A Whole Lot of Hype
28th March, 2014
Now that the post budget excitement is beginning to abate we can start to think about other points rather than total DC encashment.
I agree that the expected legislation allowing full encashment of DC funds is fundamental. I also agree that greater choice and freedom together with education and necessary controls are good. In fact there is a strong case for a limited extension in certain circumstances below retirement age if only to reduce the attractiveness of liberation scams for the needy.
What I’m less sold on are the Chancellor’s motives, the net impact on the public purse on the medium to short term and whether it will have any great impact other than around the margins. There are other changes that, although they could perhaps go further, will help deal with small pots and benefits. There are considerable relaxations to the drawdown regulations not to mention the possibility that all trust based DC scheme will have to offer drawdown. The people in the middle who have sufficient pension or fund value to provide a reasonable income in retirement tend to be the most inert, they saved for a reason and will accept what is provided. I really don’t think this will change things as much as early commentary (both for and against) would suggest.
In my opinion the proposed changes to trivial commutation regulations could be far more important, at least in the DB universe. With near immediate effect the trivial commutation limit will increase from £18,000 to £30,000 (including DB Schemes) which in itself should lead to a significant saving in disproportionate payroll costs for a lot of DB schemes and the lack of options available for DC members with small points. I think this is an area for Trustee awareness and communication to members; neither the receipt nor payment of such small pensions are in anyone’s interest.
The further extension to the commutation of very small funds (from £2k to £10k) without consideration of other funds could also be helpful to many however, this allowance applies in such prescribed circumstances it can be very difficult to take advantage of.
Where the changes could be of most benefit is if the Wind Up Lump Sum limit is increased analogous to the trivial commutation limit, which has yet to be confirmed. The costs and complexity of wind up and buy out are largely fixed and therefore can be extremely disproportionate for smaller funds, any additional freedom and choice given to members and trustees with regards to small benefits could make the whole process smoother, cheaper and more efficient.