“Bold, modern, progressive”SBGAXA Wealth This presentation is directed at Professional Financial Advisers only. It should not be distributed to or relied upon by retail clients.
Agenda • Pension changes – headlines. • How will consumers react to change? • Some of the unknowns and some of the pension planning opportunities. • Is higher rate tax relief on pension contributions at risk? • The value of cash flow modelling
Pension Changes - Headlines 2014/15 • New – effective from 27 March 2014 • Capped Drawdown maximum GAD 150% • Flexible Drawdown Minimum Income Requirement £12,000 • Trivial commutation limit increased to £30,000 • Small pots limit increased to £10,000 per arrangement and a maximum number of payments increased to 3 • The purchase of an annuity can be deferred for longer than 6 months after taking PCLS, to allow individuals to benefit from the proposed new rules
The closing date for responses to the consultation is Wednesday 11 June 2014. The 10 questions posed in the consultation consider the application rather than the creation of the legislation, for example; • “what more can be done to ensure the guidance is available at key decision points during retirement?” • “how can the government design the new system such that it enables innovation in the retirement income market?” Why has the Government proposed to change the way in which pension benefits can be taken?
“The annuities market is currently not working in the best interests of all consumers. It is neither competitive nor innovative and some consumers are getting a poor deal. It is time for a bold, modern and progressive reform.” “This is the most fundamental change to how people can access their pension in nearly a century.” George Osborne Chancellor v Regulator….. What retirement planning vehicle would you normally consider for a client with less than a £100,000 fund? Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf
60% of consumers do not switch when they buy an annuity. For standard annuities an estimated 79% could get a better deal on the open market. For enhanced annuities an estimated 91% could get a better deal on the open market. FCA’s Thematic review of annuities: Findings Estimated annual income gains by consumers from purchasing an annuity on the open market Source: http://www.fca.org.uk/static/documents/thematic-reviews/tr14-02.pdf
Saving less for retirement • Government concerned that a lack of choice at the point of retirement will undermine confidence in longer term saving. Source for table: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf
and living longer*….. 1948 12 year life expectancy 65 male 2012 21 year life expectancy 65 male 1948 15 year life expectancy 65 female 2012 24 year life expectancy 65 female • Government concerned that annuities might not be the correct product for everyone - rates have reduced as life expectancy has increased. *Source:: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf
Current tax system for accessing DC at retirement Tax free lump sum Pension pot Full withdrawal (at marginal rate) Annuity Full withdrawal Capped drawdown Flexible drawdown £30,000 (previously £18,000) £310,000* *This is a stylised assumption based on an individual with a full basic state pension of £5,744 per year, who takes the max. PCLS from their DC plan and purchases a single life, level, no guarantee annuity worth £14,256 p.a. (an annuity rate of 6.1%) at age 65.
Future tax system for accessing DC at retirement Tax free lump sum Pension pot Full withdrawal (at marginal rate) Annuity Drawdown / other products
The projected impact on tax revenues of the measures to introduce greater flexibility and choice to defined contribution pensions. Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293759/37630_Budget_2014_Web_Accessible.pdf
How many retirees will use their pension pot to buy an annuity, according to research? • Poll of 1,000 scheme members conducted by Hymans Robertson Options Percentage Use “most or all” of their pension pot to buy an annuity when they 25% retire Take most of their pension pot as cash to spend in other ways and 32% some to buy an annuity Not buy an annuity and take their whole pension pot as cash to 12% spend in other ways Not buy an annuity, keep control of their money and draw an 31% income from the pot each year Source: http://www.hymans.co.uk/news-events/newsroom/the-budget-pension-reforms-only-25-of-retirees-will-use-pension-pot-to-buy-an-annuity,-according-to-research.aspx
Other survey “highlights” • Defined contribution scheme members closer to retirement take a more negative view of the value of annuity. • 34% of scheme members aged over 51 felt that annuities “are not flexible enough for (my) retirement plans compared to 20% of people under 51. • 38% of scheme members aged over 51 felt that annuities were “poor value for (my) savings” compared to 21% of people under 51. • 61% of DC scheme members agree that they are confident about self-managing the money built up in pension pots throughout their retirement compared to 19% who aren’t. Still early days and when the moment of truth comes what price will individuals place on the value of a guarantee? Source: http://www.hymans.co.uk/news-events/newsroom/the-budget-pension-reforms-only-25-of-retirees-will-use-pension-pot-to-buy-an-annuity,-according-to-research.aspx
Question What proportion of your current pension clients will look for ongoing advice when taking income from their pension fund? • Above 75% • 50-75% • 25-50% • Below 25%
Some of the unknowns… • What will the pension death benefit tax charge be? • Can you crystalise some funds and continue to contribute to pension? • Can over 75’s contribute if they have already crystallised funds at an earlier date? • What will pensioners bonds look like? • What will guidance look like for a consumer? • Will the minimum age to access private pensions increase?
NISA v pensions – a high level summary NISA Pension High tax rate on entry High tax rate on exit Access pre age 55* Death during investment period** ? Death after taking cash from pension Does the power of tax relief swing the pendulum in favour of the pension wrapper? *Date that pension can be accessed could increase in the future. ** Is the NISA invested in BPR qualifying AIM stock / estate below the NRB / beneficiary a spouse or civil partner?
Funding for Flexible pensions…. Effective net contribution Net benefit BRT PCLS £25 Pension £60 TOTAL £85 Basic Rate Taxpayer £80 Gross £100 HRT PCLS £25 Pension £45 TOTAL £70 Higher Rate Taxpayer £60 ART PCLS £25 Pension £41.25 TOTAL £66.25 Additional Rate Taxpayer £55
Bonus Vs Dividend Vs Pension cont. • Assuming £200,000 profit to extract, £100,000 each for two directors who are currently higher rate tax payers. • *Consider also the potential loss of personal allowance and increased income tax liability by £4,000 (£10,000 X 40%) • ** Assumes sufficient carry forward of annual allowance is available Bonus Dividend Pension** Profit £100,000 £100,000 £100,000 Corporation tax £0 £20,000 £0 Employer’s NIC £12,127 £0 £0 Net profit for £87,873 £80,000 £100,000 distribution Employee’s NIC £1,757 £0 £0 Employee’s I.T. £35,149 £20,000 £0 Net benefit £50,967* £60,000* £100,000
Bonus Vs Dividend Vs Pension cont: The net benefit Bonus Dividend Pension Profit £100,000 £100,000 £100,000 Total tax and £49,033 £40,000 £0 deductions Net Benefit £50,967 £60,000 £100,000 Flexible Drawdown BRT £25,000 PCLS + £60,000 £85,000* HRT £25,000 PCLS + £45,000 £70,000 ART £25,000 PCLS + £41,250 £66,250 *If withdrawn as one lump sum some will be taxed at 40%
Higher rate taxpayers are on the increase…. • Over the last 30 years the number of 40p taxpayers has risen by 400% with 4.4m paying higher rate in 2014, up from 930,000 in 1984. • More than a million people have been pulled into the 40p tax band since 2010. • A further 313,000 pay the top rate of 45p. • Whilst only 16% of taxpayers pay the higher or additional rates of tax, the top 10% of taxpayers now account for 59 per cent of total income tax contributions!
Our simple tax relief system for 2014/15! 60% relief 20% relief 40% relief 40% relief 45% relief £0 £41,865 £100,000 £120,000 Over £150,000 Or even a combination of these rates
Question What proportion of your current higher rate tax paying clients will be effected by the new Lifetime allowance of £1.25mill? • None • Less than 5% • 5 -20% • Over 20%
Cashflow Modeling • Cashflow • Assets • Expenses
Summary • Now more than ever clients need advice. • Professional connections also need help and advice – are they up to speed with all the changes in pension legislation? • This is an advice rich area for advisers Thanks for listening
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