DC savers are still fighting for pension freedom

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Charlene Young explains how some DC savers are still being denied full access to pension freedom - more than four years since its introduction - despite a handy statutory override being in place.

It has been over four years since George Osborne’s famous budget speech announcing freedom and choice in the defined contribution (DC) pension world.

However, some pension savers are still finding they cannot access the options that were intended to be available from 6 April 2015.

To ensure DC scheme members could access the increased flexibility and new benefit options, the government included a permissive statutory override in the tax rules.

For those of you who like your legislative references, head straight to section 273B of Finance Act 2004.

For those who don’t – the override is a small section that starts by listing the various payments that can be made under pension flexibility by a money purchase pension scheme.

There are payments that can be made to a person who is a member, e.g. an uncrystallised funds pension lump sum (UFPLS) or, in the case of a deceased person, the more flexible death benefit options that could be accessed by their eligible beneficiaries.

The override then states that these payments above can be paid by the trustees or managers of the pension scheme even if making them would not usually be permitted under the rules of their scheme.

Example – death benefit flexibility

Consider Mrs Jones who passes away aged 65 with her husband as the beneficiary of her DC schemes. The schemes (valued at £250,000) can each only facilitate the payment of a lump sum death benefit which – although payable free of Income Tax – will then form part of Mr Jones’ estate for inheritance purposes.

Mr Jones is 61 and in receipt of guaranteed income which more than covers his ongoing expenditure needs. Having researched what other options are available to him as a dependant of Mrs Jones, he realises that he is eligible to use the funds to provide him with a pension rather than a lump sum (in this case a dependant’s pension) and would like to use the funds to provide dependant’s flexi-access drawdown. The providers of Mrs Jones’s DC schemes cannot offer this option as they haven’t changed their scheme rules due to systems constraints.

They agree however that they can use the permissive statutory override to ‘designate’ the funds into a dependant’s flexi-access drawdown fund for Mr Jones on the basis that they’re going to be immediately transferred.

Once the funds have been designated, this allows Mr Jones to transfer the funds to a scheme that can facilitate the ongoing payment of a dependant’s drawdown pension. One of the conditions for transfer of pensions in payment (including those for beneficiaries) is that the transfer happens on a like-for-like basis – that is, from the dependant’s drawdown fund to another dependant’s drawdown fund.

From a practical perspective, the receiving scheme will only need to know:

  • that the funds are designated into dependant’s flexi-access drawdown in the Mr Jones’ name
  • the date of designation
  • whether the drawdown payments are taxable or not

This can simply be provided as part of the information sent at the point of transfer – thus having little impact on the original provider’s systems if they are unable to actually pay any beneficiary drawdown income.

Recent cases have shown that not all providers are willing to use the provision. They have insisted that beneficiaries take the (only) option that is available under their scheme, while some have subsequently bowed to public pressure.

While the statutory override remains permissive and not mandatory, not allowing its use starts to look unreasonable when freedom and choice are supposedly available for all in the world of DC pensions.

Senior Technical Consultant

Charlene is a Chartered Financial Planner with over 10 years' experience in financial services. She joined AJ Bell in 2014 after relocating to Manchester from Bristol, where she held financial planner and paraplanner roles at leading firms. In addition to analysing and commenting on technical and regulatory issues, Charlene is also responsible for designing and providing technical training for AJ Bell staff.

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