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

 

Pension Freedoms and the problem of youth

Whilst the vast majority of the UK populace has quite rightly been very happy with the changes and additional flexibility given to pension savers, a thought should be spared to some of the restrictions that will be placed on pension savers in the years to come.

Pension headlines have quite rightly been dominated with the good news of “accessing pensions from age 55”, “more flexible annuities to meet lifestyle”, “free guidance for all”, “changes to the 55% tax on death benefits” etc., what has seen little comment, however, is that from 2028, the age that savers can access their pension funds is rising from 55 to 57.  In addition, the recent government announcements have confirmed that from 2028, this age will be linked to being 10 years below the state pension age.  If the coalition’s proposals from 2013 to accelerate the state pension age are accepted, younger savers starting their careers today might not be able to access their state pension until age 70 and therefore their personal arrangements until age 60.  

Whilst it is very clear that The State cannot afford to pay pensions for an ageing population under the current rules, this linking of personal pension to state pension seems to be quite a contrast to the driving force behind the revolution in pensions we are seeing, and might be a reason for a future generation to tell us the we never had it so good (for once).

What is clear is that if early retirement is the goal, savers will need to make effective financial plans to give them the freedom to stop working when they desire.  This could and should include using other savings vehicles, such as NISAs in addition to their pensions so that they can bridge the gap between when they want to stop working and when they can access their pensions albeit in a far more flexible manner than has been available to them previously.

Duncan Wilson

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

Future pensions innovations – it’s retirement income, but not as we know it

As highlighted in my previous blog, there has been a lot of comment regarding potential product innovation in the field of pensions and those savers reaching retirement.

 

What is clear is that while annuities are far from dead and buried, it is very unlikely that the traditional “one size fits all” annuity will be as prevalent, as the majority of people are likely to want their pension income to be able to adapt to their individual circumstance, health and their changing lifestyle in retirement. For example, it has been suggested that annuities could be designed to offer smaller payments initially while other sources of income continue and then increase later in life as Care is required. Similarly, many are considering the design of an annuity that could provide a higher level of income initially to suit additional costs of, say, holidays, family, homes, entertainment etc., and decrease later in life when one tends to stay at home, possibly increasing again when Care is required.

 

Along a similar vein, there could be certain annuity products that are specifically designed to consider payments for Care costs, which could address the coming social issue for which Government and individuals are not fully prepared.

 

A concept inspired by US pensioners is a pension income product you might purchase at retirement that doesn’t provide any income for, say 20 or 25 years, at which point the payments can be significantly accelerated. This could make both the early and later stages of retirement planning easier. A product like this could work extremely well with pension drawdown, which will still be available and work well for many when they reach retirement.

 

So, there are likely to be some very exciting changes in the world of retirement income options over the coming years. There remains the question of the cost of these solutions, especially in the formative years of these innovations when there is likely to be less competition. What is clear is that savers are likely to only benefit from the opportunities they bring if they take structured and impartial financial advice, and take the time with their financial planner to put the right solution in to place.

Duncan Wilson

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

Are annuities really dead in the water?

Retirement provision has traditionally been regarded as consisting of two distinct phases – accumulation (while you save money for retirement) and decumulation (when you use the money you have saved to provide you with your income and lifestyle in retirement).

 

Traditionally most people are more interested in accumulation and the tax reliefs available from HMRC. The focus of the recent budget proposals has been more on the decumulation phase. The biggest headline winner is that from April 2015, there will no longer be a need to purchase an annuity.  This has generated a huge amount of comment in the press, and is bringing about a lot of exciting advances from providers of financial products.

 

New financial products are being devised with the objective of combining the certainty of annuities with the flexibility of investment products. These offer innovative solutions, however we are of the opinion that the charges for these (especially in the formative years as there is less competition) could be a major factor for many people. 

 

Interestingly, annuities could still form a part of people’s retirement income plans, as it seems likely that many people will continue to seek the security of the guaranteed income they provide - particularly for example if they have a medical condition that can potentially entitle them to the increased income available from enhanced annuities.

 

What is clear is that on-going financial planning advice in both the accumulation and decumulation phases will be of importance for all to maximise the potential from their wealth.

 

 

Duncan Wilson

Private Client Partner

 

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk