You may be aware that the Government has made changes to Pensions legislation which mean that, with effect from April 2015, people with certain types of pension arrangement have more choices and are able to access their pensions in a more flexible way.
The types of pension arrangement that this applies to are known as Defined Contribution (“DC”) or Money Purchase pension schemes, in which you build up a pot of money rather than a pension based on a formula (like the Career Average Plan).
Here we explain how these flexibilities work, so that you can consider whether they are likely to be something you would like to take advantage of.
Note that the UUKPF is not offering these new flexibilities directly, however there are ways in which you may be able to access them if you would like to and we’ll cover this shortly.
The new flexibilities for "DC" pensions
Since April 2015 someone with money purchase savings in a
registered pension scheme (their “DC pension pot”) can choose to access this at
any time from age 55 and use their pot in one or more of the following ways:
In the past the majority of people
retiring with DC pension pots had no alternative but to buy a lifetime annuity
from an annuity provider (such as an insurance company) with at least some of
their pension pot. A lifetime annuity is effectively a pension that
is payable for life which may have pension increases applying to it, and a
dependant’s pension payable at a certain level after death. However the
cost of buying an annuity can be very high – which has a lot to do with the
fact that interest rates are very low and the moment. This is why it is
possible that fewer people will choose this option now that there are more
flexible options available.
The option to buy an annuity still
exists, but the rules about annuity purchase are being relaxed in order to
allow annuity providers to come up with some interesting and innovative
approaches that would not previously have been allowed. For example it
may become possible to buy an annuity with variable pension increases, rather
than increases that are fixed each year.
Annuity payments are taxed as income.
Under a flexible drawdown arrangement,
a member can take up to a quarter of their DC pot as tax free cash and
designate the rest of the pot for “flexible drawdown”. This part of the
pot continues to be invested and the member can take income (known as “drawing
down”) from the pot as and when they like. All of the payments that are
“drawn-down” would be taxed as income.
It would be possible to use some of the
remaining “DC pot” to buy a short term annuity which would provide a known
income for up to 5 years.
Drawdown arrangements have been
available in the past but only for people with big pension pots. They are
now available to anyone, whatever the size of pot.
Under this type of arrangement a member
can take their DC pension pot as a lump sum or as a series of lump sums over a
period of time. A quarter of each lump sum payment is tax free, with the
remainder taxed as income. The remaining pot continues to be invested
until the point of payment.
What are the main differences between the options?
Remember that the options will only apply if the Rules of a scheme allow, but the following table summarises the main differences
(b) Flexible Drawdown
(c) Uncrystallised Lump Sums
Make a once and for all decision at retirement
Need to continue to make decisions after retirement
Income secure for life
DC pension pot can stay invested after retirement
Can take lump sums gradually
More flexibility in how and when to take benefits
25% of DC pension pot tax free
"Pension Wise - your money your choice"
If they apply to you, choosing between the options available is
something that you should think carefully about. Since April 2015 anyone over
the age of 55 retiring with a DC Pension is eligible for free guidance on the
options available to them. This Government initiative is called “Pension Wise –
your money your choice”.
The information provided here is not intended to replace this
As well as any guidance you receive as part of the Government’s
initiative, you can always speak to a financial adviser to talk through your
options. You can find a list of IFAs here www.unbiased.co.uk.
Do the new flexibilities apply to you?
If you have any pension arrangements from when you were with previous employers that are entirely DC pension arrangements, then these new flexibilities may apply to those pensions. If you have any DC pots from when you were in a previous employers’ scheme that had other elements of benefits – for example a final salary scheme in which you paid additional voluntary contributions (AVCs) into a DC pension pot – then the new flexibilities might apply to that pot, but this will depend on the Rules of that particular scheme.
In your Unilever UK Pension Fund, your Investing plan account (if you have one) is a DC pension pot. The Rules of the UUKPF don’t allow these new flexibilities to apply in the Investing plan. However, the Rules of the UUKPF will allow you to transfer your Investing plan account out of the UUKPF and into, for example, a registered pension arrangement that will allow the new flexibilities, as long as you are at least 12 months away from your Normal Retirement Age.
If you decided to transfer your Investing plan account out of UUKPF, then the rest of your benefits in the UUKPF – your Career average plan and Final salary plan benefits – could stay in the UUKPF.
Alternatively you could consider transferring all of your benefits in the UUKPF (including your Career average and Final salary plan benefits). Doing this would be a very significant decision, not least because you would be giving up a defined and fixed pension based on a formula. This is not a decision to be taken lightly or without first considering some independent financial advice. In fact, if your transfer value is £30,000 or more than you will need to show proof that you have taken advice before you will be able to make the transfer.