PENSIONS UPDATE:
BUDGET 2016
AND DB TRANSFERS
IAN NAISMITH
AGENDA
Budget 2016
 Pension changes announced
 Lifetime ISA
 Annual and lifetime allowance changes
DB transfers
 Issues highlighted by FCA
 Key points from CP15/30
2
Budget 2015 – pension changes
Pensions
Dashboard
To be developed
by the industry
by 2019.
Dependant’s
Drawdown
Child can continue
dependant’s
drawdown beyond
age 23.
Financial Advice
Employer-funded
tax-free allowance up
from £150 to £500 from
April 2017. Consultation
to allow up to £500 from
fund for advice before
age 55.
Trivial
Commutation
Available from
money purchase
scheme pension.
Serious
Ill Health
Payments possible
from crystallised
funds. Taxed at
marginal rate
post-75.
Charity
lump sums
Available from
crystallised and
uncrystallised
funds pre-75.
2 year limit
does not apply.
LIFETIME ISA BASICS
Paid after end
of tax year
Start
by age
40
Government
25% bonus
Individual’s
contributions
– up to
£4,000pa
Bonus
until age
50
OR
First home
worth up to
£450,000
Lose
bonus
+
5%
charge
BENEFITS OF PENSION (BASIC RATE TAXPAYER)
Bonus
E’ee cont
E’er cont
Employer cost
£100.00
£100.00
£100.00
Employer NI (13.8%)
£ 12.13
£ 12.13
Bonus amount
£ 87.87
£ 87.87
Employee tax + NI (32%)
£ 28.12
£ 28.12
Net bonus
£ 59.75
£ 59.75
Tax relief (20% of contribution)
£ 14.94
Pension contribution
£ 74.69
£100.00
Tax in retirement
(20%x75%=15%)
£ 11.20
£ 15.00
£ 63.49
£ 85.00
£3.74 (6%)
£25.25 (42%)
Retained by employee
£ 59.75
Gain
Figures ignore investment growth, charges and possible annuitisation
PENSION v. LIFETIME ISA – OVERALL GAIN
Pension
Tax rate in
retirement
E’ee
E’er
0%
25%
67%
20%
6%
42%
Higher rate
(40%)
20%
42%
67%
40%
17%
37%
Additional rate
(45%)
40%
27%
50%
45%
20%
42%
Tax rate now
Basic rate (20%)
Figures ignore investment growth, charges and possible annuitisation
PENSION v. LIFETIME ISA – OVERALL GAIN
Pension
Tax rate in
retirement
E’ee
E’er
Lifetime
ISA
0%
25%
67%
25%
20%
6%
42%
25%
Higher rate
(40%)
20%
42%
67%
25%
40%
17%
37%
25%
Additional rate
(45%)
40%
27%
50%
25%
45%
20%
42%
25%
Tax rate now
Basic rate (20%)
Figures ignore investment growth, charges and possible annuitisation
LIFETIME ISA BENEFITS
First-time buyers
Savers for retirement
• Likely to form a
large majority for
Lifetime ISA
• LISA bonus equivalent to
basic rate relief, but no tax
on benefits
• Many would save
without the bonus
• LISA gives greater gain for
personal contributions, unless
tax rate reduces in retirement
• Take care with
qualifying criteria
• Not as attractive as pension
with employer contributions
• Pension exempt from IHT
TAPERED ANNUAL ALLOWANCE
Threshold income < £110,000
Unaffected
Adjusted income £110,000 - £150,000
Unaffected
Adjusted income > £150,000
Affected
Annual
Allowance
£50,000
£40,000
£30,000
£20,000
£10,000
£0
£120,000 £150,000 £180,000 £210,000 £240,000
Adjusted
income
DEFINITIONS
Threshold income
Taxable income MINUS relief at source
contributions PLUS new salary sacrifice
Adjusted income
Taxable income PLUS employer contributions
PLUS net pay arrangement contributions
For defined benefit schemes, employer
contributions = benefit accrual (16:1 factor)
minus required employee contribution.
TAPERED ANNUAL ALLOWANCE
Pension
£50,000
Pension
£80,000
Adjusted net income = £180,000
Annual allowance = £40,000 – (£180,000 - £150,000)/2 = £25,000
TAPERED ANNUAL ALLOWANCE
Pension
£50,000
Pension
£80,000
No tapered annual allowance because income < £110,000....
....but has exceeded the normal annual allowance
ISSUES AND MITIGATIONS
 Income may not be known until end of tax year –
defer pension contributions?
 Relief at source contributions can take threshold
income below £110,000.
 Carry forward may be available from previous
years, based on the annual allowance then.
 Consider other tax-beneficial savings – e.g.
employer share schemes – and non-pension
vehicles.
LIFETIME ALLOWANCE
£2,000,000
£1,500,000
£1,000,000
£500,000
£0
2006 2008 2010 2012 2014 2016 2018 2020 2022
THE NEW PROTECTIONS
Transitional protections
Fixed
Retain £1.25 million
Can only combine
protection lifetime allowance,
with either form of
2016
but no further accrual. individual protection.
Lifetime allowance is
Individual
value at 5/4/16 (max
protection
£1.25 million). Further
2016
accrual possible.
Can combine with
enhanced protection
or any form of fixed
protection.
APPLYING FOR PROTECTION
Applying for protection
Individual
protection 2014
Online form to be
Deadline 5
completed. HMRC
April 2017.
will send a certificate.
Fully digital online
Fixed & individual process. System will
protection 2016
provide a reference
number.
Available
from July
2016. No
deadline.
Deadlines for all other protections have passed
INTERIM PROCESS
Online application not available until
Finance Act receives Royal Assent in July.
Write letter to HMRC
using standard template
HMRC provides reference
number valid until 31/7/16
Apply online when that
becomes available
See HMRC Pension
Schemes Newsletter 76
for process and 77 for
updated letter template.
77 also has explanations
for consumers.
LIFETIME ALLOWANCE ACTIONS
Assuming no existing protections:
Value @ 5 April 2014 > £1.25 million
Apply for IP14.
Value @ 5 April 2016 > £1 million
Apply for IP16. Consider FP16.
Value @ 5 April 2016 < £1 million
Consider FP16 if it may grow above £1 million
If value > £1.25 million, FP16 could be
beneficial if IP14 or IP16 is reduced by
a subsequent pension sharing order.
PENSION TRANSFERS: KEY POINTS
 Advice independent of the scheme required for
transfers of safeguarded rights to access retirement
freedoms if value is over £30,000
 Advice on transfer from DB to PP must be given or
checked by a pension transfer specialist. Firm must
also have a permission for such advice.
 Advice on transfer from DB to PP must be accompanied
by transfer value analysis, except at scheme NRA or for
immediate benefit crystallisation
PENSION TRANSFERS: FCA CONCERNS
“Firms are not providing sufficient evidence for
recommending a transfer, or the reasons given
were not specific to the client. We have seen
examples where clients with different attitudes to
risks are being advised to invest in the same fund
with little or no justification. Firms need to ensure
their risk profiling procedures are in-line with the
good practice we published.”
http://www.fca.org.uk/firms/financial-services-products/investments/pension-transfers
PENSION TRANSFERS: FCA CONCERNS
“Firms are not providing sufficient evidence for
recommending a transfer,Personalisation
or the reasons given
were not specific to the client. We have seen
examples where clients with different attitudes to
risks are being advised to invest in the same fund
with little or no justification. Firms need to ensure
their risk profiling procedures are in-line with the
good practice we published.”
http://www.fca.org.uk/firms/financial-services-products/investments/pension-transfers
FCA CONCERNS
“Firms are not providing sufficient evidence for
recommending a transfer, or the reasons given
were not specific to the client. WeDocumentation
have seen
examples where clients with different attitudes to
risks are being advised to invest in the same fund
with little or no justification. Firms need to ensure
their risk profiling procedures are in-line with the
good practice we published.”
http://www.fca.org.uk/firms/financial-services-products/investments/pension-transfers
LATEST CONSULTATION – CP15/30
Starting-point is that DB to DC transfer is unsuitable
 Should this be reviewed for those over age 55?
Advisers won’t transact for insistent clients (PI insurance /
Ombudsman) and providers won’t take direct instructions
 Is there a case for amending regulation?
TVA assumes annuity purchase
 Is this appropriate if drawdown/UFPLS intended?
TVA outputs too long and complicated
 How can they be made more meaningful?
Focused advice for enhanced TV exercises too narrow
 What advice options should FCA consider?
FCA CP15/30, Chapter 8
INSISTENT CLIENTS – FCA GUIDANCE
1.You must provide advice that
is suitable for the individual
client, and this advice must
be clear to the client. This is
the normal advice process.
2. It should be clear to the
client that their actions are
against your advice.
Good Practice
 Gather bespoke information
 Resolve inconsistencies
 Explore the real need
 Make advice unambiguous
 Document reasons & risks
 Give robust warnings
3. You should be clear with the
 Retain contemporaneous
client what the risks of the
records
alternative course of action
 Use the client’s own words
are.
FCA factsheet 35 - Pension
reforms and insistent clients
TVA - COBS 19.1.2R SUMMARY
A firm must:
(1) Compare the benefits of the DB scheme and the new
personal/stakeholder pension
(2) Provide enough information to enable an informed
decision;
(3) Provide a copy of the comparison, highlighting factors that
do and do not support the advice, in good time; and
(4) Take reasonable steps to ensure that the client
understands the firm’s comparison and its advice.
KEY TVA ISSUES
1.



How meaningful is a TVA close to retirement?
May be unrealistic to assume an annuity will be bought
May be looking at variable withdrawals or cashing in
BUT this is the major quantitative tool available
2.



How much information is enough, but not too much?
TVA report typically 20-40 pages, on top of suitability letter
Lots of comparisons, including if scheme enters PPF
How can we shorten without increasing risk?
Remember: TVA is only a tool informing your recommendation
TRANSFER CONCLUSIONS
 Keys to good advice are taking individual
circumstances fully into account, making sure the
client understands and documenting thoroughly.
 The FCA expects us to keep customer documentation as
short as possible – important judgement call on what can
be left out for individual customers.
 Advisers are under no obligation to transact business
against their recommendation, but possible perception
problem if ‘the industry’ is seen to be blocking transfers.
Questions?
28
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Every care has been taken to ensure that this information is correct and in
accordance with our understanding of the law and HM Revenue &
Customs practice, which may change.
However, independent confirmation should be obtained before acting or
refraining from acting in reliance upon the information given.
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Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF.
Telephone: 0131 655 6000.
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