Useful Information
Defined Contributions Benefits - Flexibilities
From 6 April 2015 the Government introduced wider options for people with savings in defined contribution (DC) pension arrangements, giving them more flexibility over how to receive their benefits.
Broadly speaking, before the changes, DC members could take up to 25% of their pension savings as tax-free cash and then had to use the remainder of their savings towards buying their pension, or 'annuity'. Now, the following choices are available:
Annuity
Members still have the option to purchase an annuity with some or all of their DC fund.
Cash
Members can now take their entire DC fund as a cash sum, or as a series of cash sums. Up to 25% of the fund can still be taken as tax-free cash. Any further amount taken as cash is subject to income tax at the member's highest rate. Members therefore need to carefully consider the tax consequences of taking their entire fund as a cash sum.
Drawdown
Members may now 'drawdown' their DC fund, that is, take income from the fund without having to purchase an annuity, and continue investing the rest. This is arguably the most flexible of the three options, as savers can vary the amount and timing of the income they draw.
It is also possible to combine the options – for example, a member could take 25% of their fund as tax-free cash, use the remainder for drawdown and then at a future point stop drawdown to buy an annuity.
The Government has set up a guidance service to help people understand their DC retirement options, called Pension Wise (see https://www.pensionwise.gov.uk). If you are over age 50, you can contact Pension Wise to make a free appointment with an expert, who will take you through your DC retirement choices over the phone, or in person.
What this means for you
If you have defined benefit (DB) benefits
For DB members, these changes to the way DC pensions work will not affect your main DB pension directly. Your pension will be paid in line with the Scheme rules. You will have some choice about how you receive your benefits – for example, you can give up part of your pension for a tax-free cash sum at retirement. But after that, your pension will be a set income for life.
You do have the option of transferring your DB benefits into a DC arrangement. You would then be able to take advantage of the new flexibility available to DC pension holders. However, there is a requirement for individuals with over £30,000 in pension savings who want to transfer their DB benefits to a DC arrangement to take advice from an authorised independent adviser.
If you have built up Additional Voluntary Contributions (AVCs) in the scheme, the same DC flexibility will apply to your AVC savings.
If you are in doubt as to the right course of action for you, you should seek independent financial advice.
If you have DC benefits
For DC members, the above flexibilities apply and allow you to choose how to access your DC benefits at retirement. However, there are restrictions in the Scheme rules. In particular, if you wish to access drawdown, you will need to transfer your DC benefits to another pension arrangement that offers this.
Again, if you are in doubt as to the right course of action for you, you should seek independent financial advice.