Hearts and Minds – The Importance of the Guidance Guarantee

The Government and the Financial Conduct Authority are currently working on the outline for the Guidance Guarantee, the free help offered by the Government to those wishing to access their pension funds.

However, vested interests will cloud the implementation of the Guidance Guarantee and it must stay on course to provide the best it can.

What six attributes must it have to be a success?

1. It must be independent of Government and providers. Both are tainted by a lack of trust amongst the general public and so Guidance must stand alone to be trusted. This means the provision and branding are separate and recognisable.
2. There must be a recognition that individuals will not have the knowledge to fully understand the information they will be given and, therefore, the process must include a period of education via the employer if necessary.
3. Where there is no employer to act as a conduit per se, for example people who are self-employed or no longer in employment, the scope of the required learning must be made available to them. Equally those without a paternalistic or engaged employer.
4. What must be clear is what the Guidance is and what it isn’t. Guidance is a provision of information and an opportunity to take stock of where one is. Clarity of what it can and cannot do will help manage expectations with the eventual outcomes.
5. This may not be the final step during the decision making process and next steps must be clear and if professional advice is needed then this must be included (albeit at a cost to the individual).
6. It must proactive and forthcoming with information and not rely heavily on individual initiative. As shown with the success of auto enrolment in increasing scheme membership, inertia will grip many and confusion should not be allowed to paralyse individuals into non-action or the wrong product.

    David Brooks

    Technical Consultant

    Telephone: +44 (0)20 7893 3456

    Email: contactus [@] broadstone.co.uk 

We're all in - well not yet, but we want to be!

Latest figures from The Pensions Regulator (tPR) indicate that more than 5 million additional employees have been enrolled into an employer’s pension scheme since automatic enrolment legislation came into effect.  Now that large and most medium-sized organisations automatically enrol staff into a Workplace Pension scheme, smaller employers are increasingly coming under pressure from existing and particularly new employees who expect to benefit from pension membership.  This has led to us seeing an increase in the number of requests from employers who say they want to bring their staging date forward.

Other reasons for bringing the staging date forward are to align the start of automatic enrolment with annual pay reviews; the company’s new financial year; the flexible benefit scheme ‘window’; or simply a less busy time of year that better suits the business.

 

Before embarking on this course, however, it is important that both the company and the pension provider will have sufficient time to prepare and can accommodate the reduced timescale. This is important because once the employer informs tPR that it will be bringing the staging date forward then it cannot be moved back. Earlier available staging dates are listed here.

 

What clients don’t always appreciate is that they could launch and start their pension early on a voluntary basis (i.e. a ‘soft launch’) and then automatically enrol remaining staff at their original staging date. 

 

The soft launch enables an employer to benefit from considerable employee goodwill (if communicated effectively) as a result of starting pension contributions early; defers the contribution cost for any employees who do not join voluntarily at outset, and allows extra time for automatic enrolment to be communicated to staff in advance of the staging date so that it comes as no surprise to existing employees.  

 

Ian Willans
Business Development Consultant
Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstoneltd.co.uk

Coming out as "protectionist"

With the Labour party toying with the politically risky idea of rolling back the new pension flexibilities it is perhaps a good time to consider where we may be going.

The success of the flexibility and freedom of choice for all with their pension assets hinges on the quality of the guidance AND advice that individuals receive. Everyone in the industry can already tell you that a form of generic guidance will be insufficient for the majority to make the right decision and will come down to chance without the correct appreciation of the risks. Without an appreciation of the risks many will experience poor and disappointing outcomes. With flexibility and freedom comes a bewildering array of choice and complication and the opportunity for mis-selling and further devaluation of pension savings.

If the first step on the path to advice is guidance, albeit restricted to pensions assets, then this will give us the greater chance to see better outcomes for members.

However, for this to succeed financial education needs to be increased at all levels. Employers should be encouraged, on a safe harbour basis, to provide financial education to all staff, from new joiners to those looking to leave and move into retirement. Schools need to engage with charities like MyBnk and the like to start the cultural change to financial literacy, knowledge and understanding across the board.

We must recall, and not forget, that drawdown was described just weeks before the 2014 Budget as a highly sophisticated product only suitable for wealthy investors. Drawdown is complicated and a minefield for laypeople to address alone. With this the prospect of pensioner penury is a very real one.

On one hand many people are naturally frugal and the argument exists that they may live on too little to keep what they have. However, many will spend too fast too soon and run out of money and fall on the state.

By retaining an income requirement a level of guaranteed income, a safety net remains, with full flexibility allowed for benefits in excess of this.

However, continuing with complicated rules does also devalue pensions and almost certainly results in individuals being forced into buying annuities at a time when they do not give the best value. Although with improvements in longevity many will still win this bet.

So, on balance I believe that a brake should be applied to the flexibilities:

 

1.   Delay the introduction of full flexibility (see 2) for the process and guidance to be properly introduced. Allow capped drawdown, as now, without triggering the Money Purchase Annual Allowance

2.   Continue the Minimum Income Requirement (MIR) for flexi-access drawdown at £12,000 pa.

3.   Continue with the small pots solution, indexed with Consumer Price Index (CPI) so members with small funds can still receive these where the MIR is not reached

4.   Increase the Minimum Pension Age (MPA) to 60 (for flexible access) to prevent early depletion of funds

From conversations across the industry and it appears their two broad camps exist. One in support of the full reach of the freedoms, with the clear upside for many. The other, as I am, proposing a check to this trajectory, mindful of the potential for significant downsides… the debate will continue.

 

David Brooks

Technical Consultant

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstoneltd.co.uk

The Whirlwind that is Pension Reforms

Last week saw the publication of the Taxation of Pensions Bill in which we expect to find further clarification on the Chancellor’s proposed changes from April 2015.

The most eagerly anticipated of which is that individuals will be able to access the ‘tax-free’ lump sum from their (Defined Contribution) pensions as and when they want from age 55. This is a big change from the current rules which require ‘tax-free’ lump sums to be taken within 18 months of a member becoming eligible for their pension income.

We broadly support the Government’s proposals, however we question whether it is wise to encourage people to view their pensions as ‘bank accounts’, as this could result in a nasty surprise for some people when they incur higher than anticipated tax charges (up to 45%) when drawing from their pensions.

It is therefore essential that the public do not view their pension as ‘bank accounts’ as the two structures have virtually no similarities.

We are concerned that the Government’s shake up has not given due consideration to increased life expectancies, long term care, and investment risk amongst others. These issues pose problems to most professional advisers, so how does the Chancellor propose to protect inexperienced investors from making the wrong choices?

The proposed changes are only likely to be accessible to people who are invested in pension arrangements which are prepared to embrace the new changes. In reality most pensions will choose not to amend their current rules, meaning that large numbers of people are unlikely to be able to take advantage of these changes without transferring into some kind of alternative pension arrangement which has chosen to adopt the new rules. This is definitely an area where independent and impartial advice will need to be sought. Clients should be very careful and very wary when considering any pension wrapper .The new rules do not change this reality.

My personal view is that the proposed changes are likely to cause very few problems in the short to medium term, however this could cause problems for future governments if forthcoming generations choose not to make adequate provision for their own retirement.

Finally we would encourage the Chancellor to consider introducing some form of safeguard in order to help protect those who cannot afford to make the wrong decisions. If they don’t, then we may well see a rise in the number of people who become solely reliant on the state in old age. 

Philip Sutton
Senior Consultant
Telephone: +44 (0)20 7893 3456
Email: getintouch [at] broadstoneltd.co.uk

 

 

September’s low CPI signals trouble for DB scheme members

 

The pension conspiracy theorists out there (oh yes, they do exist) will look to the conveniently low CPI figures for September (1.2%) and conclude that the Government has cooked the books to raise extra tax revenue. Without getting BBC’s More or Less involved it does seem to us that September is often the lowest month for the measure of inflation… we’ll let you make up your own minds. However, let me explain why this could increase tax revenues and the very real implications for those in DB schemes.

 

Briefly, the Annual Allowance is the Government’s yearly limit for an individual on tax relievable savings into a pension. Introduced in 2006 it has had a tumultuous existence (which we need not go into here) and currently sits at £40,000 (from 6 April 2014) down from the £50,000 allowed in the previous tax year.
 

For DC schemes this test is straightforward and values the contributions paid in for people by their employer or themselves.

 

For DB schemes this is a little more complicated and involves valuing the increase in the pension the member has earned over the year, with an allowance for inflation (CPI) to the starting pension.

 

The announcement of a low CPI of 1.2% for September which is the annual rate used for the next year means that members in DB schemes will have less scope for an increase in their pension resulting in a greater chance they will exceed the Annual Allowance.

 

Some people might be in a DB scheme that uses Career Average Revalued Earnings (CARE) basis. Many of these schemes increase benefits in line with salary AND inflation linking and where the higher RPI is used this could also increase the risk of exceeding the available Annual Allowance.

 

Any pension earned in excess of the Annual Allowance is added to the person’s income for the year and taxed at the highest appropriate marginal rate.

 

There may be mitigating factors:

-       Low salary inflation could restrict the increase in the pension

-       Individuals can carry forward unused Annual Allowance from the previous 3 tax years so may have scope to reduce the tax charge

-       Where the tax charge is over £2,000 people can ask the scheme to pay the tax. However, the reduction in their benefit can be complicated and must be understood.

People should contact their Trustees/providers to understand the carry forward they have and engage with their employer to understand the impact of any potential salary increases on their tax bill. Employers may also decide turn to the advice community for assistance in explaining these overtly complicated rules to members and the implications for their personal wealth.

David Brooks

Technical Consultant

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

Decisions, Decisions.

I was thinking about what would be an exciting subject for our blog and suddenly the clouds parted…

The famous quote “If you fail to plan, you are planning to fail!” came to mind and these wise words are as true today as they were many years ago.

We are all inundated with so much “noise” nowadays, that it’s sometimes difficult to see the wood from the trees. Geopolitical tensions are rife, politicians are vying for our support (offering us promises that they may not be able to keep), interest rates remain stubbornly low etc.

Clients often ask us questions such as; “should I be gifting funds or setting them aside to cover the costs of Care”, “are markets too high or too low?”, “do I need to worry about Inheritance Tax?”

As financial planners, it’s important for us to be aware of this “noise”, but what is really important is our clients’ objectives (or plan). We know only too well that each of our clients’ circumstances are different. Some people are financially secure, but scared. Some are blinkered by the riches that certain assets have produced for their parents, without consideration that that may not be suitable for them. Many are just too confused by everything and end up doing nothing.

With improved access via the internet, there are some that look after their finances themselves (DIY financial planning), but in the same way as the gambler only talks about the BIG WIN, the pitfalls that lurk around the corner for this approach can be seriously painful.

We don’t have a crystal ball but we work hard to understand our clients’ future plans so short term changes would not blow them too far off track.

Frazer Wilson
Senior Consultant

Telephone: +44 (0)20 7893 3456
getintouch [at] broadstoneltd.co.uk