Freedom of Choice
In April 2015 the Government made significant changes to the ways that people in certain types of pension schemes can take their pensions.
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.
It's important to be aware that the Local Government Pension Scheme (LGPS) is not a Defined Contribution Scheme, so many of the changes that took place in April 2015 do not apply directly to members of the LGPS.
Freedom and Choice
The biggest change from April 2015 is that members of some DC pension schemes will no longer have to buy an annuity. Instead they will have what the Government refers to as "freedom and choice" over how they use their DC 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, ie to buy an annuity with some of their pot and take the rest as cash when they wish
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 LGPS?
The LGPS remember is not a Defined Contribution Scheme, so members will not be able to take all of their benefits as cash in the same way as members of DC Schemes can.
The LGPS is a defined benefit pension scheme. In this type of scheme 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 LGPS pension at retirement is based on how long you've been in the scheme and how much you have earned. This means your benefits are secure and predictable.
The LGPS also has a feature that allows members who are retiring and want to have access to additional cash, to swap some of their pension for a bigger lump sum. At retirement you can usually take a lump sum up to 25% of the total value of all your LGPS benefits which is paid tax free.
Transferring out of the LGPS
The new Freedom and Choice rules do allow members of the LGPS to leave the scheme and transfer the benefit they have built up to a Defined Contribution pension that would allow them to make use of the extra flexibilities.
Transferring pension benefits between schemes is highly complex and if you are considering transferring out of the LGPS it is important that you think very carefully about your decision.
If you are thinking about transferring your LGPS benefits to a DC pension, you must receive advice from a qualified independent financial adviser who is qualified to advise on pension transfers before you 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 www.pensionwise.gov.uk. 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 DC 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.
Beware of fraudsters
The introduction of these new freedoms could provide an opportunity for fraudsters to "scam" you out of your pension saving. This could be through a variety of means, such as:
• Cold calls,
• Doorstep visits,
• Promises of unrealistically optimistic investment opportunities
• Asking you to transfer your money quickly, even sending documents to you by courier
It is important to be vigilant to make sure you do not fall prey to the scammers. If you do receive any unsolicited calls, emails or visits, you are strongly advised to be cautious.
If you think you may have been contacted by someone who is not your adviser, or you think you may have been a victim of fraud, contact Action Fraud on 0300 123 2040. Or you can go to their website at www.actionfraud.police.uk
The following questions and answers aim to help you understand these changes:
Q1. What is Freedom and Choice?
A1. From 6 April 2015 members of certain pension schemes will have more freedom over how they take their money from their pension pot.
These changes affect pension scheme members who are:
• age 55 or over, and
• have a pension based on how much has been paid into their pot (a Defined Contribution pension).
There will now be four main options for members who are in a Defined Contribution pension scheme which offers flexible benefits from their pension pot including:
• purchase an annuity (annual pension) or scheme pension if offered by the scheme
• flexi-access drawdown
• taking a number of cash sums at different stages
• taking the entire pot as cash in one go.
These new flexibilities do not apply to any Defined Benefits you have in a Defined Benefit pension scheme, including the LGPS, and therefore they have no direct impact on your Defined Benefits from the LGPS.
Q2. Does Freedom and Choice impact on LGPS members at all?
A2. Not directly. However, if you cease membership of the scheme with 3 or more month's membership then, unless you are retiring with immediate payment of your benefits on the grounds of redundancy, business efficiency or ill-health, you will be given information about your right to transfer your benefits built up in the LGPS. If you then choose to use the right to transfer the value of your LGPS Defined Benefits to a Defined Contribution pension scheme which offers flexible benefits, you will be able use the 'Freedom and Choice' flexibilities under that scheme.
Q3. Are there any new rules around transfers from the LGPS to a defined contribution scheme?
A3. Yes, if you cease membership of the LGPS and wish to use the right to transfer the value of your LGPS Defined Benefits to a Defined Contribution pension scheme which offers flexible benefits you will be obliged by law to obtain appropriate independent advice, at your own cost, from an authorised independent adviser, who is registered with the Financial Conduct Authority (FCA). You must prove that this advice has been taken before any payment of a transfer can be made from the LGPS Pension Fund(s) to a Defined Contribution pension scheme offering flexible benefits.
You are only entitled to request one transfer quotation in any 12 month period and, if you wish to proceed with a transfer, the election to proceed must be made at least 12 months before your Normal Pension Age in the LGPS or, if you are a Pension Credit member, at least 12 months before your Normal Benefit Age.In addition you can only transfer benefits from the LGPS if you have left the scheme and you have not already drawn benefits from the LGPS (either in your current employment or any earlier employment).
Q4. How will I know what the total value of my LGPS benefits is?
A4. You will need to request a transfer value quotation from all LGPS Pension Funds in which you have benefits in the scheme. The total value of your benefits is the sum of all these transfer values.
Q5. What happens to my LGPS benefits if I do transfer to a defined contribution scheme?
A5. From the point of transfer all rights to any benefits of any description in any circumstance in the LGPS included in the transfer are extinguished.
If you have more than one set of benefits in the LGPS (for example, because you hold two separate deferred benefits in the scheme from two separate periods of employment) and you decide to transfer one and not the other, only the benefits in respect of the one that is transferred will be extinguished; you would still be entitled to benefits in the LGPS in respect of the one that you had not transferred.
Q6. Who do I need to get authorised independent advice from?
A6. You must by law receive appropriate independent advice from an independent adviser who is authorised by the Financial Conduct Authority (FCA). You can check if an adviser is authorised by the FCA using the Financial Services Register on the FCA website. The advisor must not only be authorised but also must be qualified to give specific advice on transfers between pension schemes. It is important that you ensure that this is the case before committing to the receipt of advice. Please do not ask your LGPS Pension Fund to advise you as you cannot by law receive advice on this matter from them. They are not authorised by the FCA to provide such advice.
Q7. Can the LGPS Pension Fund give me names of an authorised independent adviser?
A7. The LGPS Pension Fund cannot give you details of an authorised independent adviser. You can however locate details of an authorised independent adviser on the FSA register, the Personal Finance Society website, the Association of Professional Financial Advisers website or contact your local Citizens Advice Bureau.
Q8. How much will this advice cost and who pays for it?
A8. The cost will vary depending on the authorised independent adviser you decide to use. You, as the member choosing to transfer, will be expected to meet the cost of the advice. You should ensure that you get a clear and understandable quote of the cost from the authorised independent adviser before committing to receiving advice from them.
Q9. Do I have to follow the advice that I receive from the authorised independent adviser?
A9. No. However, if you choose to ignore the advice and proceed with the transfer to a registered Defined Contribution scheme offering flexible benefits (or to a qualifying recognised overseas pension scheme) you will have no redress from either the authorised independent adviser or from the LGPS Pension Fund, should that decision prove to be financially disadvantageous to you.
Q10. If I follow the advice to transfer what protection do I have?
A10. If the advice you are given from an authorised independent adviser is to proceed with the transfer and it proves to be financially disadvantageous to you, you would need to seek redress from the authorised independent adviser who provided that advice. There will be no redress from, or reinstatement in, the LGPS Pension Fund from which the benefits have been transferred.
Q11. How will the LGPS Pension Fund know I have taken appropriate independent advice?
A11. You will have to prove to your LGPS Pension Fund(s) that this advice has been taken before the Fund can release the transfer value payment. As part of the transfer information provided by the LGPS Fund there will be an 'Advice Confirmation Form' which the adviser must complete. The information on this form will include confirmation:
• that advice given to you was specific to the transfer
• that the adviser is authorised to provide such advice
• of the FCA reference number of the company for whom the adviser works
• your name, and the name of the scheme from which the transfer is being sought and in respect of which the advice was given.
You must also sign that 'Advice Confirmation Form' and return it as part of any other application forms to transfer your LGPS benefits which your LGPS Pension Fund may send you. On receipt of the above proof of advice the LGPS Pension Fund must check the authorisation status of the adviser's company. They will do this by checking the company's entry in the FCA register using the FCA reference number provided by the adviser on the 'Advice Confirmation Form.
Q12. Are there any other new rules which could impact on the transfer value of my accrued LGPS pension benefits?
A12. Potentially, yes. In circumstances where the Government is convinced that the number of transfers to Defined Contribution schemes offering flexible benefits may result in a risk to the LGPS Pension Fund and, hence, to local taxpayers, the amount of the transfer value can be reduced. Your LGPS Pension Fund will confirm if this applies when you are considering your transfer.
General Points to note about transferring from the LGPS:
• You cannot transfer your benefits, other than Additional Voluntary Contributions (AVCs), if you leave the scheme when you are less than one year away from your Normal Pension Age.
• An option to transfer must (other than in respect of AVCs) be made at least 12 months before your Normal Pension Age or, if you are a Pension Credit member, at least 12 months before your Normal Benefit Age.
• If you wish to investigate a transfer of your pension rights, your Pension Fund has to (other than in respect of AVCs) provide you with a transfer value quotation within three months of receiving your request and the quotation will be guarantee for a period of three months from the date of calculation (known as the 'Guarantee Date').
• If you wish to proceed with the transfer, a written option to proceed must be received by the LGPS Pension Fund within three months of the 'Guarantee Date'.
• If you opt to proceed, the normal time limit for payment of the guaranteed transfer value will be six months from the 'Guarantee Date'.
• If payment is not made within this period your Pension Fund will need to recalculate the value as at the actual date of payment and pay the recalculated value or, if it is greater, the original value plus interest.
• If you are considering whether to transfer benefits, make sure you have full information about the two pension arrangements i.e. details of what your benefits are worth in the LGPS and details of what your benefits would be worth in the new pension scheme, if transferred.