Freedom of choice

Who is affected?

The changes are mainly aimed at members of Defined Contribution (DC) pension schemes, sometimes also referred to as Money Purchase Schemes.

Members of Defined Contribution schemes build up a pot of money consisting of their own contributions and any contributions that their employer may have paid in. This money is then invested and the returns from that investment are also added to the pension pot and re-invested.

Traditionally when a person with a Defined Contribution pension retires, they have generally been required to use the money they have built up to buy an annuity. The annuity is an income for life paid by an insurance company and the bigger the size of the pension pot at retirement a person has the bigger the annuity they can buy.

Freedom and Choice

The biggest change from April 2015 is that members of some Defined Contribution pension schemes will no longer be required to buy an annuity. Instead, they will have what the Government refers to as "freedom and choice" over how they use their Defined Contribution pension pots. People with these types of pension schemes will now be able to use their pension pots in any of the following ways:

1) To take an annuity in the same way as before

2) To take their money as cash, either all at once or in a series of separate instalments

3) To take a mixture of 1 and 2 above, for example, they could buy an annuity with some of their pot and take the rest as cash when they wish

Usually, where members choose to take their pension pots as cash the first 25% of that cash is paid tax free and the rest is taxed in the same way that any other income, such as a salary, is taxed.

What about the Scheme/Plan?

The Scheme/Plan is not a Defined Contribution (DC) scheme/plan, so members will not be able to take all of their benefits as cash in the same way as members of DC schemes/plans can.

The Scheme/Plan is a Defined Benefit (DB) pension scheme/plan. In this type of scheme/plan the benefits you get at retirement don't depend on how well your investments perform or how large an annuity an insurance company will sell you. Instead your Scheme/Plan pension at retirement is based on how long you've been in the Scheme/Plan and how much you have earned.

Transferring out of the Scheme/Plan

The new Freedom and Choice rules do allow members of the Scheme/Plan to leave the Scheme/Plan and transfer the benefit they have built up to a Defined Contribution pension that would allow them to make use of the extra options.

Transferring pension benefits between schemes is highly complex and if you are considering transferring out of the Scheme/Plan it is important that you think very carefully about your decision. The Trustee(s) of the Scheme/Plan recommend that financial advice is obtained on the suitability of the transfer to take account of your personal circumstances.  

The new Freedom and Choice rules mean that if you are thinking about transferring your Scheme/Plan benefits to a Defined Contribution pension and the value of that transfer is over £30,000 you must receive advice from a qualified independent financial adviser who is qualified to advise on pension transfers before you can transfer. We will require written evidence that you have received this advice before we will pay out any transfer value of your benefits.

The Government has recently launched an information service called Pension wise at https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise . This is a free and impartial service that offers guidance to consumers about the options they have in relation to their pensions, and helps you understand the Governments reforms to Defined Contribution pension schemes.

You will be responsible for arranging and paying for any advice you receive. You can find an independent financial adviser in your area at www.unbiased.co.uk.