The Declaration of Compliance Process - Important?

Employers who pass their assigned staging date to commence the automatic enrolment process need to be aware that their responsibilities do not end once they have finished automatically enrolling their employees.

The regulatory body (the Pension’s Regulator http://www.thepensionsregulator.gov.uk/) has a very specific mandate from central government to encourage employers to have an ongoing involvement and a visible engagement process after their automatic enrolment process has completed.

One specific arm of this mandate is the declaration of compliance process (DOC).

The DOC is a method by which the employer confirms that the scheme that it operates is fully compliant with the standards set out by the Pensions Regulatory body. Employers are required to complete this every three years, in tandem with their re-enrolment of those employees who were not automatically enrolled at the assigned date.

After the assigned date, there is a very small window for the employer to complete their DOC using the Pensions Regulator’s website and if the DOC is not completed in this time, then the regulatory body has jurisdiction to levy fines on defaulting employers.

An important part of this process is to educate employers as to the ongoing role of the Pensions Regulator, beyond the role that it plays in the run up to automatic enrolment.  The DOC remains an employer’s responsibility but it is the responsibility of every financial advisor to ensure that the employer is aware of what is required as part of this process and their ongoing role within it.

Robert Simmons

Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Importance of Good Employee Communication

With the changes in pension’s legislation, more employees than ever are being automatically enrolled into pension schemes with their respective employers.  Employees who are affected by this are often unaware of these changes and the potential benefits or implications of being involved in such a process.

There is a distinct knowledge gap between an employee’s idea of what their pension should be and the actual reality of the workplace pension that is offered. The engaged employer should be aware of this knowledge gap utilising many forms of media to engage with its employees.
Communications can take several forms from employee facing booklets to presentations made by product providers or financial planning consultants. With all of these methods it is important to keep in mind the three prime concerns of every employee: What do I have to contribute? What will I receive at my retirement? How much will I pay for this additional benefit?

Financial planning consultants can liaise with their clients to tailor the best delivery method to effectively engage with their employee demographic. Answering questions early and definitively provides a more stable grounding for employee engagement in the pensions process. There will always be issues which will be encountered over the employee’s time within the pension but the likelihood of the same queries and questions occurring can be decreased considerably by good employee communication and engagement.

Robert Simmons

Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The DWP’s announcement on commission, what does it mean for your scheme?

In March 2014 the Government announced a number of changes to the pension system to improve workplace pensions for employees. These changes affect both employer and employee to some degree, and the biggest change that will affect employers is the removal of commission payments to financial advisers.

In the past, many employer-based pension schemes were set up to pay commission at both scheme level and new employee level. This would cover things like scheme reviews, ongoing payments, new joiners and governance meetings. All of which could be covered by commission overall payments received in respect of the scheme.

This is set to change when initial and trail commission are removed in November 2014 and April 2015 respectively. Payments will cease and most advisers will have to review the position with the employers they service.

In most cases, this will likely result in moving to a fee based retainer to cover the services which would have previously been covered by commission.  

Employers affected by these changes need to revaluate the services they are receiving from financial advisers to make a judgement as to whether their fees are appropriate to the level and quality of services being provided.

Robert Simmons
Corporate Pensions Administrator
Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Previous Pension Minefield - A Survivors Guide

In today's modern workplace individuals change employer ever more frequently so that an individual may change employer numerous times during his/her working life. The days of a 'job for life' that the previous generations enjoyed are long gone.

In most cases, individuals moving employer have pension benefits with their former employers.

With pension transfers becoming more common, employees with benefits in old pension schemes from former employers may decide to transfer these benefits to pension schemes run by their current employer. This can serve to eliminate the additional administration that can result on an employee’s retirement.

In recent years, the Financial Conduct Authority and the Pensions Regulator have heavily scrutinised the area of pension transfers and have especially highlighted the need for good quality advice in this area.

Mindful of this need for greater transparency, many of today’s pension providers will not consider the transfer of benefits for any employee until they receive financial advice from an independent financial adviser. Others will not allow transfers without employer consent.

Employees may be unaware of the value of their pension ‘pots’ and the potential minefield that they may be stepping into when seeking to transfer benefits. Many previous pension schemes may have additional (hidden) benefits that may be lost on transfer to their current employer’s scheme.

As advisers, it is important for us to be mindful of these benefits when reviewing  the previous pension arrangement of a corporate employee and understand when a line is crossed from providing mere factual information and explanation and veering into the area of individual ‘advice’..

Robert Simmons
Corporate Pensions Administrator
Telephone: (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

 

Will April's pension freedoms throw your automatic enrolment scheme off the tracks?

Doesn’t it seem like your automatic enrolment journey is finally chugging along nicely? At the start there was the surprise of just how many new processes you had to learn and how much administration time it seemed to take up. Yet now your consultant has helped you understand those things you thought you knew then realised you didn’t, and finally the whole assessment piece is just a few new employees a month which is taking an hour rather than a day. Your enrolled employees even appear to be engaged and talking about the benefit to them. This auto enrolment thing is easy!

Now we know in order to keep it so we always need to keep one eye on the future and consider how it will affect your company’s scheme. We’ve talked in previous blogs about what the new pension freedoms proposed for April 2015 will mean for your employees, but are there things for the employer to consider?

One thing stands out to me. What happens if an existing employee of 55 or over decides to access their company pension but not retire from work?

Further questions flow from there: Are you aware of whether or not you will need to re-enrol them in to your company scheme? Are your employees aware of the impact this could have on their tax position or what will happen if they use all their savings up? Accessing their pension could reduce their annual contribution allowance to £10,000, do they know this and what are your responsibilities as the employer? What does this mean if you have a salary exchange scheme up and running?

Finally of course is the question your employees will ask you in a couple of months’ time – “Does our pension scheme provide access to facilities to allow all the new pension freedoms in April?”

You may not have heard, but the majority currently don’t….

Now is the time to start thinking about the new freedoms coming in April and how you can keep your automatic enrolment scheme on the right track.
  

Charles Goodman

Consultant

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

 

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

 

Scotland decided

Markets have rallied and the pound has posted gains against a range of currencies including both the Euro and US Dollar in a positive response to the news that Scotland voted to reject independence. What is surprising is the vote was not as close as opinion polls were suggesting (55% voted no). In our opinion, this definitive result has brought an end to the prospect of months of difficult negotiations, uncertainty over the division of national assets and debt, and the currency arrangements of an independent Scotland. This is clearly extremely good news for both the UK and global financial markets. Indeed, markets are now likely to focus on the fundamentals of the UK economy.

 

Antony Summers
Private Client Partner

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

LTA! - Come on in your time is up

Rarely has such a concept become an anachronism so quickly. The Lifetime Allowance was introduced at £1.5m in 2006 and rose to the heady heights of £1.8m by 2010. It has since been pegged back and back to its new low of £1.25m. However, it is time for it to go. I am not living in complete naivety and understand that when it bites it is a revenue earner for the Treasury but a tax system should be fair and people should not penalised for saving into a pension.

 

Reasons why it should go:

 

1.   The Annual Allowance (the “input test” little brother to the Lifetime Allowance “output test”) is also at an all time low of £40,000. This level already restricts the tax efficient accrual in DB schemes (actually disproportionately afflicting those in the public sector) and also restricts the levels that the wealthy can attract tax relief therefore a second tax charge via the LTA is not required.

 

2.   The next government (however it is constructed) will be sure to introduce a flat rate of tax relief for pension contributions. The purpose of the LTA tax charge is to reclaim excessive tax relief during the accumulation phase if tax relief is say 30% there is no longer a need to recover excess tax relief.

 

3.   The unfairness in the system means that DC members are actually hit the hardest when taking benefits as there is a very good argument that DB benefits are given an unfair value. For example a £40k pa annuity would cost c£1.2m against a £40k pa DB pension worth (for LTA purposes) £800k. The LTA system is biased in favour of Public Sector schemes.

 

4.   It can be pretty complicated – protections and restrictions make it very difficult for joe public to understand – if we want to simplify the system as much as possible removing the Lifetime Allowance helps us move towards that goal.

 

5.   It stifles prudent saving into a pension and good investment performance. Having an upper limit, as well as an income limit, has forced individuals to either leave a scheme or begrudge the investment returns that takes them above their given threshold and attract tax charges.

 

Potential Issues if it is removed:

 

1.   It would be seen as a tax-cut for fat cats – albeit old fat cats. This is presentation matter and while some will regard it as such provided the “input test” is as punitive as it is now this already provides the brakes on wanton tax avoidance for younger fat-cats.

 

2.   What would you do to those that opted out of a scheme to protect what they’d earned, they might feel hard done by for the lost years of pension saving but they may be able to restart and they should benefit with carry forward for the lost years, a simple solution for those affected.

 

So as we approach the exciting time of the party conferences and the “pre-manifesto manifestos” shadow pensions ministers (and the real one) should take a progressive view and pledge to remove the pointless Lifetime Allowance.

 

David Brooks

Pensions Consultant

 

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

At what cost an inheritance?

With the continual increase in property values more and more family inheritances are being delayed in Probate.

 

More importantly, because of the overall increase in joint estate values it is not uncommon for Probate to be needed on both first and second death and as a result the process is fast becoming a very expensive and time consuming issue for middle England – in some cases creating a large financial burden rather than leaving a simple bequest.

On death your liability to Inheritance Tax is calculated however the overall tax due may change between the date of death and Grant of Probate because assets may increase or decrease in value.

Your Personal Representatives (PRs), who are often your beneficiaries, are responsible for settling any IHT and possibility Capital Gains Tax before they can settle your estate and HMRC would expect them to consider all assets - including their own - as a potential source from which to pay the tax. 

Often PRs do not have sufficient personal funds to pay the tax, or unencumbered property against which to secure a probate loan which often causes anxiety, stress and lengthy delays.

As a result of being your beneficiary how much of an additional financial commitment might your PRs be inheriting alongside their bequest?

It is frequently said that people are remembered for what they left, rather than for what they did.

Probate, unlike other taxes, does not have a year of assessment but can carry a very big unintentional sting in its tail that can take years to resolve.

How would you like to be remembered?

Helen Wilson

Consultant

Telephone:  +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

Death and (Pension Drawdown) Taxes

Further good news in relation to the above was confirmed in the recent Government’s response to the “Freedom of choice in pensions” consultation following the 2014 Budget. 

 

To give a little background, at present when people utilising pension drawdown (or those who are over 75, not in drawdown but have “uncrystallised” pensions) die, the residual “pot” is taxed at 55% - the only exception being when the fund is used to purchase an annuity for the spouse or the spouse carries on with income drawdown.

 

In their response to the consultation, unsurprisingly, the Treasury has acknowledged that a rate of 55% might be “too high” and “needs to be changed”. This mirrors something that financial planners have felt since the rate was raised from the previous tax of 35%.  Interestingly, however, as this is a relatively complex and sensitive area, confirmation of the rate is not due until the Autumn statement, and will not take effect until 2015. 

 

Perhaps more interesting is the speculation within the industry (and within the adviser group at BROADSTONE) of what the new rate will be.  We haven’t got to the point of running a sweepstake, but popular opinions in the office include a parity with Inheritance Tax (40%), perhaps charging the pension fund to the individual pension holder’s marginal income tax rates or a return to the days of 35%.  The outlier is speculation that perhaps the Government will look to allowing wealth to truly span the generations, and maybe allow family members to effectively inherit the pension fund into their own pensions.

 

It will be fascinating to see the final detail of this in the Autumn statement (and see which of the office predictions were right).  One thing that everyone will be pleased about is that from next year 55% tax will no longer apply.

 

Duncan Wilson

Private Client Partner

 

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk