April 2015 is a big date for pensions as we all gain much more flexibility in relation to our retirement. Given the pensions industry was only told about these changes a year ago, it has had to react quickly in order to be ready in time.
It is only a year since the Chancellor announced his “Freedom and Choice” policy forcing the pensions industry to react quickly in order to get ready in time. From April your employees may be able to access all of their pension at retirement, but any amount over the current limit on tax-free cash payments will be taxed at the individual’s marginal rate of income tax.
For Defined Contribution arrangements, where the pension savings are in the form of an investment fund, members should have immediate access to cash. For Defined Benefit arrangements, such as SHPS and LGPS, members will first need to transfer their benefits into a Defined Contribution arrangement, having paid for Independent Financial Advice. As ever, there are exceptions to the rule – for example, as the Defined Contribution section in SHPS is held in a trust, the trustees will need to agree to the flexibilities on offer and make changes to the rules to enable members to access them. Not all pension schemes will be amended from 1 April and if people have pensions with the unfunded public sector schemes, they will not be able to transfer these into defined contribution schemes after 1 April 2015.
Your employees will get information from the pension schemes they are in on the new options available to them, but with time being so tight, this may not have happened yet. So you should consider whether you should communicate with your employees directly about the changes. Especially where you have a number of pension arrangements, there might be advantages of having a clear and consistent message for your staff.
The changes should prompt employers to consider the “at retirement” process for their employees, not only as part of being an employer of choice, but also to manage the risks to the business. Is it a good or bad thing for an employee to transfer to a Defined Contribution scheme in order to gain access to the cash? There are a number of considerations, but from a financial perspective it reduces the pensions risks in the business and so may contribute to better outcomes in a stress test of the business.
Freedom and Choice will affect your employees’ views on retirement and may well influence their plans to leave employment. So this isn’t just about pensions, this is about your people and your future plans for your workforce.
If you would like to discuss this, please speak to your usual KPMG pensions contact or contact Steve Simkins.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.