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.


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.  

Pensions – The Lifetime Allowance cut April 6th 2014

Don’t snooze or you might lose. (OK I know pension rules are a tad dull but read on it’s important.)

The Lifetime Allowance is being tinkered with again! A year ago it was announced that the pensions lifetime allowance will drop at the end of the (current) tax year 2013-14 from £1.5million to £1.25 million. Remember, if you exceed the allowance, the excess is liable to be taxed at 55%.

Many more people are going to be affected by this than the Government suggests – a major pensions company estimates 360,000+.  Who  should care? Well, for starters anyone with aggregate pensions  (including final salary) currently valued at more than £1.25 million who hasn’t any existing protection from HMRC.  But also anyone in danger of getting close to that limit in the years to come (don’t expect Government to put it back up again anytime soon). The graph below shows the LTA since inception in 6/4/2006 (“A-day”) and perhaps suggests a trend (source = Standard Life):

Pensions Lifetime Allowance LTA chart

Lifetime allowance 2006 to date

Who’s in danger of falling foul of the latest rule change then? Well, of course it depends on how much aggregate pensions you have now, what your current funding level is and how long to go until your likely retirement date – but some simple maths produces the following table as a guide for members of money purchase schemes (i.e.  group personal pensions, occupational money purchase schemes, executive plans, RACs (S226s), S32s, i.e. anything not final salary) as follows:

Fund level now (without further contributions) to achieve £1.25 million
Years to Retirement Fund now growing at 4% Fund now growing at 6%
3 £1,111,245 £1,049,524
5 £1,027,409 £934,073
7 £949,897 £831,321
10 £844,455 £697,993

And that’s assuming you make no more contributions to any plan!

Likewise for those lucky enough to have a defined benefit (final salary) pension (the calculation is 20x the annual benefit, so £62,500 per year is where it max’s out):

(Deferred) Annual Final Salary Pension level now to achieve £1.25 million
Years to Retirement Pension revaluing at 3% p.a. Pension revaluing at 4% p.a.
3 £57,196 £55,562
5 £53,913 £51,370
7 £50,818 £47,495
10 £46,506 £42,223

The table above assumes you’re no longer an active member of the scheme / adding years!

Don’t forget to aggregate your money purchase and final salary pots together.

What to do?

There are two new options to lock into the current higher allowance:

“Fixed protection 2014” allows clients to lock into the old £1.5m allowance beyond 2014. The down-side is that pension savings have to stop after 5 April 2014. You must apply for this by 5 April 2014.

“Individual protection” is only available to clients with pension savings worth more than £1.25m on 5 April 2014. It gives a personal allowance equal to that benefit value on 5 April 2014 (i.e. up to £1.5m), and importantly it doesn’t mean giving up on pension saving. You must apply for this by 5 April 2017.

It’s a complicated issue though and might require regular monitoring of all your pension accounts.  There are many potential angles to this and not all are obvious. For example, maybe you think you’re a marginal case? Well perhaps de-risking your pension investments works for you – e.g.  if  a steady lower risk, lower return portfolio probably keeps you below the limit, but a higher risk approach (always assuming it does achieve higher returns)  is likely to take you over it – in which case do you really want to take risk chasing higher returns  when the Government stands to get most of the benefit? Just one example of things to think about.

The simple message is get to advice from a good independent pensions adviser   …………..(hmmm…  Oh! Hello …… ) if you are in any way concerned about this. We can look at various scenarios and discuss solutions and the alternatives which suit your particular circumstances and give you the best results when you do actually retire.

Remaining invested in Pensions beyond age 75

Following changes in 2011, Pensions legislation no longer requires you to buy a lifetime annuity, or take any pension commencement lump sum (PCLS), at age 75. However, for those who remain invested in pensions via drawdown plans or uncrystallised pension policies, and are approaching that magic age of 75, this presents two key decisions:

  • Taxation of lump sum death benefits after age 75. From that point onwards a 55% tax charge will apply to any lump sum death benefit paid from pension savings, whether untouched or in drawdown (this was the main reason why a client of mine recently crystallised his benefits).
  • Lifetime Allowance test at age 75. Pension savings that clients have built up which are not providing a lifetime annuity or scheme pension will be tested against a client’s available Lifetime Allowance at 75. Once the test has been carried out there will be no further Lifetime Allowance test on the value of those savings.

This may well influence your choices as to how much, and when, you decide on taking income from your remaining pension savings.

Whilst pension legislation now allows pension policy holders freedom from enforced annuity purchase at age 75, not all of the pension policies in which those people’s savings are currently held actually allow this flexibility. Many older, legacy, pension products were designed with systems and policy terms that reflect the old restrictions that applied to earlier the legislation, and in many cases those terms will not be updated and will still dictate what clients can do with those policies.

For some it might mean that annuity purchase becomes the only income solution available at 75, whether the pension savings are in drawdown or not. For others it could even mean a worse-case scenario, as  recently reported in a case in the Daily Telegraph, that a client could lose all options to be provided with authorised benefits from pension savings, resulting in a 55% tax charge being applied to the total capital value of those savings that were paid after age 75.

If you are unaware of what flexibility, or limitations, exist with your existing pension products and you are near to age 75, you might struggle to have enough time to consider alternatives that could provide continuing solutions that align with your preferred retirement income plans. If this sounds like you, i.e. approaching 75, and still with an older drawdown scheme or perhaps uncrystallised pension plans, you should consider an urgent review of the choices available to you from your existing products, to help ensure your longer term retirement income plans are to be achieved without potentially significant change.

-Source: Skandia