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

 

 

What emotion do you attach to your finances?

Darwin identified six basic human emotions; happiness, sadness, fear, anger, surprise and disgust; each one triggering a facial chain reaction.

 

More recently Glasgow University has identified only four basic emotions; with fear and surprise sharing the same initial wide eyed expression and a wrinkled nose being the starting point for either anger or disgust.

 

So what, if anything, has this got to do with investment and pension planning?

 

 You may well ask!

 

In truth financial planning is as much about the journey to reach your financial objectives as the development of human emotion is about evolution.

 

No one wants to have a wide eyed fear, preferring to have a wide eyed surprise, when it comes to their pension and investment planning outcomes.

 

Financial outcomes are the result of the route we choose to take at each review - unlike evolution where we get what we inherit!

 

The financial journey taken is defined by how we adapt to information and circumstances along the way; it is in the planning that we can determine the extent of the ‘feel good factor’ we gain.

 

So with physics stating that the two ends of a continuum are the farthest points apart and facial expression perhaps differing on this matter; we really hope “you laugh until you cry”, for all the right reasons, when it comes to your pension and investment planning outcomes.

 

After all: it’s all about the planned journey!

 

 

Helen Wilson

Consultant

 

Telephone:  +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

 

Have employers gone AWOL on automatic enrolment?

April, May and July 2014 were supposed to see the first real test of automatic enrolment offerings in the market and legislation.  These are the months when the majority of the 35,000 employers that needed to comply with the new pension regulations this year were impacted. 

 

This figure dwarfs the 12,000 employers that have already had to put a Workplace Pension Scheme in place since the implementation of automatic enrolment.  However, commentary from many pension providers suggests that they haven't had the influx of schemes they expected (some less than half). Now this could be because employers are using postponement but according to the law a scheme still needs to be in place from the staging date. Worse, could some employers have gone AWOL and decided not to bother with these new requirements?

 

In some respects this is no surprise. Many businesses are finding it hard to dedicate the time and resources needed to automatic enrolment.  However, the first significant case where a company failed to comply with the rules has already been highlighted by the Regulator.

 

The Regulator is monitoring developments closely. As of the end of March 2014 they had issued 14 compliance notices, one unpaid contribution notice, two statutory inspection notices and one statutory demand.  The Regulator says a common cause of them having to use their statutory powers is insufficient time and resource being given to the planning and preparation for the new duties.

Employers should expect to properly plan for automatic enrolment and put aside a minimum period of between three to six months to deal with these changes. The actual lead in time for planning and implementing these changes will be very dependent on the company's knowledge in how to implement automatic enrolment, the complexity of the employee employment contracts, the assessment of the current employees and their eligibility along with a review of pay structures and payroll arrangements currently in place, in addition a review of any current pension arrangement should take place to ensure that it meets the Governments minimum requirements as a Qualifying Workplace Pension Scheme. 

 

The message therefore is clear. Although it may be a challenge to find time to deal these new rules, employers have no choice or they run the risk not only of fines from the Regulator but reputational damage if they do not fulfil their duties.  They also face the potentially higher costs of complying at short notice through not spending the time required to make the decisions on what is best for their business and their employees.

 

Nick Rudd
Corporate Benefits Director

Telephone:+44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

 

A rethink on ‘face to face guarantee’ for pensions advice

There has been a lot of news and comment in relation to pensions in the last few days. Yesterday, the Government published a response on the “Freedom and Choice in Pensions” consultation.

 

Not only has the Government put more detail into their plans on how they intend to deliver the “free and impartial” advice to those people at retirement looking to draw their pensions, there has also been comment regarding some of the potential product innovations that we could see in the coming years.

 

Turning first to the “free and impartial” advice.  It is now clear that the Government is not going to look to the big insurers (with the biggest pockets) to fund the advice.  Whilst this might have been an obvious route for them, there were questions about the “impartiality” of those looking to sell products, who would therefore have a vested interest, advising those looking to retire and needing assistance with their choices.  With this in mind, it looks as though the financial planning advice will be driven through the Money Advice Service and The Pensions Advice Service who will direct pension savers to “retirement guides”.  This approach seems to be sensible and pragmatic.  However, it is clear that there has been a rethink of the guarantee of free “face to face” advice.

 

At the current time the detail on the guidance that will be received and what savers should expect from their guidance provider is still unclear.  However, the complex decisions that need to be made at retirement along with the expanding horizon of products and choices that are likely to be available, we would expect that a large majority of pension savers will still be recommended to seek face to face advice.

 

Duncan Wilson

Private Client Partner

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