Members of defined benefit (DB) schemes will be allowed to transfer in to defined contribution (DC) plans in order to make use of new Budget freedoms, the government has confirmed.
In a statement today, the Treasury said it would continue to allow such transfers subject to two important new safeguards: a requirement for an individual to take advice from an impartial financial adviser regulated by the FCA before a transfer can be accepted; and introducing new guidance for trustees on the use of their existing powers to delay transfer payments and taking account of scheme funding levels when deciding on transfer values.
This means members of private sector DB schemes who have not yet retired will be able to make full use of the new flexibility in the pensions regime announced in the Budget, which from April 2015 will allow all those in DC schemes to have full access to their savings from age 55 – subject to their marginal rate of tax.
However, the Treasury said the new rules around allowing DB to DC transfers will not apply to members of unfunded public sector pension schemes.
Lane Clark & Peacock partner Jonathan Camfield said: “We‘re delighted the Treasury has concluded that DB to DC transfers can continue. Of course, many pension scheme members will want to retire and receive their normal pension benefits, but some members will want to make use of the new flexibility, which might be particularly attractive for those with health issues, those with high debts and those who want to have more control over how and when they receive their income in retirement.”
However, Barnett Waddingham partner Simon Taylor warned of the “significant danger” involved.
“The government’s reasons for considering a ban were unrelated to member outcomes, but there is a significant danger that members will transfer out of DB schemes without strategies in place to mitigate the risks they are taking on – primarily inflation, investment, and longevity,” said Taylor.
“Employers may also see low take-up rates for such options (resulting in net losses instead of savings) if members are confused about how to manage their funds through retirement and therefore reject the option.”
The Treasury also announced the “guidance guarantee” for those approaching retirement under the new regime will be delivered by independent bodies including the Money Advice Service (MAS) and The Pensions Advisory Service (TPAS) rather than by pension schemes or providers.
Chancellor George Osborne said: “We’re making sure that people have the right support to make their own choice about how best to finance their retirement and I’m pleased to confirm that everyone with defined contribution pension savings reaching pension age will get free and impartial guidance on their range of available choices at retirement.”
According to the Treasury, guidance will be offered through a broad range of channels, including web-based, phone-based as well as face-to-face, and to remain free to the consumer will be funded by a levy on regulated financial services firms.
The Financial Conduct Authority (FCA) has also published a consultation paper on the elements of the guidance guarantee for which it will be responsible.
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