Rules and Ramifications For financial advisers only – not for retail clients Retirement Rules and Ramifications

Learning objectives for the day By attending this session, delegates will be able to: Share the detail around new-style drawdown Understand the implications of new ways of taking lump sums Explain the changes to annual allowances proposed from 2015 Explain the proposed new annuity options Identify the tax planning issues around each option

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

Then Now Pensions make-over 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 has converted 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 Unlimited withdrawals from a crystallised fund Like traditional drawdown, funds are designated as drawdown money (i.e. crystallised) when a Pension Commencement Lump Sum is paid. This designation often occurs within the accumulation scheme so that an amount of 3 times the PCLS is crystallised. PCLS is restricted to 25% of the fund so the residual would always be 3 times the PCLS but partial crystallisation can occur and there is some added flexibility to accommodate adviser charges. Customers will be permitted to make unlimited withdrawals from their crystallised fund subject to income tax at marginal rate. Withdrawals could be uniform or ad-hoc and it is expected that customer will opt for both although it is not known in what proportion. Withdrawals may be taken to sustain a planned income strategy or used to withdrawal all funds as a lump sum, perhaps in 2 or 3 payments to avoid moving into a higher tax band. £10,000 allowance covers 98% of pension savers over 55

Avoiding the trip-wires

Taxation – the basics Existing income £60,000 Case study 1 – Les is considering buying his car pre-retirement, but can access PCLS at 55 Existing income £60,000 Less personal allowance £10,600 Total Taxable income £49,400 Taxable income @ 20% (0-£31,785) £6,357 Taxable income @ 40% (£31,785 - £49,400) £7,046 Tax £13,403 Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc. As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes) Les decides to buy a car for £22,000 with PCLS and take the ‘income’ that goes with it. Tax may be subject to change in the future and depends on individual circumstances.

£88,000 withdrawal in 2015/6 Additional tax £30,640 or Existing income £60,000 PCLS £22,000 non-taxable Pensions Income £66,000 Total ‘income’ £126,000 Less personal allowance £10,600 Total Taxable income £126,000 Taxable income @ 20% (0-£31,785) £6,357 Taxable income @ 40% (£31,785 - £126,000) £37,686 Tax £44,043 Additional tax £30,640 or 46.4% of £66,000 pension! Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc. As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes) Tax may be subject to change in the future and depends on individual circumstances.

What if ‘post-retirement’ and pre-state pension? Existing income £0 PCLS £22,000 non-taxable Pensions Income £66,000 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 Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc. As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes) Tax may be subject to change in the future and depends on individual circumstances.

HMRC newsletter - February 2015 If a member has a P45 from a previous source/employment dated on or after 6 April in the current year and there is no existing pension source, the scheme administrator should: - operate the code on the P45 on a Month 1 basis

The not-so-neat version! Just on the pension… Pensions Income £66,000 Less MONTHLY personal allowance £883 Total Taxable income for MONTH (pension only) £65,117 Taxable income @ monthly 20% band (0-£2,649) £530 Taxable income @ monthly 40% band (£2,649 - £12,500) £3,940 Taxable income @ monthly 45% band (£12,500 – 65,117) £23,678 Tax in MONTH 1 £28,148 PLUS normal tax on earned income Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc. As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes) Tax may be subject to change in the future and depends on individual circumstances.

HMRC newsletter - February 2015 If the scheme administrator already has a tax code for the member and is making payments, they can operate the tax code held against flexibly accessed payments provided: - the payroll software is sophisticated enough to cumulate the payments and take account of tax allowances already used, deducting the correct value of tax at the appropriate basic or higher rates, and - the scheme administrator can separately identify, and quantify the flexibly accessed element of any payment, when reporting the payment through RTI using data item 168, on or before the date the payment is made

Annual Allowance(s) Trigger points for reduced Annual Allowance: Receiving income from 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 No material change to contribution rate for 98% of retirees

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) No material change to contribution rate for 98% of retirees

X MPAA – An example £10k max £30k £10k April 2016* April 2015 Jan 2016 DC £10k max £30k £10k X FAD income April 2016* April 2015 Jan 2016 Overall still needs to be below £40k in the pension input period or AA charge will apply. AA charge is marginal rate (for info) so in effect tax neutral as tax relief given (as long as conts below your Net Relevant Earnings) *Pension Input Period ends on 5 April 2016

Defined Benefits and Money Purchase DC £12k FAD income April 2016* April 2015 Jan 2016 DB accrual ending 31 March 2016 - £28,000 *Money Purchase Pension Input Period ends on 5 April 2016

Money Purchase Annual Allowance – The checks The chargeable amount is the higher of: The alternative chargeable amount* Total of DB > £30k + excess DC > £10k DB is £28k = £0 DC is £12k = £2k over £2k is the alternative chargeable amount The default chargeable amount DB plus DC > £40k £28k + £12k = £40k Charge is nil under this test *This additional check is only required if contributions exceed £10,000 into a money purchase arrangement EG £32k in DB, £8k in DC is okay, as second test does not apply!

When is a lump sum not a lump sum? Question As part of their objectives, Jeff and Ann want to clear their interest-only mortgage with a lump sum of £10,000. What is the most efficient way of accessing the ‘lump sum’? 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 Trivial commutation previously available from age 60 • • Part tax-free; part taxable This option could be extrapolated from FAD but has special rules to prevent the recycling of tax relief. This is a variation on phased retirement could be a major new option for providing retirement income. Primary/Enhanced protection and PCLS over £375k rules: When can a protected PCLS sum be paid? A protected PCLS sum of in excess of 25% of the capital value of the member’s pension benefits can only be paid on the first occasion that an individual vests benefits on or after 6 April 2006, and provided that all benefits are drawn from the scheme at that date.

Avoiding the trip-wires

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

UFPLS Net income required £10,000 25% @ 100% = 25% 75% @ 80% = 60% 25% @ 100% = 25% 75% @ 80% = 60% = overall ‘rate’ = 85% £10,000/ 85% = £11,765

UFPLS Client needs approximately £10,000 pa £11,765 crystallised PCLS £2,941 . £7,059 income £10,000 ‘income’ shown net of 20% tax

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 • A lifetime annuity can go down as well as up and need not increase uniformly. Previously a lifetime annuity could only reduce in very limited circumstances. For example, an index linked annuity could reduce if the movement in the index was negative, an investment linked annuity could reduce if the attached investment returns did not support the income, and an ill-health pension could reduce if health was restored. Now a pension can go up and down as required. Possible options for Partnership’s lifetime annuity include a pension that starts at a higher level reducing in later life when old age restricts activity. There appears no obvious reason why a pension cannot be reduced to a trivial amount, say £1 a year allowing individuals to draw all their income in early years but this option could be closed if used to avoid Annual Allowance restrictions (see below). Whereas an increasing annuity had to increase annually, the new rules could allow a step up at a future date, or a future event, e.g. going into residential care. • Restriction on guarantee period removed. Currently an annuity could be guaranteed for fixed term of up to 10 year so that the income continues to be paid to next of kin for that term if the annuitant dies. The 10 year limit is being removed so that any period could be selected. Extended guarantees restrict Partnership’s IP. Where standard life expectancy might be 20 years and Partnership predict 15 years due to medical conditions, the longevity become almost irrelevant if the income is guaranteed for 25 years. Extended guarantees competitive dynamics will be dependent on investment returns, expenses and margins rather than longevity. An extended guarantee period might be of interest to customers where the priority is providing a legacy for family or charity. • Scheme Pensions There is uncertainty about how the new definition of Lifetime Annuity distinguished from Scheme Pensions through annuities. Further clarification is required . • Bulk Annuities There is uncertainty about how the new definition of Lifetime Annuity distinguished from Bulk Annuities that are assigned to scheme members. Further clarification is required .

Taxation of death benefits   New System Die before 75 Die after 75 Lump Sums (“uncrystallised funds”) Tax free 45% in 2015/16 Marginal income tax thereafter* (“crystallised funds”) Benefits as flexible drawdown income Marginal income tax Annuity Guarantee periods Tax Free The treatment applies to a specific nominated beneficiary. We do not know if the position will change if there is no nominated beneficiary or the nominated beneficiary predeceases the pension fund holder.

Death benefits - Jeff and Ann Jeff and Ann have children aged 21 and 22 Can they leave pensions income for them? What about when they pass the age of 23?

Death Benefits – The Terminology Dependant: Spouse, civil partner, child under age 23, older child dependant due to physical or mental Impairment, someone financially dependant on member or someone in a financial relationship of mutual dependence with member. Nominee: Anyone nominated by the member to receive an income on the member’s death. The scheme administrator cannot normally appoint a nominee or change the nominee. (discretion still applies) Successor: Anyone nominated by dependant, nominee or successor to receive any remaining benefits on their death

Dependents and Nominees Pension Fund Trustee discretion Options for Financial Dependants Options for non-Financial Dependants Lump Sum (outside pension) Pension Income Lump Sum (outside pension) Pension Income

Dependents and Nominees Options for non-Financial Dependants Lump Sum (outside pension) Pension Income Scheme administrator / Trustee discretion to pay to anyone (within class of beneficiary) Should be nominated by the member Scheme administrator / Trustee cannot make a nomination if living dependant or nomination made by member But could pay to a financial dependant

Reconsidering bypass trusts Benefits via trust Benefits from pension fund Benefits pass to trust Tax = 0%, 45%, trustee rate depending on date of death Trust monies outside of estate Loans to spouse create debt against estate (if not repaid) Original member establishes future beneficiaries Spouse takes only what is needed Tax = 0%, marginal depending on date of death Remainder stays outside of estate Spouse nominates cascading benefits Bypass trusts become more about control than taxation

Impact on Defined Benefits?

Defined Benefits – Safeguards Individual must take advice before a transfer can be accepted Pension Transfer Specialist Independent from the defined benefit scheme Guidance given to trustees on the use of existing powers Delays Scheme funding levels 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 ..read points. The principle of ‘target benefits’ can be used on a group basis by trustees. An annuity geared towards the promised benefit can be an asset of the scheme, but de-risk the payments due.

Learning objectives for the day By attending this session, delegates will be able to: Share the detail around new-style drawdown Understand the implications of new ways of taking lump sums Explain the changes to annual allowances proposed from 2015 Explain the proposed new annuity options Identify the tax planning issues around each option

Still some areas of crystallised ball-gazing!

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