Pensions Freedoms for those over 55 – an opportunity for individuals and employers
The Government introduced pensions freedoms in April 2016. These apply to both Defined Contribution schemes and Defined Benefit (also known as Final Salary) schemes. Many people aged over 55 will have some years in a Defined Benefit scheme but are no longer contributing (active). The existing approach is that benefits built up are preserved (or deferred) until the person reaches their normal retirement age. Before the new Pensions Freedoms arrived in 2016 there was little choice for members except to stay in a DB scheme and wait for the pension to start when they retired. Meanwhile, employers have had to continue to fund any shortfall in the future cost of these pensions.
However, the Freedoms meant more flexibility for individuals and it may be that a transfer out from the DB scheme makes better use of the benefits. For example:
- Funds can be withdrawn before retirement if it fits the needs of the individual
- Funds being withdrawn are subject to income tax but that can still be a good option for the individual depending on their circumstances
- DB schemes generally have fixed rules such as if the pensioner dies, their partner will get 50% of the pension for the remainder of their life. The annual amount is fixed (depending on the final salary amount) so there is no scope for varying the amount taken. In some situations it may be better to transfer the whole amount to a more flexible pension that will allow variations in pay out earlier in the retirement period and allow the balance to be passed to a surviving partner in full
- There is no need to buy an annuity, thus saving costs.
If the deferred member transfers their pension out of the DB scheme the employer will also benefit because the liability for that pension is capped at the transfer amount.
Every situation is different and appropriately authorised Independent Financial Adviser (IFA) advice is mandatory for any transfer of pension pots of £30,000 or more. It would be worthwhile an employer agreeing to pay for this initial advice to make sure that their members are properly informed regarding their potential for choice.
We work with dedicated IFAs that can provide help for individuals or briefing for employers. If you would like to explore this idea for your organisation please contact Chris Harris, Not for Profit sector Partner or send us an online enquiry.