Consulting Actuaries

Budget 2014 - Our Initial Comments

Royal London Consulting Actuaries

20 March 2014

Defined Contribution (DC) pensions were centre-stage in the Budget, but hidden in the associated consultation document are proposals that could change Defined Benefit (DB) schemes significantly, including a ban on transfer values to DC arrangements and increases to the minimum pension age.

  • Since 1985, DB scheme members have had the right to a cash equivalent transfer value. Taking a transfer value is less common now than it used to be, however the Government intends to ban transfer values from the public sector to DC arrangements and is suggesting extending this ban to all other DB schemes.

    This seems a significant curtailment on an individual’s options at, or prior to, retirement.  For example many individuals use transfer values at retirement due to their own special circumstances or to amalgamate the benefits they have accumulated over their career. In addition, trustees often use transfer values to allow members to take early retirement if the scheme is not well funded. Trustees’ de-risking strategies could also be affected by such a ban.

  • Many DB schemes also provide an AVC facility. It is not clear if AVCs will be subject to the DC pots regime or the DB regime. Clarity is needed on whether members will be able to take all their tax free lump sum entitlement from the DB scheme and then access their AVC pot for additional cash subject to the marginal tax rules.

  • The minimum age at which members can take their pension is currently 55. The Budget proposes that this age will increase in line with the State Pension Age from 2028. Hence when the State Pension Age rises to 67 in 2028 the minimum retirement age will become 57.

    The Government consultation also suggests that the minimum pension age should be set at 5 years before State Pension Age. If enacted, then in 2020 the minimum would become 61, which could be a problem for DB schemes with an NRA of 60.

  • From 27 March 2014 the trivial commutation limit will increase from £18,000 to £30,000 from all sources. This will apply to DB schemes however no detail is provided as to how a DB pension will be converted into a lump sum for this purpose.

Lastly, if your scheme is a hybrid arrangement, rather than pure DB or DC then the Government, as usual, has not decided if such schemes are DB or DC, and is asking for ideas.