Pensions: turning the new flexibility to your advantage

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

A significant amount of press space has recently been devoted to the new pension flexibility that will be introduced from April 2015. The Government has introduced some generic on-line guidance for scheme members to assist them in making their choices (with further services to follow) so the question employers could perhaps usefully be asking themselves, if they have not already done so, is whether the pension arrangements that they currently offer meet their employees' growing expectations.

Auto-enrolment requires employers to make pension contributions on behalf of workers so employers could, in our view, also take this opportunity to ensure that their pension schemes offer suitable flexibility for their employees. This is especially true when combined with other workplace benefits (for example, cash accounts, corporate individual savings accounts, share options and the like) because it can act as a good workforce retention mechanism offering employees the possibility of aligning their saving needs with the business. Private pension schemes are an important and efficient savings tool towards retirement, particularly when one considers that the current state pension is only around £113 per week for a single person and £180 per week for a married couple after a full 30 years' national insurance contributions (not to mention that for the new state pension after 2016, 35 years' service is required to get the full pension).

What are the main changes from April 2015?

Currently, pension scheme members who are 55 years of age or more, can take their pension by way of a 25% cash lump sum (if they wish) combined with a lifetime annuity (this could, for example, be a fixed annuity or investment-linked annuity). Or, instead of the annuity option, a retiree may choose income drawdown, flexible drawdown, perhaps even take phased retirement or a combination of some of the above. Small pensions may also be taken entirely as cash. There are already complex choices available within this range and retirees need to weigh up the advantages and disadvantages of each in the light of their particular circumstances. By way of example, even the choice of annuity provider is important because the same amount of cash may purchase substantially different pensions from different providers.

From April 2015 however, there will be no limits on what members can withdraw and the whole amount can be taken as a cash lump sum, although a portion of it will be taxable at the retiree's marginal rate of tax. Significantly though, the proposals would currently allow a member who has not selected an annuity to pass the full value of their pension, potentially tax free, to their beneficiaries on death. This could be an important estate planning consideration for some as the proposal is that the 55% pension tax charge payable on death will be scrapped if the saver dies before the age of 75 meaning that a lump sum can be passed to beneficiaries completely free of tax. If the saver dies after age 75, then an income tax charge will apply, but this will be at the new owner's marginal rate, rather than 55%.

The benefits of flexibility

Auto-enrolment has raised the profile of pensions so that they now form an important part of the overall remuneration package for most workers. With this increased focus, employees will expect greater functionality and flexibility from the pensions they are offered and this is likely to form an increasingly important tool in attracting and retaining the best staff.

In our view, offering pension scheme members a wider range of choices is a good thing, provided that members take (and are given) appropriate advice. The Government initiative "Pensionwise" is under development and currently only provides on-line explanations of the options available. No tailored advice is available and members will need to get their own specific advice should they need it.

Whilst employers may not financially advise their employees, they can certainly put the building blocks in place for their employees to have the full range of options available to them and hopefully make appropriate choices. Not everyone will buy that Lamborghini!

Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Olswang Corporate Quarterly Spring 2015 publication.