As the headlines screamed out, there is no doubt Osborne's 2014 budget left the pensions industry reeling.

However behind every headline one should consider the good - giving individuals open access to a pension fund in the hope of encouraging higher saving levels. The bad - for companies the fact this freedom breaks the link for the funds to be used to create income for an individual to actually retire from the business. The ugly - regardless SMEs still have to deal with auto enrolment (AE) impacting businesses both financially and in terms of time.

The impact of the Budget itself is immediate and effects anyone age 54+.

There is a transition period to April 2015. The main amendments include...

  • Reducing the flexible drawdown minimum income requirement from £20,000 - £12,000
  • Increase in the size of a single pension pot that can be taken as a lump sum, from £2,000 to £10,000 and an increase in the number of pension pots of below £10,000 that can be taken as a lump sum, from 2 to 3
  • Increase in the overall size of pension savings that can be taken under trivial commutation, from £18,000 to £30,000
  • Increase in the capped drawdown limit from 120% to 150%

But without doubt the Budget ‘biggie' is that from April 2015, those over 55 will now have complete access to their fund at their marginal rate.

This is not good news for employers. Workplace DC pensions are an employee benefit. Employers provide benefits to meet corporate objectives. The point of a DC scheme historically, has been for employers to provide support for their employees in securing a financially stable retirement. This security of income is vital if the employee is to retire, allowing the employer to develop new talent and maintain a productive ‘agile' workforce. The combined effect of the removal of mandatory retirement, coupled with this new flexibility to, is that employees can now effectively spend all of their savings from age 55 without actually retiring.

What would you do in this scenario ?

Your employee* has a fund of £50k. They can take...

  • £12.5k tax free
  • £30k taken at marginal rate
  • £42.5k lump sum (if 20% tax payer)

Or...

Approximately £250 gross per month, flat rate single life annuity, no guarantees

*Age 65

It would take 14 years at least for income to equal lump sum.

While most members will not (be able to) buy that Lamborghini, human nature is such that many members will use their savings to make purchases that they previously wouldn't have been able to afford, such as holidays, new kitchens and cars or simply clear debt

To counter the Lamborghini affect, education at retirement must be provided by the employer. But at retirement is far too late and individuals will have constructed their own thoughts by then and we believe this education piece needs to be from 50 and no later.

Amidst the budget hype the ads are still on the TV saying ‘you're in!' almost suggesting no effort needs to be undertaken by the SME re its AE requirements. At 1st April (no April fool's joke) 4000 SMEs went through auto enrolment. With approximately 30,000 SMEs dealing with AE in 2014 and larger numbers in 2015, there are real worries in the marketplace about dealing with this capacity. Failure to comply comes at significant cost and the ‘I was not aware' excuse will not wash with The Regulator.

To counter this, Barnett Waddingham has created a solution which offers not only an effective pension savings vehicle, but also high levels of support for both employers managing their way through the process, and employees who could be saving for their retirement for the first time. Low cost for both parties is at the heart of our solution, but this is not at the expense of good administration systems, high levels of governance, active management and leading educational tools on pensions and wider money management.

Check our website www.barnett-waddingham.co.uk/ae to see how we can help you.