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 pensions. 

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 instalments

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 can.

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         www.pensionwise.gov.uk 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 pension schemes.

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 as:

• Cold calls,

• Emails,

• Doorstep visits,

• Promises of unrealistically optimistic investment opportunities

• 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 cautious.

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 Regulators website

Pension flexibilities and means-tested benefits

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 credit.

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 of age.

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.

DWP factsheet

 

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