Retirement Rules: Changes and Options for Pension Funds

THE HOME OF THEPROFESSIONAL ADVISERRetirement – Rules and Ramifications

Learning objectives • By the end of the session you will be able to explain: • The changes to the way in which customers can draw from pension funds from April 2015 for defined contribution pension schemes • The options and restrictions that apply to members of defined benefit schemes • How the provision of “guidance” through Pension Wise will work and interact with advice

Agenda • Guidance and advice • An overview of the changes • Annuity changes • Defined Benefits • The future

Freedom and Choice These reforms create more choices for individuals, and we want people to be equipped and ready to make informed decisions. Treasury, March 2014

6 stages

What the guidance does / doesn’t do • Tell customers what to do specifically • Recommend a particular product • Recommend a particular adviser “Ultimately, consumers must take responsibility for the decisions they make, but the guidance will support them in this decision making and help empower them to make the most of their pension savings” • Relevant options • Key facts • Consequences • Other issues to consider

Some way to go… In order to pay the least amount of tax on your DC withdrawals you should… Proximity to retirement ILC January 2015

Avoiding a car crash

Some idea of objectives.. Financial Planner 26/1/15, research from NEST

...but a gap in how to achieve them ILC January 2015

How will you use it? 55% 27% 10% Source: PPI / Ignition House, January 2015

Financial advice - a key form of support ILC January 2015

Pensions make-over Then Now Trivial Commutation Trivial Commutation Small Pots Small Pots Capped drawdown Uncrystallised Funds Pension Lump Sum Flexible drawdown Flexi-Access Drawdown Annuity Annuity – significant changes Death benefits taxable Death benefits - tax free pre 75 Annual Allowance Annual Allowance(s)!

Flexi-Access Drawdown (FAD) • “Flexi-Access Drawdown” applies to all new drawdown crystallisations • Existing flexible drawdown hasconverted to FAD • The pension can be income withdrawal or a short term annuity • No limit on the amount drawn from the fund each year • Amounts over 25% subject to marginal rate of tax • Revised Annual Allowance £10,000 if income taken

Tax on earnings only Existing income £30,000 Less personal allowance £10,600 Total Taxable income £19,400 Taxable income @ 20% (0-£19,400) £3,880 Tax £3,880 Tax may be subject to change in the future and depends on individual circumstances.

£48,000 withdrawal in 2015/6 – year end Existing income £30,000 PCLS £12,000 non-taxable Pensions Income £36,000 Total ‘income’ £66,000 Less personal allowance £10,600 Total Taxable income £55,400 Taxable income @ 20% (0-£31,785) £6,357 Taxable income @ 40% (£31,785 - £55,400) £9,446 Tax £15,803 Additional tax £11,923 or 33% of £36,000 pension! But Beware Month 1 taxation Tax may be subject to change in the future and depends on individual circumstances.

Annual Allowance(s) • Trigger points for reduced Annual Allowance: • Receivingincomefrom Flexi- Access Drawdown (FAD) account • Receiving an Uncrystallised Funds Pension Lump Sum (UFPLS) • Exceeding the ‘capped’ rate of drawdown on an existing capped drawdown arrangement • Scheme pension where the arrangement is providing scheme pension to less than 12 members, including dependants, at the time the first payment is made. • Stand alone lump sum with primary protection and greater than £375k protected tax free lump sum

Annual Allowance(s) - there’s more.. • Current allowance of £40,000 remains for existing capped drawdown • And designating new tranches for income within limits • Annuity only clients not impacted (assuming no decreases) • Defined Benefits • Retain £40,000 (or £30,000 + £10,000 for DC)

Question When is a lump sum not a lump sum? When it’s an income!

Uncrystallised Funds Pension Lump Sum (UFPLS) • Payable from age 55 • or upon meeting ill-health conditions • 25% available tax free, remainder taxable as pension income • Reduced annual allowance • Unless taken under ‘small pots’ allowance • Not available to those with primary and/or enhanced protection and lump sum rights > £375,000 • Not available for DB pensions

Lump sum or ‘income’? UFPLS FAD PCLS available ‘Income’ available £10,000 tax-free £2,500 tax-free £7,500 taxable Annual Allowance £10,000 Annual Allowance £40,000

Lifetime Annuities • The annual rate of income will be allowed to go down as well as up • Retains £40,000 annual allowance if annuity only • Assuming no decreases • Allow lump sums to be taken • Must be specified at point of purchase • There is no limit on the maximum guarantee period that can be offered • Commutation of guaranteed payments on death under £30,000

Taxation of death benefits

Defined Benefits – Safeguards Individual must take advice before a transfer can be accepted • Pension Transfer Specialist • Independent from the defined benefit scheme Unless £30,000 or under FCA handbook: With defined benefit transfers a firm ‘should start by assuming that a transfer or opt-out will not be suitable’.* *FCA: COBS 19.1.6

Notes from the guidance “It is not the trustee’s role to second-guess the member’s individual circumstances… Nor is it their role to prevent a member from making decisions which the trustees might consider to be inappropriate to the member’s circumstances”.“We expect trustees to conduct proper due diligence on the receiving scheme to ensure that it is a legitimate arrangement”. Lexology.com 16/2/15

The relevance of underwriting • DB scheme population often weighted towards retirees • ‘Freedom and Choice’ confirms individual retirees cannot transfer out of Defined Benefit Schemes • BUT schemes can de-risk the benefit by annuitising • DB de-risking is a huge opportunity

The wind of change “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

The Future "New products will need to be developed and markets will need to adjust. If sold well, annuities have the potential to be a good product and I expect them to continue to play a significant role. But I want people to be able to decide what is right for them.“ George Osborne

Provider approach Protected investment funds Variable & invested annuities Flexibility & guarantees • 2015 will see a variety of solutions

Combining annuity and drawdown Income requirement

The development of hybrid products Top-ups Death benefits • Lump sum • Income • Dependants, Nominees and Successors ? FAD – Passive Funds • Value Protection option • Guarantee option • Dependants or Nominees Annuity Cash Account • As per FAD consolidated income payment

Learning objectives • By the end of the session you will be able to explain: • The changes to the way in which customers can draw from pension funds from April 2015 for defined contribution pension schemes • The options and restrictions that apply to members of defined benefit schemes • How the provision of “guidance” through Pension Wise will work and interact with advice

Thank You Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No. 05465261), and Partnership Home Loans Limited (registered in England and Wales No. 05108846). Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Partnership Home Loans Limited is authorised and regulated by the Financial Conduct Authority. The registered office for both companies is 5th Floor, 110 Bishopsgate, London EC2M 4AY

Retirement Rules: Changes and Options for Pension Funds