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The new game in town: Govt reshuffle triggers new era of pensions policy

The new Government top team is set to further cement the Treasury’s all-powerful position as the organisation driving financial services and pensions policy.

Prime Minister Theresa May has lost no time following her appointment in clearing out David Cameron’s allies, notably George Osborne as Chancellor and Ros Altmann as pensions minister.

Now that we know the shape of the new Government, it is worth examining who are the people at the top of Government, and the kind of policies financial services firms should expect from them.

Osborne’s pet projects such as the Lifetime Isa, pension tax relief reform and the creation of the secondary annuities market all hang in the balance.

There is also the question of whether we will see a snap election, as well as whether these are the right people to negotiate the best terms possible for the financial services industry as we agree our exit from the European Union.

The senior team in Government represents a radical departure from the Cameron/Osborne era, and signals huge implications for the UK’s pensions and tax policy over the coming years.

Osborne vs Hammond

As the new Chancellor, Philip Hammond is expected to take a very different approach to the “rabbit out of a hat” attitude financial services came to expect from Osborne.

Cicero Group executive chairman Iain Anderson says: “Hammond is cool, calm and collected. A very detail orientated and thoughtful person. Osborne liked to have the big canvas, the big policy and the big surprise. Financial services policy is going to be a lot more thought through, with fewer surprises and more consultation.”

Anderson does not expect to see pension freedoms changed or added to. But he forecasts May’s mantra of a “Government for everyone” will be translated into attacks on executive pay and the pensions of higher earners, alongside a greater focus on what works for “Middle Britain”, for example through changes to auto-enrolment.

Lansons director Ralph Jackson says pension saving has been transformed over recent years, but questions whether savers have ultimately benefited.

He says: “Osborne has clearly been a reforming chancellor, and he has had to steer the economy through incredibly difficult times, with the focus on deficit reduction at the heart of that. He has been bold through pension freedoms, and also tried to innovate with tax and pensions policy.”

But Jackson admits the former chancellor’s approach to driving through reform such as pension freedoms without always consulting the industry has not won him many friends.

He says: “Osborne was never particularly inclusive in the way he managed the economy. For the bigger opportunities like the Budget or the Autumn Statement, he tried to pull something out of the hat to generate some form of good news for savers who were struggling, and others had to pay for that.

“But by and large, the economy has come through a difficult period. He was a reforming chancellor, but not one who was easily liked by many people.”

Anderson adds May has been definitive in saying Osborne’s economic policy has not worked for everyone. He suggests the new Prime Minister may look to make a “clean break”, and innovate beyond simply coping with Brexit. He believes one of the things that could come under scrutiny is whether the current “twin peaks” set-up of regulation between the FCA and the Bank of England is the right one.

What comes off the table?

In the wake of a Government reshuffle, and with resources diverted to developing a strategy on Brexit, existing pension policy initiatives have been called into question.

Former pensions minister Ros Altmann, who left the Government last week, has already come out fighting. As Money Marketing reported earlier this week, Altmann wants to see Osborne’s flagship Lifetime Isa product scrapped on the basis it discourages adequate pension saving.

Jackson says: “May and Hammond’s focus is going to be on economic stability. The Autumn Statement will be important as a means of achieving this, and will be different to the one Osborne would have delivered.”

He says initiatives such as the Lifetime Isa, pension tax relief and secondary annuities may not see the light of day.

He says: “All of those things are always up for review any time there’s a new team in place. The key issue in the Department for Work and Pensions will be whether or not things like secondary annuities or pension tax relief reform are still appropriate when looking at the bigger picture.”

But former pensions minister Steve Webb believes the Government will continue to be wedded to at least some of those big ideas.

Webb, now director of policy at Royal London, says: “There’s a sense of the Government wanting to be seen to be doing things. The risk is if all you’ve got is Brexit and austerity, that’s a pretty meagre programme. Stuff that has already been announced and is in motion has the best chance of still happening.

“The Lifetime Isa is likely to be quite popular, and coming from the Foreign Office Hammond may not be coming in with profound views on tax policy. The civil service has also had a pro-Isa world view for at least six years. There is a lot of momentum there.”

He argues while the Lifetime Isa costs money, it would be quite early on for the Treasury to reverse that.

Webb also points out secondary annuities are expected to raise money for the Exchequer, and says he would be surprised if this initiative was shelved at this point.

The role of the Treasury

Under Osborne, the relationship between the Treasury, the FCA and the DWP was that it was the Treasury deciding the direction of travel on financial services policy. Jackson expects this to continue, with the Treasury likely to continue to dictate the pace of pension reform.

Yet both Altmann and Webb are concerned the Treasury is not going to simply set pensions policy, but damage the role of pensions in the political hierarchy.

The new pensions minister has been named as Watford MP Richard Harrington. Altmann and Webb had the title minister of state for pensions, while Harrington carries the less lofty title of parliamentary undersecretary of state at the DWP.

Altmann says it is worrying the pensions minister role seems to have been “downgraded”, adding pensions are too important to downgrade.

Webb says the constant fiddling with pension tax relief already served to undermine the overarching goal of boosting long-term saving.

He says: “Ros acted as a counterweight to the Treasury, particularly on Lifetime Isas and the pension Isas idea. I am sure she will have been privately lobbying ministerial colleagues, and frankly, sometimes she did so in a barely coded way in public. That’s been her biggest contribution, being that strong voice to say it’s not just the Treasury world view that prevails.

“The worrying thing about the new set-up is the Treasury becomes even more dominant. Even within the DWP, let alone Government, pensions are at the back of the queue.”

Another vote?

Given May’s rapid accession to become Prime Minister, the prospect of another election has been floated to ensure the Government has public backing to run the country.

But political commentators say this is unlikely.

Jackson says: “A snap election would be the worst possible nightmare for May. She has said the Conservative Government continues to have a mandate from the British public, as they were elected last year on a campaign which manifestly included a referendum on the EU which has since been carried through. Going back to the electorate is difficult, as voters are clearly in the mood for change and the winners are likely to be fringe parties rather than the main ones.”

Anderson says it is quite clear to see Labour is in a “very dark place” and it will be hard for the Opposition to come close to winning an election, now or in 2020.

He says: “The big that usually changes politics is how the economy is doing. There is a concern that the UK enters a recession early next year, and if that is the case that is the last time you want to be holding a general election.”

Lobbying post-Brexit

Clearly, the new Government also has the not-so-small matter of Brexit to contend with. Financial services firms that want to lobby for an EU exit that suits their business will have to get to grips with the new world order.

Anderson cautions against firms going in to fight their corner on the basis they will be able to convince the Government that the Leave vote can be unravelled.

He says: “There is an awful tendency by a lot of people in financial services to rock up in front of those in Parliament and say ‘we know best’. This is more than misguided. If the financial services sector turns up with an argument that says ‘let’s not do this Brexit’ they are going to be met with a very short shrift indeed. The Leave vote cannot be undone.”

Anderson adds: “We are going to see a lot less testosterone in our politics, and we need to see less testosterone in financial services firms as well.”

Adviser views

Tim Page Director Page Russell

“I suspect Brexit will suck the air out of everything and further reforms will be put on the back burner.
“My fear on pensions is we’ll go back to having a succession of different ministers in charge, few of which will really understand the brief. This could hamper long-term planning.”

Lee Robertson Chief Executive Investment Quorum

“With so many big departmental figures gone it is difficult to know what might be in store.
“I wouldn’t be surprised if proposed reforms like the secondary annuity market did not see the light of day. But the Treasury’s drive to reduce pension tax relief may mean the Lifetime Isa is still part of the future savings landscape.”

Who’s who in the Govt top team?

Britain’s new Prime Minister Theresa May speaks outside 10 Downing Street in central London on July 13, 2016 on the day she takes office following the formal resignation of David Cameron. Theresa May took office as Britain’s second female prime minister on July 13 charged with guiding the UK out of the European Union after a deeply devisive referendum campaign ended with Britain voting to leave and David Cameron resigning.

Theresa May takes the top job in UK politics after a six-year stint at the Home Office. She has considerable financial services experience, working at both the Bank of England and the Association of Payment Clearing Services before becoming a Conservative MP in 1997. In opposition one of her roles was to shadow the Department of Work and Pensions.
May has commented in recent years on the UK’s “over-reliance on financial services”.

PHILIP HAMMOND

The new Chancellor is seen in political circles as a “fiscal hawk”, and has made clear one of his priorities is to safeguard financial services throughout the Brexit negotiations.
He has considerable experience in Government, including as Secretary of State to the Foreign Office and Defence and Transport Secretary. He has also previously acted as shadow to the chief secretary to the Treasury.

DAMIAN GREEN

Damian Green replaces Stephen Crabb at the DWP. Green previously shadowed this department in 1998, but his more recent political appointments have been in the home office, working with Theresa May. He was a financial and TV journalist before becoming a politician.

DAVID DAVIS

As Secretary of State for Exiting the European Union, David Davis is charged with overseeing the Brexit negotiations. He has had roles at the Foreign Office in John Major’s government and in opposition was shadow home secretary.
He has been a prominent advocate of Brexit. In 2010 he chaired The Future of Banking Commission, which investigated the causes of the banking crisis in the UK.

Source: Money Marketing By Natalie Holt 20th July 2016 8:46 am

The UK’s state pension crunch will hit in the 2020s

According to Gordon Dryden Gilling-Smith’s 1967 Guide to Pensions and Superannuation, the first recorded pensioner was someone called Martin Horsham. Horsham retired on 10 March 1684 on a pension of £40 a year.

That may not sound much today but, at that time, average yearly earnings in skilled trades were between £30 and £36 a year, while in unskilled trades and agriculture they were between £9 and £20. Horsham’s pension was paid to him by his successor in the workplace, a Mr G Scroope, from his own earnings of £80 a year.

Irrelevant to pensions today? Not really. The principle established – that of the pensions of those in retirement being funded by a levy on those at work, something we today refer to as a pay-as-you-go system – is the structure on which our state pension system and most other similar systems around the world are based.

That said, the state pension in the UK today is not so generous as to provide a pension of double average earnings. It will not make us anywhere near as wealthy as Horsham was relative to others when he retired all those centuries ago. The maximum state pension anyone can get nowadays is around 30 per cent of average earnings.

For pay-as-you-go state pension schemes to work across the generations as people join and leave the workforce they need to take account of the ever-changing demographic and economic realities. Clearly, if we were ever to have an increasing number of young taxpayers in the workforce and a relatively small number of people retiring then it could be expected we could afford to pay a generous level of state pension.

Equally, the worst outcome would be if we were to have a high number of people retiring at a time when we have a relatively low number of younger taxpayers. If that were to happen then you would expect lower state pension outcomes as a result.

State pension costs can only really be controlled in two ways. The amount paid can be varied or the length of time the pension is paid can be varied. Recent changes to the state pension in the UK have seen a popular higher pension promise but with an unpopular later attainment age at the same time: a neutral approach in my view. But what of the future following the likely economic and demographic uncertainties caused by last week’s vote to leave the EU?

The effects of that will begin to be felt during the 2020s as our terms for disengagement with the EU are finalised. The 2020s is also the decade when the UK’s so-called baby boomers reach retirement age. While the post-war baby boom in the US lasted through the 1950s, the same was not the case in the UK. Our post-war baby boom was over by the end of the 1940s. Our real baby boom happened in the 1960s.

Our pay-as-you-go state pension system in those soon-to-be days will need to react to the realities of a sharply increasing number of pensioners in light of the current demographic and economic landscape.

Source: Money Marketing written by Steve Bee 4th July 2016 1:15 pm

Pensions still the most effective savings option, says IFS

older coupleImage copyright Thinkstock

US shares close higher but Europe loses ground

Man reflected on screen of Tokyo share price graph

US stocks have closed higher, but European markets have continued to suffer from worries over oil prices and economic growth.

The three main US indexes all gained between 1.4% and 2%, lifted in part by a 2% rise in the US oil price.

Earlier in London, the FTSE 100 closed 0.7% down, while the main Frankfurt and Paris indexes fell 1.7% and 1.8% respectively.

Those falls followed a heavy sell-off in some Asian markets.

The pound hovered close to five-and-half-year lows against the dollar.

Alongside the rise in the price of US West Texas Intermediate crude, Brent oil also rose in afternoon trading. The price was up 2.5% to $31.03 a barrel, having briefly drifted below $30 on Wednesday.

The falls in European shares followed overnight losses in Asia. Japan’s Nikkeiindex closed down 2.7%, having dropped more than 4% at one point.

Hong Kong’s Hang Seng eased off two-and-a-half-year lows to finish down 0.6%. The Shanghai Composite, which has endured torrid trading in recent months, was one of the few bright spots, rebounding nearly 2%.

North Sea Brent Crude

Oil slide

Investors were spooked by Wednesday sharp falls on Wall Street, when the Dow Jones and S&P 500 fell 2.2% and 2.5% respectively.

Joshua Mahony, market analyst at IG, said that fear may be masking some positive economic signs.

“The issue here is that before long people will forget why they are selling, but continue to sell simply due to the fear factor. Yesterday felt like the beginning of that.

“US crude inventories actually rose less than expected yesterday, which ordinarily would have been bullish for oil prices, yet once more the trend was the most important thing and everyone is looking for another reason to sell crude, which of course means the FTSE 100 in particular is dragged lower once more.”

There are fears that the continuing low crude price reflects a slowdown in some economies and could weigh on growth in emerging markets, many of which rely on oil revenues.

On Wednesday, Russia’s Prime Minister, Dmitry Medvedev, warned tumbling oil prices could force his country to revise its 2016 budget.

He said that the country must be prepared for a “worst-case” economic scenario if the price continued to fall.

Analysts at Cenkos Natural Resources said: “With no apparent signs of strengthening demand, and only further indicators of future global supply growth, the outlook for oil prices is leading most market watchers to ratchet down estimates for oil prices in 2016 and 2017.”

Oil and gas projects worth $380bn have been postponed or cancelled since 2014 as companies slash costs to survive the oil price crash, including $170bn of projects planned between 2016 and 2020, according to a report from energy consultancy Wood Mackenzie.

Via BBC News http://www.bbc.co.uk/news/business-35310386

Short-term pension boost to follow reforms

Money in piggy bank

The majority of new pensioners will gain from the “flat-rate” state pension in the early years after it is launched in April, government figures suggest.

However, people retiring in decades to come are more likely to lose out financially from the reformed system.

The new UK state pension, aimed at simplifying the system, will see a bigger payment of £155 a week made to many new pensioners from April 2016.

Not all new retirees will receive the full amount.

Winners and losers

Chancellor George Osborne has set the new pension at £155.65 a week, compared with the current £119.30.

It includes all the extra payments available at the moment, such as means-tested Pension Credit and the earnings-related State Second Pension.

Under transitional arrangements, most people retiring will not receive the headline figure. They will get more or less, depending on their National Insurance contributions.

Now the Department for Work and Pensions (DWP) has calculated that in the first 15 years, some 73% of people who reach pension age will find they are getting more than if the old system had carried on. The typical gain for them is £10 a week.

In the early years, the typical loss for those getting less will average £7.

By the time people just starting out in the world of work, aged in their 20s, come to retire, virtually all will qualify for the full flat-rate payment.

However, this younger group will do much worse than if the current rules were left alone. Some 69% of those retiring in 2050, now in their 30s, will lose out compared with staying in the current system, typically by £14 a week.

Some 76% of those aged in their 20s will typically get £15 a week less.

One reason is that they will no longer be able to contribute to the earnings-related State Second Pension, one of the payments which is being rolled into the new flat rate pension to make it affordable for the Treasury.

Existing pensioners are not affected by the change. They will continue to receive their current basic state pension with annual upratings.

via BBC News at http://www.bbc.co.uk/news/business-35314431

Seven key takeaways from the Queen’s speech

The Queen’s Speech lasted eight minutes, but was accompanied by a 103-page briefing pack outlining the policy agenda for the newly-elected majority Conservative government.

Much we already knew, but there are some interesting nuggets of information. Here we take a look at the key themes.

1. Cuts to come – but tax breaks too.

The speech really tooted the government’s horn on the economy, flagging up that the UK was the fastest growing major advanced economy last year after growing at 2.8 per cent, the best perfomance since 2006.

But make no mistake: as was forewarned in the Tory election manifesto there is some way to go to fix finances which still include a 4.8 per cent deficit. There will be cuts to come, including a £23,000 welfare cap and restriction in jobseekers to under-21s, part of £12bn in welfare savings.

Departmental savings on top of this will be significant – and the government has tied its hands on taxation by locking income tax, VAT or national insurance to prevent further tax rises.

It also previously announced that the personal tax-free allowance will be increased to £12,500, with legislation set to be brought forward to ensure people working 30 hours a week on the national minimum wage do not pay income tax. It’s also going to put an extra £8bn into the NHS.

Squaring this circle will not be easy. Look out for new so-called ‘stealth’ taxes later – and departmental secretaries will already be sweating over the pain they will have to take on their budgets.

2. Scotland will have wide-ranging powers.

The government will bring forward legislation to secure a strong and lasting constitutional settlement, “devolving wide-ranging powers to Scotland”.

The accompanying document said the Scotland Bill will enable the Scottish parliament to set the thresholds and rates of income tax on earnings in Scotland and keep all the money raised in Scotland.

More power means more responsibility and the Scottish parliament will be more accountable to the Scottish public. The Scottish parliament will be responsible for raising around 40 per cent of Scotland’s taxes and for deciding around 60 per cent of its public spending.

Of course, for the nationalists this isn’t enough. They want something between this and full fiscal autonomy – and are already accusing the government of failing to respond to the will of people at the election.

3. Triple-lock renewed.

The previous government introduced the ‘triple lock’, which has seen pensioners received a 2.5 per cent increase in the basic state pension this April and the full rate increased to £115.95 a week. The state pension has now risen to the highest share of average earnings for over two decades.

The government confirmed the triple-lock will continue to apply to the state pension for the duration of this Parliament. However Kate Smith, Aegon’s regulatory strategy manager, questioned whether the triple-lock will apply to the new single tier pension from April 2016.

It is likely the minority of critics bemoaning the preferential treatment of pensioners will also find their voice afresh.

4. Brits have a EU choice to make.

Early legislation is set to be introduced for an ‘in-out’ referendum on European membership before the end of 2017, meaning Britons will finally have their say on whether we should stay part of the EU.

Key points include confirmation that the ‘franchise’ will be that used for the general election, which unlike the local election alternative will not include resident EU nationals. It also confirmed those campaining to stay in will be the party of ‘yes’ – a lesson from the Scottish referendum.

Attention will not be on when the vote is held, with widespread expectations that Mr Cameron will push for a vote earlier, perhaps this time next year.

5. Right to Buy extension.

The Housing Bill was a centre piece of the speech as its policies were of the election, but it has already been questioned by industry experts.

The bill extend Right to Buy levels of discount to 1.3m housing association tenants, with new houses built to replace them funded by disposal of high-value vacant council houses.

Stephen Smith, director at Legal and General Mortgage Club and Housing, said: “We hope that when more detail on the plans to help home ownership is announced it will include support for custom build in the UK.

“We know there is a real pent up demand for this sector and, if it gets the right support, it could make a real contribution to achieving the numbers for new house building that we need.”

6. Interest rate shake-up.

The Bank of England Bill will strengthen the governance and accountability of the Bank, however the main elements will be announced by the government in due course.

According to the FTAdviser sister publication, the Financial Times, the Bank will overhaul the way it sets interest rates and will trial a new meeting schedule for the Monetary Policy Committee to improve transparency and decision-making.

7.Strike action – and a hit to Labour funding.

Finally, the government is set to bring forward legislation to reform trade unions and to protection essential public services, such as transport, against strikes. It will introduce a 50 per cent voting threshold for union ballot turnouts, with a need for 40 per cent of the electorate to favour a walk-out.

More surprisingly, it will change the rules to require members to opt in to political funding rather than out, which will likely leave less money in the pot for Labour.

Source; FT Adviser by Donia O’Loughlin published 27th May 2015

John Lawson: The price of freedom and choice in pensions

So, Freedom and Choice Day has come and gone. What has happened so far and what can we expect next?

An initial rush of people taking cash had been expected. Those aged over 55 but under 60 who did not have access to the £30,000 total or £10,000 in three single pots trivial commutation limits were one source of demand. Everyone over 55 who wanted to take more than £30,000 as either a partial or full encashment was another.

However, those with their heart already set on taking cash have been a relatively small proportion of overall enquiries, the bulk of whom are not sure what to do with their savings. In addition to the normal wake-up packs, customers also receive risk warnings under the second line of defence rules and are being referred to financial advisers and Pension Wise to help them consider their options more carefully.

It will take two or three more months at least to see the emerging picture of what the vast majority of savers are ultimately choosing to do.

One of the most positive early signs is that a large proportion of savers have either taken or plan to take financial advice. Given the complexity of the choices, the impact on personal tax and the potential loss of means-tested benefits, this is good news. The cost of making the wrong choice, even for those with modest savings, can easily be measured in thousands of pounds rather than hundreds. Advisers can clearly add value here.

The following are some examples of particular areas where customers could do with some help.

Taking pensions as cash to invest in a bank account

It is clear that customers do not understand a pension is just a tax ring-fence. They are generally unaware that they can keep their savings in a bank account within their pension rather than having to move it outside. Cash Isas are available outside the pension ring-fence and, from April 2016, the first £1,000 of bank account interest (basic rate taxpayers) or the first £500 of bank account interest (higher rate taxpayers) will be tax-free. However, these tax-free concessions may not cover all of the cash a saver has, so keeping cash within a pension bank account may make good sense.

Timing of withdrawals

We have already seen customers insist on taking large withdrawals despite the severe tax consequences. Many of the people withdrawing are unaware of the higher rate tax threshold, loss of personal allowance from £100,000 of taxable income or the 45p tax band. Staggering withdrawals (including tax-free cash) over a number of tax years could save someone thousands.

Choosing the right method of withdrawal

There are now two main options for withdrawal: flexi-access drawdown and uncrystallised funds pension lump sum. Flexi-access is generally more suitable for those who expect to pay tax at a lower rate in the future, as it allows them to withdraw just their tax-free cash upfront and defer the taxable part until their highest marginal rate falls. Taking no more than their tax-free lump sum also preserves the annual allowance of £40,000.

Losing means-tested benefits

Taking money out of a pension could reduce or remove altogether entitlement to state benefits such as Pension Credit, Housing Benefit and Council Tax Reduction. Savings within a pension are disregarded in the calculation of entitlement of most means-tested benefits but, once taken out of the pension, that capital generates a notional income that can reduce or remove any entitlement. Understanding the impact of cashing in a pension fund on means-tested benefit entitlement is paramount before taking a cash lump sum or income.

The Government has produced basic guidance but advisers can also refer clients to Citizen’s Advice or Pension Wise if they do not want to provide advice in this area.

These are just some of the basic problems people are struggling with at the moment.

Negotiating these potential pitfalls is only the first step. Understanding the risk/return trade-offs between annuities and drawdown takes the complexity to a whole new level but advisers who show they can add value on the basics are sure to be trusted to help people manage more complex planning in the longer-term.

Source:  Money Marketing John Lawson Head of Pensions Policy at Aviva 20th May 2015

Savers face tax hit as income tax and pension changes bite

Savers planning to take advantage of the new nil tax rate on savings income could be hit with higher-than-expected tax bills following the pension freedoms, experts warn.

From April this year the starting tax rate on the first £5,000 of savings income will drop from 10 per cent to nil, at the same time as the pension freedoms allow savers to make ad-hoc withdrawals from their pots.

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Tony Wickenden: Mind the tax gap

As a result of the tax changes, someone could earn £15,600 from pensions, earned income and savings income such as bank interest and pay no tax at all.

But taking even a small withdrawal of taxable pension could push savings income out of the tax-free zone, leaving savers with an effective charge of up to 40 per cent, Taxbriefs editorial director Danby Bloch warns.

AJ Bell head of platform technical Mike Morrison says: “It’s a quirk of the tax system that if you’re on low earnings you get the differential between earnings tax and savings tax and could get hit.

“Luckily it won’t affect many people but it’s those kinds of people who will be going to Pension Wise, rather than an adviser. Yet unfortunately it’s probably beyond the expertise of many of the guidance staff.”

Landmark Financial Solutions managing director Colin Jelley says: “This has always been the problem with the starting rate of tax on savings. The fact is it’s bought into more focus now because of the pension freedoms. Part of the problem is that it’s presented as a nil rate but for a reasonable part of the population it won’t be.”

Source: Money Marketing 6 February 2015 By Sam Brodbeck

Claire Trott: The key pension dilemmas ahead of April

All the hype of the pension reforms being announced in last year’s Budget and the following rush to get new legislation in place has now subsided to a certain extent.

With less than 100 days to go until the beginning of the new tax year and the implementation of the new rules, the task for providers is to be prepared for those clients wanting to take their cash from 6 April. For advisers and their clients the challenge will be different: they need to be prepared for the issues associated with the new freedoms and in some cases this will mean pre-planning.

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Capped drawdown decisions

Capped drawdown will cease to exist from 6 April for new clients but it will be available for those that are already in capped before the end of the current tax year. With all the flexibilities soon to be available there could be little point in worrying about the demise of capped drawdown but with the knock on effect to the annual allowance, this brings another issue.

Speaking to advisers, the restriction that accessing income through an uncrystallised funds pension lump sum or flexi-access drawdown imposes on the annual allowance for money purchase contributions is something that should be avoided if possible. This is not to say that these advisers feel their clients are definitely going to make contributions in excess of the £10,000 allowed, rather they want to be able to offer the flexibility should it be needed. In many cases, as there is no need for income now and they do not want to unnecessarily take money from a tax privileged environment, clients will be crystallising the smallest amount possible into capped drawdown.

Provided the capped drawdown is written under one arrangement, further units can be crystallised into capped drawdown in the future and income taken without triggering the money purchase annual allowance rules.

Care needs to be taken if clients accessed some of their funds through capped drawdown some time ago because certain policies were, and still are, written as tranches into a new arrangement each time a crystallisation occurs. This would mean any new crystallisations would likely be deemed flexi-access drawdown, so if any income is then taken the MPAA rules will be triggered.

One other factor to consider is transfers of funds already in capped drawdown, as this will mean a split of the arrangement into two. The first arrangement will be the drawdown fund and the other will hold the uncrystallised fund, again forcing new crystallisations to be a flexi-access drawdown and trigger the MPAA rules.

Death benefit conundrums

Death benefits are also big on the agenda for this year. Many will be reviewing their expression of wishes forms to ensure the most appropriate person is named. The flexibility to name any beneficiary as well as the ability, if left to beneficiaries flexi-access drawdown, to continue to pass it down and across generations forever means more decisions and even greater implications of those decisions.

My initial thoughts were that advisers and clients would be revoking their nominations to bypass trusts on mass but this may not be the case if control or money leaving the direct family is an issue. Bypass trusts, with their structure and flexibility, means trustees can ensure the money goes to the correct people over the years but in a pension the tax treatment may be significantly more favourable.

When passing flexi-access drawdown down the generations, each nomination is made by the person holding the pot at the time, so this could mean that marriage, divorce, stepchildren and the like could alter the original intended path of the funds. It would actually only take one person to take the whole pot out and the flow of income between generations would be lost, however large it originally was.

Clearly, pensions are not the only issue for advisers to consider with their clients ahead of the tax year-end. The added complexity and new intricacies and interpretations that appear with every round of legislation will make for an exciting first quarter of this year, ready for the real onslaught as we see how the changes take shape in practice.

Source: Money Marketing,  Claire Trott, Head of technical support at Talbot and Muir, 20th January 2015

Countdown to pensions freedom day

In Budget 2014, Chancellor George Osborne announced radical new pension freedoms that looked set to crush the annuity industry and change the basis for retirement planning. In essence, all pension investors – not just the very wealthy ones – are to have total income flexibility in retirement.

The rule changes will come into effect in April 2015 and mark a complete departure from the Treasury’s previous stance in which it said it had a moral obligation to prevent investors from exhausting their pension savings. In April 2015, if you want to and are at least 55 years old you will be able to take your entire pension out in one go, subject to income tax, and spend it exactly how you wish.

Until now, pensions policy has been to restrict income in retirement either by pushing people into annuities that provide guaranteed income for life or allowing them to draw income directly, but within strict limits that won’t exhaust their pensions too quickly. This worked well for people who only had pensions as a source of income for retirement. However, it was extremely frustrating for those who had built up alternative sources of income, via, for example, individual savings accounts or buy-to-let property.

The surprise announcement on pension freedoms felt like a stab in the back for many who took out guaranteed annuities for life just before the Budget – there is no way to reverse an annuity purchase in order to take advantage of the new rules. Many say Mr Osborne’s Budget 2014 speech signals that pensions policy is a tool that governments will continue to tweak at will, and without consultation. In fact, the lack of consultation with investors and pension providers was one of the most shocking elements of this pension policy U-turn. Until Budget 2014, all major pension policy changes had been subject to months or even years of consultation with industry and consumers.

In the immediate aftermath of the Budget, life assurers that provide annuities saw steep falls in their share prices. In the months following the announcement, annuity providers attempted to hold rates as high as possible. However, a slowdown in demand coupled with plummeting gilt yields took their toll and the third quarter of 2014 saw annuity rates plummet by 3 per cent to the lowest level since November 2013.

As a result, many experts are advising people to seriously consider whether they can afford to wait until April before taking their pension income because there will be a flurry of new flexible products. Nevertheless, if you would have been inclined to opt for income drawdown anyway, you’re still going to face the same issues over drawing an income directly from your pension, albeit with a bit more flexibility.

The traditional guaranteed income for life that stays flat through retirement doesn’t really fit most people’s needs. Most commonly, there is a U shape to retirement income needs, made up of three stages. In the United States they call these the ‘go go years’, the ‘slow years’ and the ‘no go years’.

In the ‘go go’ years, typically ages 55-75 (although this will vary a lot) you might travel the world and spend lots of money on having a good social life. In the slow years, typically 75 to 85, your income needs drop. In later life, many people need a higher income to pay for healthcare, or residential care.

Everyone’s U shape will be different. And the new pension freedoms will make a U-shaped income easier to produce.

How it could go wrong

There will be plenty of consumer risks surrounding the new pension freedoms.

■ Companies will be lining up to persuade pension investors to part with their money, whether this is for the holiday of a lifetime, a new car, or another early retirement treat. Plus investment schemes that are at best unregulated and at worst bogus will be out to get a slice of your freshly released pension money.

■ Those who would previously have bought annuities can still do so. However, they may be tempted to stay invested, meaning they will face new worries about how to invest the money and whether they will run out of money before they die. Investors who suffer capital losses early in retirement often struggle to make these back.

■ People who don’t understand the rules properly could end up paying too much tax. Or pay tax that they weren’t expecting to pay.

Should you transfer out of a final-salary scheme?

Members of so-called ‘gold-plated’ defined-benefit (DB) schemes, also known as final-salary schemes, will not have access to the new freedoms unless they transfer their benefits to a defined-contribution (DC) scheme such as a self-invested personal pension (Sipp).

Nearly all final-salary schemes allow you to transfer what is known as the Cash Equivalent Transfer Value (CETV), which represents the value in cash terms of your existing benefits. These transfer values are more generous now than they have ever been because they are calculated with reference to gilt yields – which are very low.

However, if you want to transfer out there will be a statutory requirement to first take advice from an independent financial adviser. Transferring out won’t be suitable for everyone. Many will find that the guaranteed, inflation-protected income that comes from a final-salary pension is an unrivalled source of comfort in retirement. Defined-benefit pensions also often come with substantial benefits for dependants, should the retiree die before them. These benefits can be difficult and expensive to replicate via personal pensions.

EIGHT REASONS TO LEAVE A FINAL-SALARY SCHEME

1. You have other assets to fall back on. If you can secure a better income from doing so or already have an alternative income to meet your needs. This could apply to someone with high levels of savings in an individual savings account (Isa) or a buy-to-let landlord.

2. You are in bad health and aren’t likely to see an average length pension. If you are in ill health or have a shortened life expectancy you may want to enjoy a higher level of income through a defined-contribution pension. The guaranteed, generous but inflexible income of a final-salary pension is not as crucial for someone in ill health as it is for people who want their index-linked pension to still be paying out 30 years later.

3. You are single or your partner has independent means but your DB scheme provides for a spouse’s pension.

4. You have a very small DB pension pot with funds less than £30,000. You may prefer to have this as a lump sum to spend.

5. You don’t trust your former employer to keep funding the scheme. Or you think your former employer is in trouble. A DB pension is only as good as the company behind it. Alan Higham, retirement director for Fidelity Worldwide Investment, says that the chancellor’s recent abolition of the death tax on products such as drawdown and annuities raises the likelihood of those in DB schemes transferring out if they are in ill health. This could, in turn, create funding concerns for DB schemes as they seek to pay out benefits to their remaining members.

6. You want to pass more to your family. In many final-salary schemes, the income generally ceases on the death of the member and their spouse. The option of transferring valuable benefits into a Sipp in order to pass on a share of a pension fund to children may prove attractive, although will not be for everyone.

7. Your pension will not be fully covered by the Pension Protection Fund if your former employer becomes insolvent (the cap at age 65 for 2014 is £36,401 annual income)

8. You are happy not to ever buy an annuity and want more flexible benefits.

KEY POINTS ABOUT PENSION FREEDOMS

■ From April 2015 individuals will be given the freedom to withdraw their entire pension pot as cash after age 55.

■ Those paying into a personal pension or a self-invested personal pension or a workplace pension which is classed as a DC pension will be affected by the changes. DC schemes are those where an employee and maybe their employer make contributions, and that money along with any returns is paid out on retirement.

■ As the rules stand, those in government-backed publicly funded DB schemes will not be able to transfer their money out. This means teachers, NHS employees, civil servants, police, fire service and armed forces will all be denied the chance to access their pension as a lump sum.

Caution on buy-to-let dreams

Ipsos Mori research conducted for Hargreaves Lansdown suggests that 12 per cent of pension investors plan to take their entire pension as cash. Many of these people will hope to use their pension money to invest in buy-to-let property. And new stamp duty rules could push more people to try to follow their dream of becoming a landlord.

Patrick Connolly, a certified financial planner with Chase de Vere, says: “The advantages of property investments are that people can see that they own a real tangible asset, rather than a number on a statement from a pension provider. They can benefit from the capital appreciation of the property and, through rental payments, could benefit from a consistent and regular income.”

However, anyone looking to withdraw their pension pot and invest it in property should think carefully about the tax situation. Firstly, only 25 per cent of the initial withdrawal will be tax-free, with the rest taxed as income. That will significantly deplete the funds available to buy property. Adrian Walker, a retirement planning expert at Old Mutual Wealth, says: “An individual withdrawing £200,000 would face a minimum tax bill of £53,627. After property fees, we calculate they would have just £144,373 left to spend. That is not enough for a one-bedroom flat in many parts of London and the south-east.”

A 7 per cent yield on a £144,373 buy-to-let property would generate £10,106 income. However, if you had left the £200,000 in a pension you would only need a 5.05 per cent yield to achieve the equivalent income.

Buy-to-let assets will probably be more heavily taxed on death than pension assets, meaning you have less to leave behind for your loved ones. Plans to scrap the 55 per cent ‘death tax’ on pensions mean investments left in a pension will in future be transferable to beneficiaries with zero tax for those that die before 75, or at the beneficiaries’ marginal rate thereafter. By contrast, a buy-to-let property would typically be included within the individual’s estate, making it liable for inheritance tax at 40 per cent.

You also need to think about the risks of buy-to-let. Mr Walker says: “Many retirees may feel able to manage a buy-to-let investment now, but should consider their ability to do so later on in retirement and remember that they may need to sell the properties if they need long-term care in the future.”

Investing in buy-to-let means you take out a large exposure to fluctuations in the rental and house price market. You could already be overexposed to residential property through your home. Investing in a balanced portfolio of liquid investments helps spread risk. Mr Connolly says: “Most people can only afford to buy a small number of properties so they may be unable to spread risks, and property is quite illiquid, meaning that investors might not sell quickly at the price they want.”

Interest rates could start to rise shortly after the new rules come in and mortgage payments will then become more expensive, impacting the yield on the property and its price.

Source: Investors Chronicle

In Budget 2014, Chancellor George Osborne announced radical new pension freedoms that looked set to crush the annuity industry and change the basis for retirement planning. In essence, all pension investors – not just the very wealthy ones – are to have total income flexibility in retirement.

The rule changes will come into effect in April 2015 and mark a complete departure from the Treasury’s previous stance in which it said it had a moral obligation to prevent investors from exhausting their pension savings. In April 2015, if you want to and are at least 55 years old you will be able to take your entire pension out in one go, subject to income tax, and spend it exactly how you wish.

Until now, pensions policy has been to restrict income in retirement either by pushing people into annuities that provide guaranteed income for life or allowing them to draw income directly, but within strict limits that won’t exhaust their pensions too quickly. This worked well for people who only had pensions as a source of income for retirement. However, it was extremely frustrating for those who had built up alternative sources of income, via, for example, individual savings accounts or buy-to-let property.

The surprise announcement on pension freedoms felt like a stab in the back for many who took out guaranteed annuities for life just before the Budget – there is no way to reverse an annuity purchase in order to take advantage of the new rules. Many say Mr Osborne’s Budget 2014 speech signals that

pensions policy is a tool that governments will continue to tweak at will, and without consultation. In fact, the lack of consultation with investors and pension providers was one of the most shocking elements of this pension policy U-turn. Until Budget 2014, all major pension policy changes had been subject to months or even years of consultation with industry and consumers.

In the immediate aftermath of the Budget, life assurers that provide annuities saw steep falls in their share prices. In the months following the announcement, annuity providers attempted to hold rates as high as possible. However, a slowdown in demand coupled with plummeting gilt yields took their toll and the third quarter of 2014 saw annuity rates plummet by 3 per cent to the lowest level since November 2013.

As a result, many experts are advising people to seriously consider whether they can afford to wait until April before taking their pension income because there will be a flurry of new flexible products. Nevertheless, if you would have been inclined to opt for income drawdown anyway, you’re still going to face the same issues over drawing an income directly from your pension, albeit with a bit more flexibility.

The traditional guaranteed income for life that stays flat through retirement doesn’t really fit most people’s needs. Most commonly, there is a U shape to retirement income needs, made up of three stages. In the United States they call these the ‘go go years’, the ‘slow years’ and the ‘no go years’.

In the ‘go go’ years, typically ages 55-75 (although this will vary a lot) you might travel the world and spend lots of money on having a good social life. In the slow years, typically 75 to 85, your income needs drop. In later life, many people need a higher income to pay for healthcare, or residential care.

Everyone’s U shape will be different. And the new pension freedoms will make a U-shaped income easier to produce.

 


 

How it could go wrong

There will be plenty of consumer risks surrounding the new pension freedoms.

■ Companies will be lining up to persuade pension investors to part with their money, whether this is for the holiday of a lifetime, a new car, or another early retirement treat. Plus investment schemes that are at best unregulated and at worst bogus will be out to get a slice of your freshly released pension money.

■ Those who would previously have bought annuities can still do so. However, they may be tempted to stay invested, meaning they will face new worries about how to invest the money and whether they will run out of money before they die. Investors who suffer capital losses early in retirement often struggle to make these back.

■ People who don’t understand the rules properly could end up paying too much tax. Or pay tax that they weren’t expecting to pay.

 

Should you transfer out of a final-salary scheme?

Members of so-called ‘gold-plated’ defined-benefit (DB) schemes, also known as final-salary schemes, will not have access to the new freedoms unless they transfer their benefits to a defined-contribution (DC) scheme such as a self-invested personal pension (Sipp).

Nearly all final-salary schemes allow you to transfer what is known as the Cash Equivalent Transfer Value (CETV), which represents the value in cash terms of your existing benefits. These transfer values are more generous now than they have ever been because they are calculated with reference to gilt yields – which are very low.

However, if you want to transfer out there will be a statutory requirement to first take advice from an independent financial adviser. Transferring out won’t be suitable for everyone. Many will find that the guaranteed, inflation-protected income that comes from a final-salary pension is an unrivalled source of comfort in retirement. Defined-benefit pensions also often come with substantial benefits for dependants, should the retiree die before them. These benefits can be difficult and expensive to replicate via personal pensions.

 

EIGHT REASONS TO LEAVE A FINAL-SALARY SCHEME

1. You have other assets to fall back on. If you can secure a better income from doing so or already have an alternative income to meet your needs. This could apply to someone with high levels of savings in an individual savings account (Isa) or a buy-to-let landlord.

2. You are in bad health and aren’t likely to see an average length pension. If you are in ill health or have a shortened life expectancy you may want to enjoy a higher level of income through a defined-contribution pension. The guaranteed, generous but inflexible income of a final-salary pension is not as crucial for someone in ill health as it is for people who want their index-linked pension to still be paying out 30 years later.

3. You are single or your partner has independent means but your DB scheme provides for a spouse’s pension.

4. You have a very small DB pension pot with funds less than £30,000. You may prefer to have this as a lump sum to spend.

5. You don’t trust your former employer to keep funding the scheme. Or you think your former employer is in trouble. A DB pension is only as good as the company behind it. Alan Higham, retirement director for Fidelity Worldwide Investment, says that the chancellor’s recent abolition of the death tax on products such as drawdown and annuities raises the likelihood of those in DB schemes transferring out if they are in ill health. This could, in turn, create funding concerns for DB schemes as they seek to pay out benefits to their remaining members.

6. You want to pass more to your family. In many final-salary schemes, the income generally ceases on the death of the member and their spouse. The option of transferring valuable benefits into a Sipp in order to pass on a share of a pension fund to children may prove attractive, although will not be for everyone.

7. Your pension will not be fully covered by the Pension Protection Fund if your former employer becomes insolvent (the cap at age 65 for 2014 is £36,401 annual income)

8. You are happy not to ever buy an annuity and want more flexible benefits.

 

KEY POINTS ABOUT PENSION FREEDOMS

■ From April 2015 individuals will be given the freedom to withdraw their entire pension pot as cash after age 55.

■ Those paying into a personal pension or a self-invested personal pension or a workplace pension which is classed as a DC pension will be affected by the changes. DC schemes are those where an employee and maybe their employer make contributions, and that money along with any returns is paid out on retirement.

■ As the rules stand, those in government-backed publicly funded DB schemes will not be able to transfer their money out. This means teachers, NHS employees, civil servants, police, fire service and armed forces will all be denied the chance to access their pension as a lump sum.

 


Caution on buy-to-let dreams

Ipsos Mori research conducted for Hargreaves Lansdown suggests that 12 per cent of pension investors plan to take their entire pension as cash. Many of these people will hope to use their pension money to invest in buy-to-let property. And new stamp duty rules could push more people to try to follow their dream of becoming a landlord.

Patrick Connolly, a certified financial planner with Chase de Vere, says: “The advantages of property investments are that people can see that they own a real tangible asset, rather than a number on a statement from a pension provider. They can benefit from the capital appreciation of the property and, through rental payments, could benefit from a consistent and regular income.”

However, anyone looking to withdraw their pension pot and invest it in property should think carefully about the tax situation. Firstly, only 25 per cent of the initial withdrawal will be tax-free, with the rest taxed as income. That will significantly deplete the funds available to buy property. Adrian Walker, a retirement planning expert at Old Mutual Wealth, says: “An individual withdrawing £200,000 would face a minimum tax bill of £53,627. After property fees, we calculate they would have just £144,373 left to spend. That is not enough for a one-bedroom flat in many parts of London and the south-east.”

A 7 per cent yield on a £144,373 buy-to-let property would generate £10,106 income. However, if you had left the £200,000 in a pension you would only need a 5.05 per cent yield to achieve the equivalent income.

Buy-to-let assets will probably be more heavily taxed on death than pension assets, meaning you have less to leave behind for your loved ones. Plans to scrap the 55 per cent ‘death tax’ on pensions mean investments left in a pension will in future be transferable to beneficiaries with zero tax for those that die before 75, or at the beneficiaries’ marginal rate thereafter. By contrast, a buy-to-let property would typically be included within the individual’s estate, making it liable for inheritance tax at 40 per cent.

You also need to think about the risks of buy-to-let. Mr Walker says: “Many retirees may feel able to manage a buy-to-let investment now, but should consider their ability to do so later on in retirement and remember that they may need to sell the properties if they need long-term care in the future.”

Investing in buy-to-let means you take out a large exposure to fluctuations in the rental and house price market. You could already be overexposed to residential property through your home. Investing in a balanced portfolio of liquid investments helps spread risk. Mr Connolly says: “Most people can only afford to buy a small number of properties so they may be unable to spread risks, and property is quite illiquid, meaning that investors might not sell quickly at the price they want.”

Interest rates could start to rise shortly after the new rules come in and mortgage payments will then become more expensive, impacting the yield on the property and its price.

Source; Investors Chronicle, By Moira O’Neill, 19 December 2014