pension allowance cuts 2014 - protect and serve · 2013. 12. 11. · 11/12/2013 6 the ‘real’...
TRANSCRIPT
11/12/2013
1
This presentation is intended for financial services professionals only and must not be relied on by anyone else. © 2013 Standard Life
Pension allowance cuts 2014- protect and serve
Bob Gordon
Technical ManagerTechnical Manager
Technical Solutions
Today’s agenda
What’s going on?
Who’s affected?
Pension protection 2014
Pension allowance cuts 2014 – protect and serve
The advice challenge
11/12/2013
2
What’s going on?
Pension tax relief in perspective Government expenditure - 2011/12*
£74Bn
£43Bn£35Bn
£27Bn
Pension allowance cuts 2014 – protect and serve *source HMRC
State benefits
Armed Forces
Pension tax relief
Tax credits
11/12/2013
3
• Pension tax breaks cost £35Bn a year (2011/12)*
The rising cost of pension tax breaks And a new policy focus
Pension tax breaks cost £35Bn a year (2011/12)– net cost £23.7Bn (after tax on pension income)*
• Costs are up 19% in 2 years*
• Perception is tax incentives aren’t meeting policy objectives
• Refocus on using tax breaks to reduce reliance on StateRefocus on using tax breaks to reduce reliance on State– 75% of tax breaks currently go to higher/additional rate taxpayers*
– but 50% of contributions relate to basic rate taxpayers*
– and the savings gap is primarily amongst basic rate taxpayers
Pension allowance cuts 2014 – protect and serve
*Source: Pensions Policy Institute report ‘Tax relief for pension saving in the UK’ (July 2013)
• State pension reform from 2016 to cap costs– single-tier £144 a week from age 68?
The Government’s response
• Auto-enrolment to tackle savings gap at lower end– expected to bring 8M new people into pension saving
• More pension allowance cuts from 2014/15– AA cut to £40k (from £50k) - hits 140,000 clients*
– LTA cut to £1.25M (from £1.5M) – hits 360,000 clients*
– £1.125Bn combined yearly saving to exchequer by 2017/18*
• Threats of further tinkering with private pensions– LibDems propose further LTA cut to £1M to fund 1% tax cut
– PPI report is influencing thinking on tax-relief & TFLS
Pension allowance cuts 2014 – protect and serve *Source HMRC
11/12/2013
4
Who’s affected?
Lifetime allowance changes 2014 How many clients are affected?
2014 2030?
30,000*
360,000*
Pension allowance cuts 2014 – protect and serve
*Source: HMRC**Standard Life estimate
£250Bn+**
11/12/2013
5
Lifetime allowance Which way is the wind blowing?
Lifetime allowance
Pension allowance cuts 2014 – protect and serve
It’s a game changer for retirement planning
• Lifetime allowance cut to £1.25M from April 2014£62 500 DB i f ll d d LTA (£1 25M/20)
Lifetime allowance changes 2014 A game changer for retirement planning
– £62,500 pa DB pension fully uses reduced LTA (£1.25M/20)
• It’s not going up again soon
• ‘Real’ lifetime allowance could be much lower– £700k fund breaks £1.25M @ 6% growth for 10 years
– £45k DB pension hits £1.25M @ 3.3% revaluation for 10 years
Risk of £62 5k (25%)/ £137 5k (55%) ‘windfall tax’• Risk of £62.5k (25%)/ £137.5k (55%) windfall tax’
• New protection options to lock-into a higher allowance
Pension allowance cuts 2014 – protect and serve
11/12/2013
6
The ‘real’ lifetime allowance Current fund to exceed allowance
£1.25M £1.5M
Years to go 4% 8% 4% 8%
3 £1.112M £993k £1.334M £1.191M
5 £1 028M £851k £1 232M £1 021M
Pension allowance cuts 2014 – protect and serve
And this assumes pension saving stops now
5 £1.028M £851k £1.232M £1.021M
10 £845k £579k £1.013M £695k
Segmenting your clients Get a handle on their LTA position
Existing protection? Review situation? No action needed?
Type of pension?
Defined benefit
Defined contribution
Deferred Active
Legacy Contributing
LTA value? NowAt retirement
(no more savings)At retirement
(ongoing savings)
Employer contribution?
Pension allowance cuts 2014 – protect and serve
Years to retirement?
(no more savings) (ongoing savings)
< 5 5 to 10 > 10
11/12/2013
7
Segmenting your clients Prioritising action
Already over £1.25MMust act before Aprilp
Projected over £1.25M even if pension saving stopsMust review soon – action likely before April
Projected over £1.25M if pension saving continuesSet-up reviews – target older clients before April
P j t d b t £1M d £1 25M
Pension allowance cuts 2014 – protect and serve
Projected between £1M and £1.25MReview regularly - monitor progress
Projected under £1MNo immediate action needed
Pension protection 2014
11/12/2013
8
• The lifetime allowance cut potentially exposes up to an extra £250 000 of pension savings to LTA tax
Lifetime allowance cut 2014 The tax implications
extra £250,000 of pension savings to LTA tax
• 55% LTA tax on excess savings taken as lump sums– up to £137,500 LTA tax
• 25% LTA tax (+ income tax) on excess savings used to provide income
up to £62 500 LTA tax (+ income tax)– up to £62,500 LTA tax (+ income tax)
• HMRC view these charges as broadly tax neutral– aim is to cancel out tax-relief on contributions and tax-free growth
Pension allowance cuts 2014 – protect and serve
• Even within the LTA most benefits are taxed
– 75% of retirement benefits are subject to income tax
Lifetime allowance cut 2014 The ‘real’ tax rate
– only the TFLS/ uncrystallised lump sum death benefit is tax-free
Effective TOTAL tax rate on retirement benefitsBasic rate
taxpayerHigher rate
taxpayerAdditional
rate taxpayer
Benefits within LTA(with 25% TFLS) 15% 30% 33.75%
Pension allowance cuts 2014 – protect and serve
(with 25% TFLS)
Excess above LTA(taken as income) 40% 55% 58.75%
Excess above LTA(taken as lump sum) 55% 55% 55%
11/12/2013
9
Lifetime allowance cut 2014 The ‘extra’ tax rate above LTA
EXTRA tax rate on excess retirement benefits
Basic rate Higher rate Additional rateBasic rate taxpayer
Higher rate taxpayer
Additional rate taxpayer
Income 25% 25% 25%
Lump sums 40% 25% 21.25%
• But lump sums paid from excess funds on death beforetaking benefits (and age 75) face the full 55% extra tax hit– these lump sums are paid tax-free within the LTA
Pension allowance cuts 2014 – protect and serve
• There are 2 new options to lock-into a higher LTA
Pension protection 2014 Mitigating the tax hit
p gbeyond 5 April 2014– ‘individual protection’ gives a personal LTA of £1.25-£1.5M
– ‘fixed protection’ gives a personal LTA of £1.5M
• Simplification?’ll h 6 diff t li it i !– we’ll now have 6 different limit regimes!
– standard + enhanced + primary + fixed 2012 + the 2 new options
– not to mention protected lump sums and low pension ages
Pension allowance cuts 2014 – protect and serve
11/12/2013
10
• Individual protection gives LTA of £1.25–£1.5M– LTA based on fund value at April 2014 (up to £1.5M)
Individual protection 2014 A higher LTA with no trade-off
– no need to stop funding (or lose employer funding/DB accrual)
– TFLS also calculated based on personal LTA
• Only available if pensions are > £1.25M on 5/4/14– not available to clients with primary protection
– can use as ‘safety net’ with fixed protection 2012/14 (+ enhanced?)
• Must apply for protection by 5 April 2017• Must apply for protection by 5 April 2017– forms not available until Autumn 2014 (Finance Act 2014)
Pension allowance cuts 2014 – protect and serve
If you’re eligible for individual protection, do it
• Fixed protection 2014 gives a personal LTA of £1.5M– TFLS also calculated based on personal LTA of £1.5M
Fixed protection 2014 A £1.5M LTA – with a trade-off
TFLS also calculated based on personal LTA of £1.5M
• Trade-off is no ‘benefit accrual’ allowed after 5/4/14– DC = no more contributions
– DB = increases after 5/4/14 stay within ‘relevant %’ each tax year
• Not available to clients with any earlier protections– can use alongside ‘dormant’ individual protection (if eligible for IP)
– individual protection better deal for clients > £1.5M at 5/4/14
• Must apply for protection by 5 April 2014 (APSS228)
Pension allowance cuts 2014 – protect and serve
11/12/2013
11
• To keep fixed protection, the DB value at 5/4/14 can’t increase by > the ‘relevant %’ in any tax year
DB fixed protection and the ‘relevant %’
– DB benefit value is calculated as (20 x pension) + separate TFLS
• The ‘relevant %’ is:– any rate of benefit increase specified in scheme rules at 11/12/12,
– otherwise, it is CPI (for the Sept before the start of the tax year)
• Scheme rules are only likely to specify a rate for:b fit (i th l ti % f P S l)– career average benefits (i.e., the annual uprating % for Pens Sal)
– late retirements (LRFs)
– deferred benefits (PUPs)
Pension allowance cuts 2014 – protect and serve
Pension allowance cutThe advice challenge
11/12/2013
12
The advice issues
Take benefits before
Advice options
before April
Individual protection (can continue contributions)
Final pension top-up
Review investment
strategy
Fixed protection
(stop contributions)
Pension allowance cuts 2014 – protect and serve
Other saving
vehicles
Bring pensions together
Advice issues Protect or not? – considerations
Individual – do it if eligible (higher LTA with no downside)
Fixed – only way to lock into higher LTA if below £1.25M @ 5/4/14Individual, fixed,
None – more exposure to LTA tax, but might give best client outcome
What is the trade-off for protection? (value of future pension provision)
Will employer compensate for lost pension funding? (does it stack-up?)
Will employer pay a final pension top-up before 6 April 2014?
Both – IP gives safety net if fixed is lost (if above £1.25M @ 5/4/14)
Individual, fixed, both or none?
Employer contributions?
Pension allowance cuts 2014 – protect and serve
Should client pay a final pension top-up before 6 April 2014?
May be best advised to stop (esp voluntary/ AVCs) and save elsewhere?
Must personal contributions continue to get employer contribution?
Personal contributions?
11/12/2013
13
Advice issues Getting pensions in shape - considerations
5/4/14 payment deadline for fixed protection cases
Get it while you can – carry forward, flex PIP rules, get tax reliefPension top-up
Project benefits against LTA with and without top-up
Can improve terms (LFDs) and widen investment choice
Opens-up more tax-efficient decumulation & wealth transfer options
Watch out for guarantees – but don’t let the tail wag the dog
p p
Consolidate
Easier to monitor progress towards LTA
Pension allowance cuts 2014 – protect and serve
g g g
De-risk investments to target LTA to reflect reduced reward for risk-taking
Changes risk/ reward equation – 100% of downside v 45% of upside
2006 LTA covenant broken – LTA frozen or reducing
Review investments
• Clients giving-up on pension saving need to find alternative
i hi l d t
Advice issues Alternative saving strategies – the options
saving vehicles and tax wrappers
– even clients staying in employer schemes should consider redirecting personal/ voluntary pension saving to other vehicles
i fl ibl d l ti
ISA
Bonds
Spouse’s pension
Trusts
– gives flexible decumulationoptions and potential safety net if plans don’t work out
Pension allowance cuts 2014 – protect and serve
VCTEIS
Mutual funds
Shares
11/12/2013
14
Advice issues Alternative saving strategies - considerations
Using both pension allowances reduces risk of LTA tax
Spouse gets tax relief on client payments up to £3,600 or 100% of incomeFund spouse’s
pensionOpens-up more tax-efficient decumulation options
ISA – use allowance – tax-efficient growth – easy access
Bonds – investment choice – tax-efficient – tax planning/ assignment
Mutual funds – investment choice - flexibility
pension
ISA Bonds
Mutual funds
Pension allowance cuts 2014 – protect and serve
Asset protection on death, divorce, bankruptcy
Retain control over who gets what – and when
Separate assets from personal wealth/ estate
Trusts
Key advice considerationsThe advice challenge
Already over £1.25M
Projected > £1.25M (no more saving)
Projected > £1.25M (with new saving)
Projected£1M to £1.25M
Protect or not?(fixed or individual)
Must act before April
Protect or not? – fixed only
Must review – action likely before April
Review soon – older clients before April
Monitor progress –review regularly
Top up pension before 6 April 2014?
Take benefits before 6 April 2014?
Pension allowance cuts 2014 – protect and serve
Consolidate pensions? – easier tracking, investment choice, benefit flexibility - but watch guarantees
Consider alternative saving vehicles and tax wrappers?
Review pension investments? – potentially de-risk
Top-up pension before 6 April 2014?
11/12/2013
15
Any questions?
References in this presentation to legislation and tax are based upon Standard Life’s understanding of UK law and HM Revenue & Customs practice in the UK as at the date of presentation Tax and legislation are
The legal stuff
in the UK as at the date of presentation. Tax and legislation are likely to change.
The value of tax reliefs depend on individual circumstances.
No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
These examples provide a suggested approach only - other approaches may be equally suitable. Every customer’s circumstances will be different and require advice.
Standard Life accepts no responsibility for advice which may be formulated on the basis of these examples.
Pension allowance cuts 2014 – protect and serve
11/12/2013
16
Investment risk
Past performance is not a guide to future performance. As with any investment, the value of your client's fund can go down as well as up and may be worth less than they invested.y y
Where we mention FTSE we are referring to FTSE®
*"FTSE" is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited ("FTSE") under licence. Standard Life Wealth is licensed by FTSE to redistribute the FTSE All Share and FTSE 100. All rights in and to the FTSE All Share and FTSE 100 vest in FTSE and/or its licensors AllFTSE All Share and FTSE 100 vest in FTSE and/or its licensors. All information is provided for reference only. Neither FTSE nor its licensors shall be responsible for any error or omission in the FTSE All Share and FTSE 100.
Pension allowance cuts 2014 – protect and serve