New planning horizons in a world of Pension Freedom?    

Important information This presentation is for adviser use only, and contains some forward thinking statements which should not be taken as fact. Information given is based on our current understanding, as at January 2015, of current taxation, legislation and HMRC practice, all of which are liable to change and subject to an individual’s own circumstances. Terms and conditions of products are available on request. The level of charges may change in the future. For webex presentations, the event may be recorded for training purposes. No reproduction, copy, transmission or amendment of this presentation may be made without the written permission from Prudential. PAC & Prudential Retirement Income Limited (PRIL) - Prudential" is a trading name of The Prudential Assurance Company Limited and of Prudential Retirement Income Limited. This name is also used by other companies within the Prudential Group. The Prudential Assurance Company Limited is registered in England and Wales. Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Prudential Retirement Income Limited is registered in Scotland. Registered office at Craigforth, Stirling FK9 4UE. Registered number SCO47842. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority    

Our learning objectives for the session To be able to demonstrate an understanding of the: Freedom & Choice taxation and planning Sustainability of Income and legacy planning with predictive tools The defined benefit to defined contribution conundrum How Death benefits in the post April 2015 can be used for IHT planning You have heard a bit today about process and the technicalities of the new pensions regime. In our session we aim to cover these learning outcomes by bringing together some of the issues that Les and Clare could face as the move into and through retirement.  

Income sustainability and Taxation New World Issues? Holidays? Retirement Income? Property? Cars? Income sustainability and Taxation Estate Planning? Gifts? Debt? A lot has been said, a lot written and a lot will continue to be said and written about what peeps will do with their pensions. Some talked about more than others, cars, holidays in particular. Initially a fair bit was talked about purchase of residential property as buy to let but I think the dream has faded into the reality as the taxation issues around CGT on sale/IHT on death/management fees/ blank income months/bad tenants/insurance not to mention in some parts of the uk the average pension fund would not buy the font door of a house. We have included here Estate planning. In my view pensions were under used and under valued as a tool for IHT planning. In the new world they are definitely going to play a major part in estate planning and inter generational transfer of wealth. Gifting whether art of Estate planning or not will also feature as parents look to help their children make their way in life. (Research from pru shows 36% of peeps retiring in 2015 expect to financially support their children or grandchildren in retirement. And finally debt. Recent Research by Pru tells us 20% of those retiring in 2015 will do so with av debt of £21.8K. Utilising pension funds for repayment will certainly be a high priority for some. A finally the real New World Issues – sustainability of Income and Taxation. You have heard today from Partnership how more tax could be paid than necessary if funds are taken all at once pushing peeps into higher tax brackets and potentially losing the PA in some cases. For me even bigger than that is sustainability – something we will look at in more detail and something the Regulator is keen to see properly addressed.    

Les & Clare – some immediate and longer term considerations Transferring ISA funds to pensions? Transferring pension funds to ISAs? Pension contributions now for Les? Pension contributions now for Clare? Where to draw income from in the long term? Where to draw income from in short term? What about Les’s Defined Benefit Scheme? Is the Buy to Let for Income or a longer term investment? What about the outstanding mortgage? L and C have a number of immediate and longer term considerations. In 35 mins we cannot address them all so we will focus on those highlighted in bold. As with any case study there is no single correct answer. All we intend dong here is demonstrating how some of these considerations can be addressed. What about leaving money to the children? What about gifting now to help the children?    

When does the client need this money? Where should Les and Clare be saving? NISA or not? Traditional Planning? April 2016 Les £15,240 Les £15,240? STOP! When does the client need this money? Clare £15,240 Clare £15,240? To cover Historically ISAs were normally the first choice for savings, with any surplus being allocated to other wrappers. However, following the Freedom & Choice reforms this may no longer be the case. This is a hypothetical example that doesn’t relate to any individual. This does not just apply to L and C of course As you can see here 2016 NISA allowance is £15240. A couple have that each and in fact the same again next year. Potentially £60K plus . The Q must now be – when do they need access and if it is not in short term say for a couple who are younger then perhaps pensions is the solution. For L and C with immediate access to pension you could argue if their income levels satisfy – pensions is the answer Total £60,960+?    

Pension v NISA - No investment returns Tax In Tax Out £10,000 gross pa for 10 years Pension 20% Accumulated Value £100,000 Net Lump Sum * (25% @ 0% + 75% @ 20%) £85,000 Increase on Net Cost £5,000 Pension Return 1.1% ISA Return £80,000 £0 0% Tax In Tax Out £10,000 gross pa for 10 years Pension 40% Accumulated Value £100,000 Net Lump Sum (25% @ 0% + 75% @ 40%) £70,000 Increase on Net Cost £10,000 Pension Return 2.78% ISA Return £60,000 £0 0% Tax In Tax Out £10,000 gross pa for 10 years Pension 40% 20% Accumulated Value £100,000 Net Lump Sum * (25% @ 0% + 75% @ 20%) £85,000 Increase on Net Cost £25,000 Pension Return 6.25% ISA Return £60,000 £0 0% Comparing investments and ISAs for a 10yr saving term. Just looking at tax boost and not considering investment returns. * Net lump sum for pensions assumes amount spread over several tax years to keep within basic rate band  

Current Savings Future Needs Les and Clare’s Savings Allocation – Time for a new approach? Home Improvement Retirement Income Emergency Holiday Car Future Holidays Current Savings Future Needs Age 45? Age 55 Order by Term To cover You could argue There is no pensions vs ISA debate – it’s about using both. Tax relief will almost always favour the pension so it’s about access. Load boxes and titles - Clients have a number of goals over their lifetime Load age 55 line - Key info for planning is which of these are after age 55 as Load future savingst - This money would likely be better placed in pensions Load current savings - this money should utilise ISAs etc. Load age 45 line - but as client gets closer to age 55 some of the accumulated funds can be moved.    

Future Savings Current Savings Les and Clare’s Savings Allocation – Time for a new approach? (width indicates cost) Order by Term Emergency Holiday Car Future Holidays Home Improvement Retirement Income Age 55 Age 45? Future Savings Current Savings Excess Funds Fund Value £100,000 Withdrawal £32,000 Amount received £32,000 Cheque £32,000 Relief at Source £8,000 Fund Value £40,000 To cover Continued from previous slide. In L and C’s situation – we could move some of their savings over to boost their p ensions Look at how lump sums can be moved as well as income redirected. As they have sufficient capital in current account to cover planned spending they can move some excess to pensions. Money Back via Self Assessment (£8,000 for HRT) Plus PCLS of £10,000 – net cost £14,000 for HRT    

Old World Issues for Les, Clare and Family. The tax landscape Son-in- Law? Les? £21,200 70 60 50 40 30 20 10 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000 140,000 150,000 160,000 Effective rate of tax % Income £ Child Benefit High Earner To cover Tax system in UK is progressive but there are certain traps that change this. Increase in personal allowance (PA) to £10,600 HRT up % to £42,385 (first time in line with inflation for 5 years) Age allowance gone for those born before 1938; £60 for <1938 (but over 75yrs) High earner arguable more important than ever With our family we have apotewntial for Les if he takes too much pension up front to lose his personal allowance. Their son in lawby virtue of his income loses the child benefit for the daughter. The son could be one of nearly 5 million HRT payers now in the UK. Historically there has been a reluctance to utilise pensions due to their lack of accessibilty to resolve these tax problems . Not any more. Pensions can resolve these tax issues for our family.  

Data that can only help. An example of the Annual Tax Summary And with the Revenue now issuing statements shwing how much tax and NI is payed in the year clients will realise just how much they have handed over in some cases uneccessary. You can use this statement to show how you can reduce their taxation.    

Adjusted Net Income – Why it is important to the family Earned income Investment income Savings income = Adjusted Net Income Chargeable gains (full gain) Less Gift aid payments To cover Trigger points are not based on earned income alone, so all client’s income and the full amount of bond gains need to be considered to calculate their adjusted net income. Includes 75% of UFPLS payment. Build – Allowable deductions There are some allowable deductions, including pension contributions. So this means that more people, not just high earners, can get caught by the tax traps. Pension contribution (gross) Trading losses  

How Pension Contributions can help High Earners £4,240 £4,240 £8,480 £4,240 Net Cost £4,240 - Tax saved £12,720 Pension £21,200 £16,960 £4,240 Les & Clare’s Bank £ Les’s take home pay Les’s Pension HMRC £ £ £ £ £ £16,960 £0 £0 £16,960 £21,200 £4,240 £0 £8,480 £12,720 £8,480 £21,200 £8,480 £16,960 £12,720 £12,720 £0   13

Pension Contributions by Les and Clare to help their Daughter Son-in-Law & Daughter (3 children) caught in HICBTC £2,000 £2,475 £4,000 £2,000 £8,000 £2,475 Les & Clare’s Bank £ Son in Law’s take home pay £ £ Son in Law’s Pension HMRC £ £ £ £0 £8,000 £0 £10,000 £8,000 £6,475 £2,475 £4,475 £4,000 £8,000 £5,525 £10,000 £3,525 £6,000 £0 £0   14

Estate Planning – How should Les and Clare utilise Assets? Why not? Because? Estate subject to IHT Pension Fund (No IHT) Estate under Nil Rate Band Bigger Smaller Estate subject to IHT Pension Fund (No IHT) Estate subject to IHT Pension Fund (No IHT) Estate under Nil Rate Band Leave this Use this WHAT YOU MIGHT WANT TO COVER Pensions are an IHT efficient way to hold your money so why would a client take money out of a pension unless they needed to. Previously not taking benefits could be subject to IHT under ‘omitting to act’ e.g. the Fryer case. The Finance Act 2011 made Pension funds exempt from Section 3(3) which now means that not taking pension benefits will not lead to an IHT claim. By using other assets, instead of a pension fund, to meet income requirements means less of the estate will be subject to IHT as pension funds are IHT exempt. Build So deferring taking pension benefits and using other assets for income can be a viable strategy up to age 75 – as the value of the estate subject to IHT can be reduced, leaving the pension fund to grow, sheltered from IHT. But from age 75 (or in Income Drawdown), pension funds are subject to 55% tax on death, so other strategies may be needed.  

Death taxes in the new world – Where is the control? Les’s Pension Clare His Death Her Death Les and Clare’s Children ???? ? Her Death Clare’s new Husband His Children His Death ?  

Thematic Review – FCA Key Findings And Les’s Defined Benefit Pension? Thematic Review – FCA Key Findings 5.1m deferred members** The vast majority of schemes should put at-retirement processes in place to facilitate transfers to DC because it is low cost to implement, good for scheme members and will reduce risk. We typically see take-up rates of 30-40% for slow burn at-retirement processes. - Hymans Oct 14 FTSE 350 Scheme Analysis Non FP Quote From FSA PS12/8 “Given the high level of risk attached to giving up the fixed benefits associated with a DB scheme, the starting point for pension transfer advice is that a transfer will not be in the member’s best interests” **The Purple Book 2013   Proportion of transfers 4.10 Majority of individuals retaining membership is likely top be the best option 4.11 It will be in the best interests of others. Eg: They are heavily in debt (not mortgage alone) Short life expectancy Unmarried and no dependents Prefer wealth to income stream 4.12 Estimates between 10% - 20% expecting to transfer F&C Consultation Response July 14

Les’s Defined Benefit Pension? Client priorities? High CETV Investment control Benefit Shape Poor health Death in deferment Employer Solvency . We’ve now announced that some people who have a ‘defined benefit’ scheme will benefit too A ‘defined benefit’ pension is typically a promise of a certain level of pension in retirement which is linked to your salary. People in the private sector or in a funded public sector scheme will still be able to transfer from a defined benefit pension scheme to a defined contribution one if they want to, meaning they can benefit from the changes. Those in unfunded public sector schemes will not be able to transfer. This means that around 18 million people will ultimately be able to withdraw their pension flexibly should they wish to do so. Pension Reforms ‘Nine Things you should know’ UK Gov Oct 14 https://www.gov.uk/government/news/pension-reforms-eight-things-you-should-know    

Les’s Defined Benefit Pension? Freedom & choice Succession planning Tax Efficiency Debt TFC Timing Longevity risk    

And the Regulator? - Policy Statement PS14/17 4.9 …customers should receive information about the consequences of their choices before the purchase... 4.16 Our discussions with industry have identified an immediate issue in relation to the projection requirements for drawdown products. Our current projection rules assume a regular income is being taken over time and may therefore produce confusing or irrelevant information for customers using products more flexibly… Extract from CP14/11 to highlight the need for people to understand the consequence of taking withdrawals Sustainability 4.43 Maximum withdrawals    

Suitability Considerations - FCA & Drawdown Drawdown can be Extremely Useful For the right client Ensure they are Reviewed Regularly Highly Personalise Suitability Reports Consider TFC Requirements Ensure Systems are Effective Failure to confirm Client Objectives Unclear Advice Consider Income Requirements Consider all other Options Help Client make an Informed Decision This is a summary of what the FCA think of drawdown. Note – They also don’t have a view on what the minimum fund value should be.  

Modelling Les and Clare’s future - Connect Four Fund YIELD Income Term    

Supporting Your Discussions I’ve mentioned lots today about matching your recommendation to the aims and objectives of your clients. Here are two forms to compliment your fact find process and help you define those objectives, and create the link between the client meeting and the recommendation.    

Intuitive Inputs…  

They would also like to leave a lump sum to their two children of Les and Clare – potential Income solution Les 60 English £200,000 pot (after DB TV) Wants income to age 95 3% escalation Balanced investor They would also like to leave a lump sum to their two children of £100,000  

Their Objectives… Sustainable indexed income Maximise death benefits for kids Replace Car & Holiday Allow for State Pension Retain flexibility    

Les and Clare’s Objectives met INCOME £10,594 State Pension Legacy £100,000 Slowing down? Annuity Purchase?  

Warning: Investments can go down as well as up Achieving peace of mind with Yield calculations for Les & Clare Gross Return Bid-Bid weekly withdrawal chart (from 25 Nov 2009 to 25 Feb 2015) from UK ABI Pensions universe. Rebased in Pounds Sterling and for Regular Withdrawals and an initial lump sum of 100000.00 with a Monthly regular withdrawal of 0.43% on 1st of the month PruFund Cautious 6.70% PruFund Growth 7.30% PruFund 0-30% 6.40% PruFund 10-40% 6.90% PruFund 20-55% 7.10% PruFund 40-80% 7.40%   Warning: Investments can go down as well as up  

Each client now has a myriad of solutions to meet their objectives Summary Each client now has a myriad of solutions to meet their objectives The Regulator expects you to help clients fully understand the issues around Freedom & Choice Sustainable income provision and the optimisation of death benefits will be key Pension Freedom is here - Carpe diem?    

Our learning objectives for the session To be able to demonstrate an understanding of the: Freedom & Choice taxation and planning Sustainability of Income and legacy planning with predictive tools The defined benefit to defined contribution conundrum How Death benefits in the post April 2015 can be used for IHT planning