George Osborne announced what he described as; “the most fundamental reform to the way people access their pensions in almost a century.”
At the heart of his announcement is the ability for Defined Contribution (DC) pension scheme members at age 55 to take their pension savings however they want them, subject to their marginal rate of tax. They will not have to buy an annuity and can even take their entire pension savings fund in one go. Although this change does not come into effect until April 2015, transitional arrangements put in place this week give a big boost to the flexibility and choice pension savers have, making income drawdown more accessible and allowing those with pots up to £30,000 to take their money now, subject to their pension scheme rules. With increased choice and flexibility comes increased risk for both employees and employers which is why the Chancellor also announced the ‘guidance guarantee’ making it compulsory for trust-based pension schemes and pension providers to offer free and impartial face to face guidance on the range of options available at retirement.
Jonathan Watts-Lay, Director, WEALTH at work said, “Whilst the changes to pensions announced in the Budget came as a surprise, it recognises what we have known for some time; that most have been poorly served when it comes to the business of retirement, allowing uninformed pension savers to make poor decisions with little or no protection.” He added, “Up until now retirement income options have been dominated by annuities and in the last few years non advised services have become popular with those selling annuities as they were seen as an easy way to avoid having to give professional financial advice. The problem is these services can’t assess the individual’s whole financial circumstances or recommend what the best course of action is for them to take. In fact the reverse is true and they place all the responsibility and risk of getting it wrong on the shoulders of the individual.”
He continues, “Unwittingly perhaps, many employers have encouraged this transfer of risk to employees by putting in place non advised annuity services for their staff and thinking that they were doing them a favour. This is a huge area of risk for employers who continue to promote these services as a solution in isolation. If employees see an employer offering a service like this they naturally may think it is something they should use but with the range of options now available and with the ability to take an entire DC fund as cash from next year employers need to think seriously about making staff aware of all of their options and the advantages and disadvantages of each.”
