a Defined Contribution pension that would
allow them to make use of the extra flexibilities.
Transferring out of a guaranteed DB pension
scheme like the LGPS to a DC scheme is highly complex and generally
not in people's best interest. So if you are considering
transferring out of the LGPS it is important that you think very
carefully about your decision.
If you go to the
LGPS website for scheme members you will be able to read a Q
& A regarding DB to DC transfers.
The new Freedom and Choice rules mean that
if you are thinking about transferring your LGPS benefits to a DC
pension and the value of that transfer is over£30,000you must
receive advice from a qualified independent financial adviser who
is qualified to advise on pension transfers before you can
transfer. You will be required to provide written evidence
that you have received this advice before we will pay out any
transfer value of your benefits.
The Government has recently launched an
information service called Pension wise at
This is a free and impartial service that offers guidance to
consumers about the options they have in relation to their
pensions, and helps you understand the Governments reforms to DC
You will be responsible for arranging and
paying for any advice you receive. You can find an independent
financial adviser in your area atwww.unbiased.co.uk.
Beware of fraudsters
The introduction of these new freedoms
could provide an opportunity for fraudsters to "scam" you out of
your pension saving. This could be through a variety of means, such
• Cold calls,
• Doorstep visits,
• Promises of unrealistically optimistic
• Asking you to transfer your money
quickly, even sending documents to you by courier
It is important to be vigilant to make sure
you do not fall prey to the scammers. If you do receive any
unsolicited calls, emails or visits, you are strongly advised to be
If you think you may have been contacted by
someone who is not your adviser, or you think you may have been a
victim of fraud, contact Action Fraud on 0300 123 2040. Or you can
go to their website at www.actionfraud.police.uk
For further information regarding fraud and
pension scams you could go to the Pension
Pension flexibilities and means-tested
In March, DWP published a factsheet
providing more detail on pension freedoms and means-tested benefits
for savers looking to take advantage of the new flexibilities. The
new rules dictate how your pension, and any money you take from it,
will be treated when calculating entitlement to income-related
benefits, including pension credit, housing benefit and universal
Under the deliberate deprivation rule, if
an individual spends, transfers or gives away any money from their
pension pot, DWP will consider whether they have deliberately
deprived themselves in order to increase their entitlement to
benefits. If this is found to be the case, an individual will be
treated as still having that income when their benefit entitlement
is calculated. There is no set timeframe within which the rules can
be applied, and decision-makers are able to apply them regardless
Both The Pensions Regulator and the FCA
state in their respective retirement risk warnings that taking cash
withdrawals from a pension may have implications for savers who may
be entitled to means-tested benefits.
However, there are concerns that the
generic warnings do not make the risks of capital deprivation
explicit enough, throwing up new difficulties for trustees and
providers seeking to ensure members are making informed decisions.
We would encourage trustees and providers to ensure that members
have clarity about what the rules are and to what extent their
spending can be retrospectively assessed as far as possible.