Schemes have been urged to move quickly to prepare for forthcoming changes to pension tax legislation, with the new ‘uncrystallised funds pension lump sum’ expected to prove popular among members.
The draft taxation of pensions bill was released by HM Revenue & Customs last month, providing a clearer picture of how the pension changes announced in this year’s Budget would be implemented.
The bill lays out several new benefit payment options for defined contribution schemes, which will become available on April 5 2015.
Trustees and providers need to get their heads around it quite quickly
Francois Barker, Eversheds
The UFPLS is a new option for members of money purchase schemes to take their entire pot, either in one go or instalments, with the first 25 per cent tax free.
Another new option is flexi-access drawdown, which allows members to put some or all of their savings into a drawdown facility, with the first quarter of their pot also tax free.
Francois Barker, partner at law firm Eversheds, said the bill added “flesh to the bones” of the Budget, providing a clearer picture of how the reforms would be implemented.
“Trustees and providers need to get their heads around it quite quickly and work out whether they’ll provide them, then amend their rules,” he said. “Even if you decide you don’t want to, we think providers and trustees will still need to make sure members are aware of their options.”
The most prominent of the changes introduced is the UFPLS, Barker said, as “flexi-access will require a lot of infrastructure”.
However, Eleanor Daplyn, partner at law firm Sackers, raised concerns about how members will view a UFPLS. “Once they’ve been through the guidance process they might realise it’s not so attractive… if they take that sum, only 25 per cent will be tax free so the money they walk away with may be less than they expect.”
Beyond the tax implications, some also questioned the level of guidance offered to schemes.
Alastair Black, head of customer income solutions for provider Standard Life, said: “There’s a big question there. Our hope is that the [Financial Conduct Authority] and [the Pensions Regulator] will give some guidance on what an appropriate level of protection for consumers will be.”
A spokesperson for the FCA said the question of consumer protection fell within the scope of its ongoing consultation into the Budget reforms.
The bill introduces the possibility of a ‘permissive override’, allowing trustees to decide whether to offer FAD, UFPLS or short-term annuities to members without the sponsoring employer’s permission.
Barker added: “As things stand that’s a trustee-only decision but there have been calls that the employer needs to have a say.”
