The Taxation of Pensions Bill – What’s important? The new stuff coming in 2015

Following the new revisions, Pensions will become more and more important in estate planning as well as retirement planning. Here is a summary of the main points, some of which were not so clear when the new flexible rules first hit the news:

  1. Capped drawdown retains the £40,000 annual allowance

Anyone already in capped drawdown before 6 April 2015 can continue to make contributions up to the £40,000 annual allowance. Provided full flexibility isn’t required at outset, an account holder can access capped drawdown whilst continuing to make significant contributions.

Accessing the new flexibility, or designating new funds for drawdown through a separate arrangement will cause the annual allowance to be cut to £10,000 (but designating new funds for drawdown within an existing capped drawdown plan which is a single arrangement, will not disturb the £40,000 limit.)

*Tactical Planning point. Capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. Investors wishing to carry on a drawdown arrangement yet take advantage of the £40,000 limit would need to enter into a drawdown arrangement (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that level of annual contribution allowance.

2) Capped drawdown to capped drawdown transfers

Where someone transfers their capped drawdown fund to a new provider they can retain their £40,000 annual allowance. If they wish to access the new flexibility following transfer they can notify the receiving scheme that the funds are to be deemed ‘newly designated’, i.e. be classed as flexi-access, which would then see their annual allowance cut to £10,000.

3) 55% tax charge on death

The Bill carries through on the promise to scrap the 55% tax charge on lump sum withdrawals following death in drawdown post 75 and on crystallised funds. The tax charge has been cut to 45% and now only applies to lump sum payments where death occurs after the age of 75. The charge will also be levied on value protected annuities and pension protection lump sums from DB schemes.

4) Anti-Tax free cash recycling

Rules exist to prevent someone from taking tax free cash from their pension and making a fresh pension contribution which attracts tax relief. The original draft Bill amended the current 1% of lifetime allowance figure (used to measure the amount of tax free cash paid within a 12 month period) to £10,000. This is now been cut further to £7,500.

5) Triviality and small pots

Further relaxation has been given to the payments under triviality and small pots rules. The minimum age under which such pensions can be taken as a lump sum is being reduced from 60 to 55 (or earlier if under ill-health rules).

6) Temporary non-residence rules

Rules already exist to prevent someone becoming temporarily non-UK resident and drawing their pension benefits in large chunks to escape UK tax.  For example, currently someone in flexible drawdown drawing the benefits while non-UK resident and then returning to the UK may be subject to UK income tax if they return to the UK within 5 tax years.

The Bill expands the rules to include the new flexible income options and now also includes ‘flexible annuity’ and ‘money purchase scheme pensions’. And imposes a tax charge on the return to the UK within 5 years where withdrawals while non-resident have exceeded £100,000.

Flexible Drawdown from April 2015 – it’s Confirmed

In the March 2014 Budget the government promised much greater flexibility for DC (Defined Contribution) pension holders withdrawing their benefits. The consultation period which followed is now over and government has today confirmed the new flexibility and the main rules. These are confirmed as follows:

  • The new DC flexibility will commence from April 2015.
  • The guidance guarantee will be delivered by a range of independent providers, including TPAS and MAS.
  • A reduced £10,000 Annual Allowance (for new pension contributions) will apply after a client commences flexible drawdown, to help counter potential abuse. N.B. – this only applies to drawing down flexible benefits – taking a secured income (annuity) or only taking tax free cash will not trigger the limited Annual Allowance.
  • Defined Benefit (Final Salary) transfers will still be permitted provided professional advice has been given.
  • Tax-free cash remains at 25%.
  • The rate of tax on undrawn drawdown accounts at death will be reduced from the current 55% – with the new rate to be confirmed in the Chancellors Autumn Statement.
  • The minimum pension age is going to increase to 57 from 2028.

This is good news for those favouring flexibility of pension withdrawal. It is interesting that an Annual Allowance for further pension contributions will continue, albeit at a reduced level, and this will be helpful in designing strategies for retirees. This annual allowance will be afforded to those already on flexible drawdown under the previous rules – where previously no further contributions could be made after commencing flexible drawdown.

So, people of pension age will be able to access their DC pension pot, and take what they want, when they want it. The key will be to use this new flexibility sensibly to meet a client’s financial needs tax efficiently – and that is where good professional advice comes into its own. Please call us to discuss your retirement planning needs – 0845 013 6525.

Stay posted for more on this radical shake-up of UK pensions regulations!

Floodgates

Careful now.

Free “Guidance” at Retirement needs to be independent!

Government proposals to provide free retirement guidance have widespread support but more than half of over-55s think it should come from an independent, consumer body.

Chancellor George Osborne announced plans at the 2014 Budget to guarantee all retirees with a defined contribution pension “free, impartial, face-to-face advice”.

Retirement “advice”, which is regulated, was quickly replaced with “guidance”, which may be unregulated, subject to the final rules.

A survey by insurance and retirement specialist LV= found that 80% of respondents supported the proposals, due to take effect from April 2015.

However, the responses revealed a lack of faith in pension providers to give impartial, trustworthy guidance.

The survey of more than 2,000 people aged over 55 found:

  • 78% support free pension savings guidance for those approaching retirement
  • 52% would accept guidance from an independent, government-backed consumer body
  • 48% would act on guidance provided by an independent body
  • only 17% would choose a guidance session offered by their existing pension provider if given the choice
  • just 19% would act on guidance provided to them by their pension provider.

Managing director of LV= Life and Pensions, Richard Rowney, said the research findings:

“…support the widely held view that, for the guidance to be a success, those approaching retirement need to have trust in the process and the organisation offering the service. It is clear from our research that, in order for this to be achieved, the sessions should be provided by an independent body.”

 

IHT – HMRC proposes just one Nil Rate Band for lifetime transfers

HM Revenue & Customs has recently released proposals which could significantly increase the IHT levy on trusts. The proposals will, if introduced, apply from April 2015 but anti-forestalling measures will back-date their application to any transfers into trust from June 6, 2014.

Presently the nil rate band (£325,000) is available for lifetime transfers into trust, and effectively “refreshes” or “re-sets” every seven years. As such, wealthy individuals can set up a succession of transfers into trust each seven years and legally avoid significant sums of IHT on eventual death, since they have moved that value out of their taxable estates.  In an example, HMRC state “(currently) a couple aged 40 could transfer property into a separate discretionary trust every seven years (£3.25 million by age 75 assuming the nil-rate band remains at £325,000) saving £1.3 million in IHT. In this scenario the next generation avoids any IHT charges altogether because of the previous generation’s use of multiple nil-rate bands.” This is considered undesirable by HMRC.

The proposals would give each individual one special ‘settlement nil-rate band’ that would apply during their lifetime, which would be divided between any trusts they establish (as specified by them as settlor). There would be no “refresh” of the nil-rate band every seven years, thus in a stroke the proposals would significantly reduce the IHT savings that are available currently.

The industry was expecting HMRC’s further  consultation document on the simplification of taxation of trusts, but this extra innovation was not anticipated. HMRC stress that these proposals are only in the consultation stage, but it is a worrying development for high net worth people who are concerned about inheritance tax.

The full HMRC consultation document can be found on HMRC’s site here.

Regulator issues warning on dodgy pension transfers

There have been some scandals recently about people losing their pension fund because they were persuaded to invest in ‘off plan’ foreign property schemes.

The Financial Conduct Authority (FCA) has now issued an ‘alert’ about transferring your pension fund to a self-invested pension plan (SIPP), saying make sure the underlying investments are suitable. They already had concerns that some firms advising people about pension transfers were not properly assessing the advantages and disadvantages of the underlying investments held within the new pension arrangement.

The FCA has now said that it is worried about investing pension monies in unregulated products, through SIPPs. In its investigations, the FCA found that there were cases where people with traditional pension plans or final salary schemes were persuaded to transfer them to SIPPs and invest them in ‘non-mainstream propositions’. These new arrangements were typically unregulated, high risk and highly illiquid investments. Some examples of these investments are overseas property developments, self-storage pods and forestry.

It went on to indicate that such transfers or switches are unlikely to be suitable for the vast majority of retail customers.

This seems to be on the increase. Please make sure that you do take care and get independent advice before making any transfer of your pension funds or entitlements.

Auto-Enrolment for Smaller Employers – is it going to get Ugly?

From feedback I have gained from practitioner colleagues involved in A-E, and in own my experience so far, the engagement of smaller employers with the whole A-E process is depressingly low.

With the majority of smaller employers (<30 employees) staging in 2015 and through 2017, (in their many thousands I might add), I have to wonder how much of a mess it’s all going to be: moderate, major, or stupendous?.

Back in 2011, NEST’s intermediary development manager Adrian Sims stated “The challenge is providing appropriate information to make a decision through intermediaries to guide them through that process.” This now seems doubly difficult given the fact that many intermediaries aren’t very interested in offering A-E services any more ( it seems) e.g. due to billing difficulties – employers don’t want to pay and they cannot get paid any other way – all traditional routes (commission, consultancy charges paid via the scheme) being cut off.

What do other group pensions practitioners think?

New Rules for Pensions – Retirement Income

New rules for pensions-retirement income

The March 2014 budget heralded a massive shake-up of UK pensions. The announcement was that from April 2015, anyone of pension age could draw as much from their defined contribution (or ” money purchase”) pension pot* as they choose. The 25% tax-free allowance (pension commencement lump sum – “PCLS”) remains in place, with the balance to be taxed as income in the tax year that it is taken.

The proposals are still subject to consultation, but it is anticipated they will proceed as planned.

For most people, this massive increase in flexibility of withdrawals from pension funds is welcome. It means that larger sums can be taken and utilised for, for example:

  • Pressing financial needs, such as repayment of a mortgage or other loans.
  • Expenditure on major items in amounts greater than the PCLS would have allowed.
  • Gifting of funds to relatives – e.g. helping children get on the property ladder, or even gifting for purposes of IHT mitigation.

So, the former overriding principle that the pension fund remaining after PCLS must be utilised such that it provides an income throughout the rest of the pensioner’s life (either through an annuity or via capped drawdown), has been done away with. Now, you may exhaust your pension fund as rapidly as you like, although doing so too rapidly may move you up into a higher tax band.

Considerations for those who may retire imminently:

Since the new regulations will not take place before April 2015, the Chancellor announced two immediate changes to the income drawdown rules to apply in the interim, to assist people retiring now:

GAD limits: the Government Actuarial Department sets withdrawal limits on capped drawdown schemes. For all existing capped drawdown plans, the existing limit shall increase from 120% to 150% of the GAD basis amount for all income years starting after March 26, 2014., people with existing plans need to wait until their next anniversary before the limit applies.

Flexible drawdown minimum income: Flexible drawdown has been available for some years now, but only to persons whose minimum guaranteed income in retirement was at least £20,000 per annum gross including state pensions (and already in payment). This minimum income limit has now been reduced to £12,000 for those wishing to start flexible drawdown after March 26, 2014.

These new limits will of course become redundant in April 2015 when complete flexibility of withdrawals will begin to apply regardless of size of funds or levels of alternative income.

Other: Existing triviality limits have been extended in advance of April 2015. From age 60, individuals with total pension savings of £30,000 or less may take it all as a trivial commutation lump sum. Additionally, small “stranded” pension pots of up to £10,000 can be taken as a lump sum – an increase from the current £2,000, and the number of such pots that can be taken as a lump sum is increased from 2 to 3.

Some individuals could therefore achieve up to £60,000 through trivial commutation (one needs to take the stranded pots first. If they do not already exist they can be created by making contributions to new plans! (subject to relevant earnings)).

55% Drawdown death benefits tax charge may be reduced.

Presently, when a person taking income through an income drawdown plan dies, the plan can be taken over by a spouse or dependent relative with no particular tax charge at that point. But upon second death (or first death where no spouse or dependent relative election applied), the remaining fund could be distributed to beneficiaries only after a 55% tax charge. This level of charges now under consultation, and may be reduced to a fairer level of tax more closely aligned to the policyholder’s former rate of income tax.

Conclusions

This all leads to a greater need for sensible advice to retirees prior to taking their retirement benefits. Whilst the Chancellor has promised “free advice for all” (which soon became “free guidance for all”) this will probably only be a telephone conversation with the reirees pension company, or similar. As an independent adviser I will look at your income needs, tax position, spouse and dependents needs, other investments and help you formulate a sensible, sustainable plan for a long and hopefully healthy retirement.  You can’t beat good independent advice.

 

*The terms “defined contribution” or “money purchase” apply to pretty much all occupational and personal schemes which are not “final salary”.

New Pensions Rules – Budget 2014, or “Look what they’ve gone and done now….”

In case you missed the content of the Budget here’s a handy link to a concise, printable document which sets out the facts and figures: March 2014 Budget Summary

I’m still shaking my head over the proposals to allow all people in money purchase pensions (non-final salary) to have unlimited (“flexible”) drawdown on their pension pots at retirement age, regardless of size of fund and without any necessity for a level of guaranteed income from another source. The sentiments below will no doubt be at odds with many with an interest in the subject. Certainly the media and various industry pundits appear mostly in favour of this new found relaxation of the rules.  Many people approaching retirement are now looking forward to planning what they will do with their fund, and financial advisers are looking forward to more cash investments to advise upon. There is no doubt that this will bring opportunity to many, but I’m wary. This all sounds like a bit iffy to me.

The main justification offered by the Chancellor for the proposed relaxation of pension rules announced last week is that “people who have been responsible enough to save all their lives for their retirement will be responsible with their money in retirement, and should have the freedom of choice”.  Sorry, I simply do not buy that. I think there are some likely adverse socio-economic effects, which could be on a wider scale than predicted. I have a number of concerns:

A huge number of working people in the UK (millions, literally) aren’t currently saving in a pension, but soon will be (shoe-horned into one via Auto-Enrolment (“AE”) regulations.)Many of this category of pension saver would not have saved in a pension otherwise, will have a smaller pension pot than average at retirement age, and, being reluctant savers, are more likely than most (in my opinion) to spend the cash quickly when given access to it. AE is a fine idea which compels those not saving for their own retirement to at least take some modest steps towards doing so, and so helps improves income in retirement. In my opinion, to then offer such pension savers the whole fund back as a potential lump sum undoes a lot of the good that AE brings.

For other pension savers, the temptation to strip out large chunks will be great for a variety of reasons. Who, in their sixties, hasn’t got a son, daughter or grandchild who is struggling financially? Maybe they cannot get on the housing ladder , or need some other important financial assistance. How many wouldn’t consider making a loan or gift from this pot of gold which is now accessible from the Bank of Mum and Dad?  The tendency in this country is for parents to assist their offspring far beyond age 21, some with an amazing capacity for selfless acts. That money isn’t going to end up looking after the parents in old their age after all.

‘Ah’, you say, ‘but they can invest that money in something other than an annuity now’. Well, yes but you could pretty much do that under SIPP drawdown anyway, apart from investing in residential property. SIPP drawdown was not an exclusive club at all, but it did require financial advice under strenuous compliance to ensure it was suitable to the client. How much depth of advice can be given under this “free financial advice for all retirees” being bandied about I wonder?

Consider also the more sinister effects of the proposed changes. For example, there will be instances where avaricious no-good kids will be looking at mum or dad’s pension and counting the days to retirement, when they can bully a serious chunk of cash from them. Not very likely? I’ve seen it with equity release in the past with children making unsubtle enquiries “on behalf of their parents”, and this will be a much easier way for them to try and raise some quick cash.

Some will call these regulatory changes a great opportunity, a freedom to carve up one’s pension any way you choose, and something that people want. But the whole idea of a pension is to provide an income for life, that is what separates it from other types of saving. It’s not a rainy day savings plan, it’s a rest of your life savings plan. Common sense suggests that many people who will retire under the new proposed regime will not be capable of managing their financial affairs suitably, and would have been financially better off with a compulsory annuity, or even capped income drawdown if they fit the suitability criteria.

More generally, let’s face it, we don’t know how long we will live, people have never had this much access to pensions before, and simply being in a pension plan half your life doesn’t make you super-sensible with money. The fact that so many people accept poor annuity offers from their pension providers at the point of retiring, rather than look to the open market, is a good example of how financially savvy people aren’t when left to their own devices.

“… But we’re going to get everyone financial advice for free at retirement”. How does that work then? I don’t know financial advisers who work for free. Someone will pick up the cost so who will it be? The retiree ultimately. I suspect. And how good will that advice be?

No-one was lobbying government for this per se. There has been a recent upswell of criticism of the annuity industry (most of it well-founded) but that could be sorted out, even if a little more regulation or legislation was needed.  So why now?

Contrary to the political spin, I believe the proposed relaxation of rules on pensions is likely to see many retirees releasing money from their pensions relatively quickly, who would be better advised not to do so. If that happens then it will raise tax revenues for a few years in the shorter term, maybe even plug an income gap for government that is no doubt sorely needed. But it would be a short-term injection. Will everyone blow their pension funds and then throw themselves on the mercy of the State for a basic income for the rest of their lives? No, but some will, at least, and perhaps quite a few.  The Chancellor claims that the proposed new flat-rate State pension with no means testing would be an adequate safety net. At around £7,000 per year I have my doubts. Moreover, I also have severe doubts as to whether the State can maintain that level of flat-rate State pension in real terms over the long term. Of course the current mob in power will have moved on or retired by then (on their generous State-funded final salary pensions).

This is scary stuff folks. I know everyone thinks it’s great, a brave message from pensions minister Steve Webb, but I don’t think the British working public are ready for it yet. By all means extend flexible drawdown, and by all means reform the annuity industry. But let’s not completely throw caution to the wind eh? Because the country cannot afford to keep getting things like this wrong. All eyes will as usual be on the next generation to fund State pensions and other benefits, and let’s face it, with an ageing population and an unfunded State pension, they’re already going to have to pay for enough as it is.

Aviva Wrap warms up the Platform Price “War”

Aviva’s new but already popular Aviva Wrap funds platform is adding a new lower cost tier for larger fund investors. The table extract below shows how it stacks up from February 17th next.

If you hold ISA or general (non-ISA) investments (or have a SIPP or similar personal pension) with any provider and are interested in an up-to-date price comparison and/or discussing the recent reductions in platform costs across UK investments providers, please call us on 0845 013 6525.

Aviva platform

BT – Your tactics are questionable to say the least.

We have all seen and heard news about the power companies bleating on about how they are only passing on increased costs, and that their margins are slimmer than a cigarette paper, as they whack up their prices yet again and somehow make record profits every year (even after the board’s bonuses). Plenty has been written and spoken about the tactics and smokescreens of NPower, E.on, British Gas & cronies. However a recent further example of stealth billing put my back up recently, and which seems just so typical of how British companies treat consumers nowadays, that I thought I’d share it with you – if only to get it off my chest.

My business numbers are with BT.  I received what looked like an innocuous piece of junk mail a few weeks ago – a single, colourful sheet of paper from BT , (printed on one side with a really small font).  Fortunately I read it before binning it. The letter said they were going to start billing me “a small charge” of £122.88 +VAT per year (£147.46) for each of my listings in the classified section of the phone book. To keep my existing (formerly free) listing I “didn’t need to do anything”, as they will just automatically add the charge to my bill every quarter.  Stealth billing rule #1 – get in under the radar by giving minimal information in a low-key chatty manner, then take the money via a DD that’s in place.

I didn’t want to pay for any phone book entries as I don’t believe anyone uses the classified book much anymore (it’s not really even Yellow Pages any more), so I called to cancel. But on ringing BT and stating my intent I was surprised to immediately be offered a much cheaper deal of less than half the quoted price “because I was a BT customer”. Isn’t everyone? I asked.  “Well… er, some non-BT customers choose to advertise in the BT classified book”. Hmm I’m not so sure about that. Either way, they knew all along of course that I was a BT customer (they wrote to me after all), and, if they truly had a two-tier pricing structure, they should have offered me the lower price in the first place.  Stealth billing rule #2:, if the first attempt doesn’t work and the customer cottons on, make up some cock and bull story about discounting it and have another bash at making some money that way.

Now if BT has a cheaper price for its customers, will they charge that cheaper price to all those customers (presumably the vast majority) who ignored the little one-off flyer (or simply didn’t care) and did nothing?  I think we all know the answer to that one. Hardly treating customers equally is it? Stealth billing rule #3: Don’t worry about people paying different prices for the same service. It’s OK if the quiet majority get shafted. 

There’s a theme here that’s pertinent to us IFAs. We are constantly nagged and reminded by the FCA to treat customers fairly and be seen to do so by publishing our various fees and charges for every situation and explaining them at length (ad nauseum some might say) to clients, and the FCA will, on a visit, check this area most carefully. Any routine discounting of fees for example is something they don’t like at all – it’s against the fairness principle to charge different fees for the same service. But while they’re micro-managing little IFA outfits like me, the OFT is happy for BT and other giants to just go ahead and make money from consumers by any method they can get away with.

There just seems a palpable lack of integrity in the major consumer markets nowadays, with senior executives aiming at maximisation of short to medium-term profit rather than the long-term.

The BT thing doesn’t constitute much more expense to even a small business, but to BT of course an extra £122 for every line entry in the classified section of every directory in the land adds up to a nice little earner. And of course what BT , the high street banks (they’ve been at it for years – they don’t need a DD they just dip into the punter’s account……but I digress) and some other major British businesses are doing isn’t illegal. They check with their legal advisers and ensure their sales processes fit within the relevant legislation and their T&Cs ( which they can more or less amend unilaterally anyway). They rely on the letter of the law, never the spirit of it, and push the boundaries wherever they think it worth the risk.

For me it just demonstrates UK big business’ growing contempt for the customer. They know that the typical UK consumer is trusting and accepting, and they are taking more advantage of that than ever before. For them, it’s not about fair prices or providing a good service for customers any more (if it ever was), it’s about exploitation.