2014 Budget pension measures

The Budget has proposed fundamental changes in the tax rules surrounding pensions

While they will impact primarily on DC (defined contribution) pensions, there will also be considerable knock-on effects on DB (defined benefit) schemes.

This briefing attempts to provide information helpful to members and representatives but its content is subject to revision as it is not clear all aspects of the changes and their implications have been fully worked though by the Government.

While the new measures give pension scheme members a great deal more flexibility as to how to make use of their pension savings they will also create new dangers for them in terms of making it more likely that they will not plan their finances on a basis which will provide them with income throughout their retirement and meet the needs of their dependants.

The main changes are summarised in the table below

It is important to note that tax freedoms do not necessarily over-ride schemes’ rules and so there may be a need to check what applies with employers and pension providers before taking decisions

The key change is the move to an unrestricted right to withdraw money from DC schemes at retirement subject only to payment of income tax at an individual’s marginal tax rate.

It is likely this will lead to a situation where DC pension funds become much more like a retirement savings account, which members  can access as and when they see fit .

There will be no compulsion to buy annuities or otherwise to draw an income via an income drawdown product, but these will remain as options.

Members close to retirement should note the phasing of the changes as it may influence their decision as to when to retire or when to access their DC pension benefits. (Since the Budget it has been announced that people retiring in 2014/15 will be allowed to draw their 25% tax free cash but delay their decision on what to do with the rest of their benefits until after the April 2015 changes take effect.)

Members with smaller DC pots should note the immediate lifting of limits which will mean that many will not have to consider annuity purchase

Older members who have opted-out of employer schemes because they did not consider they could provide a decent level of pension may wish to reconsider their position and think of the schemes as simply a savings account for retirement.

The new freedoms will apply from age 55 and so may attract the attention of members who intend to carry on working. Any ability of employers to stop this will be inhibited by their auto-enrolment obligations.

The new regime would appear potentially, from April 2015, to allow DC scheme members to draw their tax free cash and leave their residual funds invested.

As from April 2015 pension schemes will have an obligation to provide all DC members with ‘guidance at the point of retirement’ about planning their retirement. What this will comprise of is unclear but it falls short of financial advice.

Concerns have been expressed that people often underestimate how long they will live and are not well equipped to plan how to spread their pension savings over their retirement.

The advantage of annuities is that they guarantee an income for life on specified terms, a defined benefit during retirement.  Leaving funds invested or withdrawing them under the new regime yourself and investing them means a member remains exposed to investment and mortality risk. However, annuities are widely perceived to offer poor value for money, especially at the present time. This, combined with evident imperfections in the annuity market, has undermined confidence in them.

Current ‘income drawdown’ alternatives to annuities are complex products, with high charges and widely regarded as only suitable for those with large funds. This may change going forwards as the competition will not be with annuities but with uncontrolled withdrawals by members.

Implications for DB schemes
The scope for schemes/employers to allow/encourage commutation of low value pensions to lump sums is greatly increased.

This may affect how active and deferred members with small benefits are treated at retirement, and offers of transfer values to deferred members before retirement may be encouraged.

DB members with larger pensions may be interested in accessing their benefits quicker and consider transferring benefits to DC schemes.

The Government has announced that it will not allow transfers out of public service schemes to DC schemes, as it wants to avoid a potential strain on the Exchequer.

It is consulting as to whether private sector schemes will be allowed to place a restriction on transfers and taking account not just of the implications for the schemes but of potential impacts on the wider economy

There are dangers that the changes could lead members to accept transfer values which offer them poor value for their benefits.

Older members may drop out of DB schemes in order to get earlier access to benefits and proposals from employers to close DB schemes may be looked at in a different light.

In general, a short-termist view of pensions may be encouraged at a time when pensions are, due to longer life expectancy, becoming more long-term.

Early retirement may be encouraged at the expense of lower lifetime benefits in retirement.

Read the government consultation document ‘Freedom and choice in pensions


Under current arrangements

From 27 March 2014

From April 2015








Tax free cash

25% of fund/benefit

25% of fund/benefit

25% of fund/benefit

No change

Ability to draw out funds at retirement as taxed income

Up to two separate pensions if each has a value of under £2,000


Any of multiple pensions if combined value is under £18,000 (if aged over 60)

Up to 3 separate pensions if each has a value of   under £10,000


Any of multiple pensions if combined value is under £30,000 (if aged over 60)

All of DC funds can be drawn-out  after age 55

Income tax is payable at the individuals’ marginal rate of income tax





No change

Income Drawdown

Capped drawdown allows an income to be drawn up to 120% of the value of an annuity with fund left invested


Flexible  drawdown allows any amounts to be withdrawn if an individual has secured a guaranteed income of £20,000 p.a

Capped drawdown allows an income to be drawn up to 150% of the value of an annuity with fund left invested


Flexible drawdown allows any amounts to be withdrawn if an individual has secured a guaranteed income of £12,000 p.a

Drawdown available but not constrained

Income drawn is taxable at an individual’s marginal rate of income tax

Funds can be left invested after you stop work




Individuals could now delay drawing benefits until after April 2015

Minimum Pension Age




May rise to 57 in 2028

Unapproved withdrawals

Subject to tax at a penal 55% rate

Subject to tax at a penal 55% rate 

Not applicable if aged over 55

Pre-2015 funds in excess of £18,000/£30,000 must be taken  as annuity or through an approved drawdown