New legislation allows increased payment flexibility

If someone is a member of a defined contribution scheme from 6 April 2015, they will be able to access their pension fund, in full, without needing to purchase an annuity. With a defined contribution pension, you build up a pot of money that you use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on factors including the amount you pay in and the fund’s investment performance.

 

Flexible rules

The tax-free lump sum of up to 25% of the fund will remain available, with any remaining balance taxed as income. These flexible rules will apply to Additional Voluntary Contributions (AVCs), an extra pension contribution members of an Occupational Pension Scheme can make to help boost their income in retirement. In addition, these flexible rules also apply to cash balances and some hybrid schemes, subject to the pension scheme rules.

New arrangement

The new legislation also allows schemes to bypass their present rules, to allow them to give the increased flexibility to their members. But, as the rules are permissive, scheme providers can choose not to offer the new flexibility. If this happens, someone may have to transfer to a new arrangement to take advantage of the new payment flexibility.

Transfer benefits

Currently, you only have the right to transfer pension benefits up to a year before your scheme’s normal benefit age, and the Open Market Option doesn’t force providers to offer transfers to any other products. However, from 6 April 2015, this legislation will be amended allowing transfers right up to the point of retirement.

Approaching retirement

The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to shop around for a number of options to convert their pension.