Freedom and Choice
What is Freedom and Choice?
In the 2014 Budget the Chancellor announced a change to the way people can take their pensions. Currently individuals who contribute to their own pension pots (known as defined contribution arrangements) have to take part of their pension pot as an annual pension (an annuity) and some tax free cash depending on the scheme or policy rules. From 6 April 2015, individuals aged over 55 with defined contribution pension savings, will be able to draw these savings as a cash amount but the amount available will be subject to income tax depending upon personal circumstances.
But how does this affect you as a member of the Local Government Pension Scheme (LGPS)?
The LGPS is not a Defined Contribution scheme. The options for those individuals age 55 or over who are members of the LGPS are:
- to retire on a voluntary basis and take immediate payment of pension;
- to defer payment your benefits to lessen or avoid any potential reduction; or
- to transfer the LGPS benefit to an alternative pension arrangement
Retiring at Age 55 from the LGPS
Benefits are paid in the form of an annual pension only or a combination of a tax free lump sum payment plus annual pension. The amount of tax free lump sum is limited by rules imposed on the Scheme by HM Revenue and Customs (HMRC).
Pension Benefits can only be paid after leaving employment. If retirement is before Normal Pension Age (State Pension Age or age 65, if earlier) the pension is likely to be reduced. Please see information on the Rule of 85 for more details of reductions that will apply to benefits.
Please note, for members who left the LGPS before 31 March 2014, their former employer's consent for payment of benefits between age 55 and 60 is required. Any decision taken by the former employer regarding the early payment of pension will be based on their own policy as an employer in the scheme and is not the decision of Staffordshire Pension Fund.
Transferring Pension Benefits to an Alternative Pension Arrangement
The LGPS will be able to continue transferring pension benefits to alternative providers after 6 April 2015 where an individual opts-out of the Scheme or leaves employment. The new legislation imposes a requirement on the LGPS member though to take independent financial advice from an approved Financial Advisor before proceeding with any transfer of benefits from the LGPS. Where the transfer value exceeds £30,000 taking approved independent financial advice is mandatory. The financial advice would be at the members own cost and would need to be evidenced to the Pension Fund before any transfer to another provider can take place. For those members where the value of the transfer payment is less than £30,000 there is no requirement to take financial advice but it is strongly recommended that professional advice is sought, as prior knowledge of the amount of commission and tax charges should be understood in advance of taking any action to transfer benefits from the LGPS.
If you are considering transferring your benefits out of the LGPS, Staffordshire Pension Fund have prepared a briefing note regarding your options:
Transferring Pension Benefitrs from the LGPS (92KB)
More information on Freedom and Choice can be found in the Question and Answer document below produced by the Local Government Association:
LGA Freedom and Choice Q & A (78KB)
Any member considering transferring their benefits should think very carefully before proceeding as they may risk losing their pension benefits and / or may be liable for a significant tax charge. The leaflet below produced by The Pensions Advisory Service contains further information:
Pension Scams - Information (123KB)
Link to The Pension Regulators website