PENSIONS UPDATE: BUDGET 2016 AND DB TRANSFERS IAN NAISMITH

Budget 2016  Pension changes announced  Lifetime ISA  Annual and lifetime allowance changes DB transfers  Issues highlighted by FCA  Key points from CP15/30 2 AGENDA

Budget 2015 – pension changes Pensions Dashboard To be developed by the industry by Financial Advice Employer-funded tax-free allowance up from £150 to £500 from April Consultation to allow up to £500 from fund for advice before age 55. Dependant’s Drawdown Child can continue dependant’s drawdown beyond age 23. Serious Ill Health Payments possible from crystallised funds. Taxed at marginal rate post-75. Trivial Commutation Available from money purchase scheme pension. Charity lump sums Available from crystallised and uncrystallised funds pre year limit does not apply.

Paid after end of tax year Individual’s contributions – up to £4,000pa Government 25% bonus LIFETIME ISA BASICS First home worth up to £450,000 OR Lose bonus + 5% charge 4050 Start by age Bonus until age

BENEFITS OF PENSION (BASIC RATE TAXPAYER) BonusE’ee contE’er cont Employer cost£ Employer NI (13.8%)£ Bonus amount£ Employee tax + NI (32%)£ Net bonus£ Tax relief (20% of contribution)£ Pension contribution£ 74.69£ Tax in retirement (20%x75%=15%) £ 11.20£ Retained by employee£ 59.75£ 63.49£ Gain£3.74 (6%)£25.25 (42%) Figures ignore investment growth, charges and possible annuitisation

PENSION v. LIFETIME ISA – OVERALL GAIN Figures ignore investment growth, charges and possible annuitisation Tax rate now Tax rate in retirement Pension E’eeE’er Basic rate (20%) 0%25%67% 20%6%42% Higher rate (40%) 20%42%67% 40%17%37% Additional rate (45%) 40%27%50% 45%20%42%

PENSION v. LIFETIME ISA – OVERALL GAIN Figures ignore investment growth, charges and possible annuitisation Tax rate now Tax rate in retirement Pension Lifetime ISA E’eeE’er Basic rate (20%) 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%

LIFETIME ISA BENEFITS First-time buyersSavers for retirement Likely to form a large majority for Lifetime ISA Many would save without the bonus Take care with qualifying criteria LISA bonus equivalent to basic rate relief, but no tax on benefits LISA gives greater gain for personal contributions, unless tax rate reduces in retirement Not as attractive as pension with employer contributions Pension exempt from IHT

TAPERED ANNUAL ALLOWANCE Annual Allowance Adjusted income Threshold income < £110,000 Unaffected Adjusted income £110,000 - £150,000 Unaffected Adjusted income > £150,000 Affected

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 Adjusted net income = £180,000 Annual allowance = £40,000 – (£180,000 - £150,000)/2 = £25,000 Pension £80,000

TAPERED ANNUAL ALLOWANCE Pension £50,000 Pension £80,000 No tapered annual allowance because income < £110, 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

THE NEW PROTECTIONS Transitional protections Fixed protection 2016 Retain £1.25 million lifetime allowance, but no further accrual. Can only combine with either form of individual protection. Individual protection 2016 Lifetime allowance is value at 5/4/16 (max £1.25 million). Further 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 completed. HMRC will send a certificate. Deadline 5 April Fixed & individual protection 2016 Fully digital online process. System will provide a reference number. Available from July 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: 5 April 2014 > £1.25 million Apply for IP14. 5 April 2016 > £1 million Apply for IP16. Consider FP16. 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.”

“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.” Personalisation PENSION TRANSFERS: FCA CONCERNS

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.” Documentation

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. 3.You should be clear with the client what the risks of the alternative course of action are. Good Practice  Gather bespoke information  Resolve inconsistencies  Explore the real need  Make advice unambiguous  Document reasons & risks  Give robust warnings  Retain contemporaneous records  Use the client’s own words FCA factsheet 35 - Pension reforms and insistent clients

TVA - COBS R 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 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.

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