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Spring 2020 Editiontechnical eye

2 Technical Eye – Spring 2020

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Welcome

Kim Jarvis

Editor

Technical Manager

Welcome to our first Technical Eye of 2020. Canada Life’s adviser magazine which focuses on technical issues around retirement planning, tax and estate planning and investment solutions.

The first Budget in 18 months contained changes to how top-slicing relief is calculated. When calculating top-slicing relief the personal allowance will be reinstated even though a taxpayer may have had their personal allowance reduced because a gain is included as part of their income. The legislation also clarifies the ordering of treatment of allowances and reliefs – these must be set off against other income in preference to a gain.

The Chancellor also announced taper threshold is increasing to £200,000 from April 2020. However, this is being combined with a reduction in what the annual allowance can be tapered to - falling from £10,000 to £4,000.

In this edition we look ahead to the new tax year and our first article acts as a reminder for clients to review their affairs, we look at the benefits of the segregated portfolio service, the changes to the tapered annual allowance and our final article explains the important of establishing a centralised retirement proposition.

I hope you enjoy this edition of Technical Eye. As always, if you have any suggestions on future articles or technical questions please feel free to contact our team on [email protected]

Kim Jarvis

Technical Manager

Cathy Russell

Tax and Estate Planning Consultant

Neil Jones

Market Development Manager

John Chew

Pension Tax and Estate Planning Consultant

Andrew Tully

Technical DirectorFrancesca GandolfiTechnical Manager

Contributions team:

Technical Eye – Spring 2020 3

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Contents02 Welcome

04 Tax year planning As we enter a new tax year this article acts as a reminder for clients to review their financial and tax planning to ensure they make use of as many allowances and reliefs as possible.

06 More segments more opportunities The facility to segment an investment bond is an attractive feature that can provide added

flexibility and tax efficiency; this article helps highlight that the more segments the investment bond has the more opportunities there are.

08 Trustee Investment powers The main role of a trustee is to hold the trust property and administer it for the benefit of the beneficiaries. This article looks at the full extent of their duties which can vary between Scotland, Northern Ireland and England and Wales.

11 Segregating a portfolio - Maximising choice with tax deferral This article considers the benefits of the Segregated Portfolio Service which is offered through

our open architecture products marketed through the Isle of Man and Ireland.

14 Tapered Annual Allowance (TAA) In the recent Budget, the Government introduced changes to the hugely complex Tapered

Annual Allowance rules. This article explores the new rules and considers the implications of the changes.

15 Centralised Retirement Proposition (CRP) When establishing a CRP the considerations, of a firm, are much wider than just investment,

and should include all of the risks clients face as they move through later life. This article looks at the next stage in the evolution for the Centralised Investment Proposition.

TechnicalServices

Empowering Professional Advisers


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As we enter a new tax year this should act as a reminder for clients to review their financial and tax planning to ensure they make use of as many allowances and reliefs as possible. This will help minimise tax payable, consequently increasing their wealth.

Professional advice has never been more important for clients when it comes to understanding what types of financial planning are 1) acceptable (to HMRC) and 2) suitable for an individual’s circumstances and objectives.

Individuals start each tax year with a personal allowance (£12,500 for the 2020/21 tax year) which is tax free, but remember that if their adjusted net income is above £100,000 they will lose their personal allowance at a rate of £1 lost for every £2 over the threshold. Therefore adjusted net income of £125,000 equals no personal allowance in the 2020/21 tax year.

Individuals should use their Individual Savings Account (ISA) allowance (£20,000 for the 2020/21 tax year). There are multiple types of ISA available – a cash ISA, a stocks and shares ISA, and an innovative finance ISA, and they could invest the full £20,000 into any one of these, or share it between them. There is also the lifetime ISA but they can only invest up to £4,000 into a lifetime ISA each year. However they could put the balance (£16,000) into any of the other ISAs. ISAs grow free of any income and capital gains tax and there is no tax on withdrawals, consequently ISAs are very useful savings vehicles for that initial tranche of savings.

Capital gains tax (CGT)

Where possible, everyone should use their CGT allowance of £12,300 for the 2020/21 tax year and this is a ‘use it or lose it’ allowance. It therefore makes sense to use it wherever possible to rebase their collectives/shares portfolio and wipe out some of the accumulated tax liability on the growth. Do watch out for the bed and breakfasting rules – remember they can’t reinvest in the SAME collective or share that they dispose of within 30 days as a way to rebase! They do need to invest into a different collective or share or, alternatively stay out of the market for at least 30 days, and not many want to do that!

Dividend allowance

There is also the dividend allowance (£2,000 for the 2020/21 tax year) and although this doesn’t seem like much – everyone, irrespective of which tax band you fall into, gets that amount of dividends completely tax free. This is another ‘use it or lose it’ allowance.

Income tax on chargeable event gains

When someone is looking to take money out of an investment bond there are two ways this can be done – and it is worthwhile looking at both calculations every time as client circumstances may change and it could be that one method is better than the other taking all factors into consideration.

If you take a partial surrender across all segments then firstly you have the cumulative 5% allowance which is tax deferred. Therefore the client may be able to take the necessary withdrawal without an immediate tax charge but, remember this is not tax-free. All withdrawals will be added into the final encashment calculation so remember to consider what marginal tax rate the recipient may be at the time of final encashment as well as on partial surrenders.

The actual chargeable event under a partial surrender does not happen on the day the surrender is made, it doesn’t fall due until the end of the policy year. This gives you opportunities to look at when the policy year falls as you may be able to delay the chargeable event until the following tax year and this may be beneficial for a particular client. For example, the client’s bond commenced on 5th June 2000 and the client needs a withdrawal in March 2020. A partial surrender chargeable event wouldn’t fall until June 2020 which is in the 2020/21 tax year and perhaps the client’s marginal rate will be lower than it was in the 2019/20 tax year.

The second method is to fully surrender individual segments or policies within the bond. The chargeable event gain under this method does fall due on the day of the surrender and will therefore fall in the current tax year for that client.

TAX YEAR Planning

CATHY RUSSELL


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With flexibility in segmentation it could be possible to have small segment sizes which would allow greater flexibility in targeting a specific amount of withdrawal and where bonds are used in trusts you also have the ability to assign or appoint individual segments to a beneficiary which moves the taxable entity away from the settlor/donor and the trustees and places the tax on the beneficiary.

Pension contributions

For anyone looking to build a retirement fund they could make contributions to their pension. There are, of course, limits to the amount of tax relief they can get depending on their own circumstances but the maximum annual allowance is £40,000. They may also want to keep track of their lifetime allowance (£1,073,100 for the 2020/21 tax year) if they think they are close to that figure and they don’t want to suffer a tax charge.

Individuals with statutory total income in excess of £100,000 could consider pension contributions as a means to keep their personal allowance and extend the basic rate band which may help mitigate all or part of any tax on a chargeable gain.

Inheritance tax (IHT)

Moving onto IHT – not many people want to ‘gift’ money to the taxman on death and the current rate is 40% on their estate, although there are reliefs and allowances which can reduce their taxable estate. They start with a nil rate band (NRB) (currently £325,000 2020/21) and this is taxable at 0%. In April 2017 we saw the introduction of the residence nil rate band (RNRB) at £100,000 per person, and this has risen by £25,000 each tax year and is now worth £175,000 (2020/21 tax year). Unfortunately not everyone will be able to use the RNRB as there are strict criteria they need to meet. They must have (or have had) a qualifying residence and they must leave this (or the equivalent value) to a lineal descendant.

If they have been widowed there may be the opportunity to claim transferable NRB/RNRB on their death, but the personal representatives will need to have records to prove the availability of these and the easiest way to do this is to gather the necessary records after the first spouse dies and keep them with the will of the surviving spouse. (IHT402/IHT436)

Another way to reduce your clients’ IHT on death is if they leave at least 10% of their net estate to a registered charity. They would then be able to claim the reduced IHT rate of 36% instead of 40% on the remainder of their taxable estate.

There is also an annual exemption of £3,000 per person on gifts. Therefore the first £3,000 that someone gifts in a tax year will claim this exemption and it makes sense to use it each year if possible. Once the current tax year’s annual exemption has been used they can go back one year and pick up any available annual exemption from the previous year, but you can only go back one year. That gives them a maximum of £6,000 available annual exemption in the first year they use that exemption.

In addition, we have the annual small gift exemption. It may only be £250, but individuals can gift £250 to as many individuals as they like (but don’t give someone the annual exemption of £3,000 plus the small gifts allowance of £250 – you can’t combine them).

Brides and grooms can also benefit as there is a marriage allowance ranging from £5,000 from each parent to their child, £2,500 from a grandparent and £1,000 from anyone else.

Finally there is the normal expenditure out of income exemption. The good news is this is unlimited – they just need to have ‘surplus’ income (and by income we mean true income, not 5% withdrawals from investment bonds) which, when gifted, does not affect their normal standard of living, and these are exempt from day 1, there is no seven year clock ticking against them.

For anyone making gifts for the purposes of inheritance tax mitigation it makes sense to keep a clear audit trail and you may find HMRC’s IHT403 form useful for recording these lifetime gifts. Any gifts made which do not attract an exemption will remain in their estate for seven years before they drop out of the inheritance tax calculation.

National Insurance Contributions (NIC)

The main rates, at 13.8% for employers, and 12% for employees with an additional 2% payable above the upper limits, give individuals the opportunity to use salary sacrifice for pension contributions, where available, as an attractive way of saving NICs and paying less income tax.

We say• Where possible clients should use all their

available allowances

• Clients need advice to get the best tax position of any possible recommendations

For more information, please contact your dedicated account manager.

[email protected]

www.canadalife.co.uk


Investment bonds are usually made up of a number of identical individual policies called segments or clusters. The facility to segment an investment bond is an attractive feature that can provide added flexibility and tax efficiency; the more segments the investment bond has the more opportunities there are. Let me explain.

Partial withdrawal v full segment surrender

With investment bonds, up to 5% of the original investment can be withdrawn each year and HMRC class it as a return of capital, and so no gain exists. If this facility is unused, this allowance accumulates, and where no withdrawal is taken, 10% is available in year two, 15% in year three and so on. This can provide a tax-efficient income but where an amount in excess of the 5% allowance is required, the use of policy segments can be beneficial to mitigate a potential tax charge.

This is because any withdrawals over the 5% allowance are treated as a chargeable gain, irrespective of the policy value, whilst a chargeable gain under a segment surrender relates to the actual growth.

To illustrate, Anna invests £200,000 into an investment bond consisting of 99,999 segments. 2 ½ years later she wants to withdraw £120,000 when the value of the bond is £240,000. If Anna takes this as a partial withdrawal a chargeable gain of £90,000 (£120,000 – ((£200,000 x 5%) x 3)) will result. As Anna has a taxable income of £38,000 even with top-slicing relief, she would then have a higher rate tax liability.

Instead, Anna could fully surrender 50,000 segments to provide the £120,000. As the chargeable gain is based on actual growth on these segments, the chargeable gain on each would be 40p (£2.40 (240,000/99,999) - £2.00 (£200,000/99,999). Therefore the overall gain would be £20,000 (40p x 50,000). With top-slicing relief, Anna remains a basic rate taxpayer thus reducing the overall tax liability.

Ensuring your beneficiaries inherit equally

Rhea and Billie want to gift £600,000 to their six grandchildren (who range from 5 to 15 years) but need to ensure each one inherits equally. If they invested in an investment bond with only 10, 100 or 1000 segments they would not be able to ring fence whole segments for each grandchild. But an investment bond which allows up to 99,999 segments gives Rhea and Billie the flexibility needed to ring fence individual segments for each grandchildren.

MORE SEGMENTS more opportunities

technical eye

KIM JARVIS


So, they invest the £600,000 into a bond with 90,000 segments. This means that 15,000 segments can be attributed to each grandchild ensuring that each grandchild inherits equally. As this is a gift to their grandchildren, Rhea and Billie need to consider what type of trust to wrap around the bond. Their adviser explains that they could either use a bare or discretionary trust. As beneficiaries under a bare trust are entitled to the proceeds at age 18 they decide to use a discretionary trust to ensure that, once a grandchild reaches 18, they cannot force the trustees to give them the proceeds of their segments.

Even though under a discretionary trust the trustees have discretion who to pay, by appointing suitable trustees, Rhea and Billie ensure that individual policies are ring fenced for particular beneficiaries. Four years later their first grandchild, Kerry, starts university. The trustees are able to use some of Kerry’s allocated segments to help with her tuition fees. But the adviser emphasises that the trustees need to appoint the segments into a bare trust for Kerry before surrendering to ensure that any income tax liability rests with Kerry. As she has no income, this ensures that any gain is within her allowances which would mean that she has no tax liability.

Pinpointing withdrawals to pay inheritance tax charges

Segmentation can also help trustees of a discretionary trust pinpoint withdrawals to pay any periodic and exit charges. Discretionary trusts are subject to the relevant property regime meaning that periodic and exit charges may arise. A periodic charge may arise on every tenth anniversary of a discretionary trust and an exit charge may arise when a distribution is made to a beneficiary.

Tom sets up a discretionary trust with £300,000. At the tenth anniversary the investment bond has grown to £500,000 and if we assume that the trust has a nil rate band of £325,000, the periodic charge will be £10,500 (£500,000 - £325,000) x 6%. The trustees are liable to pay the periodic charge and must surrender segments in order to meet this liability. The surrender will be a chargeable event and under a discretionary trust the tax point for any chargeable gain will be the settlor. As the settlor has the right to recover this income tax liability from the trust fund, the trustees also need to surrender enough policies to meet this income tax liability.

The table below highlights the advantage of holding an

investment bond with a greater number of policies.

Where the trustees hold an investment bond with 99,999 policies it gives them the ability to manage the surrender. The above table shows that an investment bond that only holds 10 policies means that the trustees, after paying the £10,500 periodic charge and the settlor’s £8,000 income tax liability (assuming they are a higher rate taxpayer) on the chargeable gain, will need to decide how to deal with the remaining withdrawal of £31,500. If the trustees distribute this to beneficiaries then exit charges would apply. If, however, they held 99,999 policies, the trustees could surrender 2,500 policies, resulting in a gain of £5,000. The trustees would receive £12,500: £10,500 to pay the periodic charge and £2,000 to meet the settlor’s tax liability and there is no leftover withdrawal that needs to be administered.

We say• With more segments clients can manipulate

withdrawals for greater tax efficiency

• Trustees have more flexibility to manage the trust fund for beneficiaries

• When paying periodic and exit charges trustees can limit the tax payable on a chargeable event


Premium

300,000 10 £50,000 £20,000 1 £50,000 £20,000

300,000 100 £5,000 £2,000 3 £15,000 £6,000

300,000 99,999 £5.00 £2.00 2,100 £10,500 £4,200

Gain per

policy

Number of

policies

Polices

surrendered

Current value

per policy

Amount

withdrawn

Total gain

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TRUSTEEInvestment Powers

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The Trustee Act 2000, and most modern trust deeds, give trustees a wide power to invest in such investments as they think fit (statutory powers). But a trustee must also give consideration to any specific investment powers which are set out in their trust documents (express powers).

Occasionally the express powers might say that the trustees may invest only in certain assets and, in such a case, the wider statutory powers would not apply.

Trustees must always consider their duty of care to the trust beneficiaries when considering the investment options.

The Trustee Act 2000

The Trustee Act 2000 (TA 2000) came into force in England and Wales from 1 February 2001. The equivalent Acts in Northern Ireland and Scotland are the Trustee Act (Northern Ireland) 2001, which has had effect in Northern Ireland from 29 July 2002; and the Charities and Trustee Investment (Scotland) Act 2005 which has applied in Scotland since April 2006.

Prior to the introduction of the Trustee Act, trustee investments in England and Wales were governed by the Trustee Investments Act 1961 (TIA). The TIA restricted the investment in ‘wider-range’ investments (such as unit trusts) to 75% and prohibited the use of investment bonds altogether, unless a wider express power was included in the trust deed.

The general power of investment

Section 3 TA 2000 gives the trustees a general power of investment which permits them to invest in investments of any kind as if they were absolute owners (i.e. persons owning the property for their own benefit) of the assets of the trust.

Although this wide statutory power applies to trusts whenever created, it does not apply to all trusts; for example trustees managing funds under the Charities Act 1993, and occupational pension trusts. These are explained further below.

As the trustees are not absolute owners of the trust assets, the TA 2000 provides beneficiaries protection from the risk that the trust fund will be lost in unwise investments; with the trustees always having to act in the best interests of all beneficiaries and avoid any conflict.

Standard investment criteria

The TA 2000 imposes two duties in this category on a

trustee:

The first is a duty to ensure diversification and suitability of investments to the trust - this is known as the “standard investment criteria”

The second is a duty to obtain and consider proper advice when making or reviewing investments (Section 4 TA 2000).

Diversification and Suitability

The requirement to diversify the trust fund means that the trustees should use a spread of investments where appropriate.

Suitability relates to the type of investment. Consideration should be taken as to the size and risk of the investments, the need to produce income and/or capital growth, as well as any ethical considerations which may be appropriate for the trust.

Duty to obtain and consider proper advice

Obtaining proper advice applies to all trusts, not just those which have the general power of investment.

Section 5 TA 2000 - This imposes a statutory duty on the trustees to obtain and consider ‘proper advice’ both before exercising any power of investment and also when reviewing the investments of the trust. This should be from a person who the trustees reasonably believe to be qualified and have experience of the existing and proposed investment.

The requirement to obtain advice doesn’t apply if the trustees believe it is unnecessary or inappropriate to do so. For example, if the trust fund has a small value and the cost of advice would outweigh the benefit of it.

There is a further requirement for the trustees to keep the investments of the trust under regular review and to consider whether they should be varied to keep in line with the standard investment criteria.

FRANCESCA GANDOLFI


Statutory duty of care

Trustees are subject to general duties of care. These include:

• To exercise their powers in the best interests of the beneficiaries of the trust

• Not make any personal financial gain from their position

• Must not purposely cause loss to the trust

• Must act impartially between the beneficiaries and

• Must treat all the classes of beneficiary fairly.

Trustees who are paid for their services as professional trustees are expected to meet a higher standard of care than other trustees.

Therefore trustees need to ensure their duty of care is always being maintained.

Pension trusts

The TA 2000 has limited application for occupational pension scheme trustees.

Section 34(1) of the Pensions Act (PA) 1995 grants the trustees of pension schemes wide investment powers. However, they are subject to certain restrictions with regard to investments in employer-related investments where the trustees are involved in scheme funding negotiations and decisions about investment strategy.

Section 34 PA 1995 gives pension scheme trustees the power to delegate their investment powers. However, they must not delegate to the scheme employer or to any person connected with, or an associate of, that employer.

The Charities and Trustee Investment (Scotland) Act 2005

The Charities and Trustee Investment (Scotland) Act 2005 (CTI(S)A) extends the general powers of trustees similar to those in the Trustee Act 2000 in England and Wales.

The main provisions of this Act are:

• Section 93(2) CTI(S)A allows a trustee to make any kind of investment for the trust.

• As with the general power of investment under the TA 2000, the general power conferred by the CTI(S)A is subject to any restriction contained in the actual trust document.

• Section 94 CTI(S)A mirrors those contained in TA 2000 and states that, prior to exercising the wider investment powers under section 93(2), trustees must have regard to the suitability of the proposed investment and the need for diversification.

They should also obtain and consider proper advice both before exercising the power of investment and when reviewing the investments of the trust. It also provides the trustees’ power to appoint nominees and delegate investment management functions.

Segmentation can also help trustees of a discretionary trust The Trustee Act (Northern Ireland) 2001

The Trustee Act (Northern Ireland) 2001, which received Royal Assent on 20 July 2001 and came into force on 29 July 2002, again introduced similar provisions to the TA 2000 in England and Wales including:

• A wider power of investment to replace the present statutory power (with the corresponding standard investment criteria)

• A new statutory duty of care

• New powers to appoint agents, nominees and custodians

• Power to purchase land

• Power to insure trust property

• Power to pay professional trustees

In addition, the Trustee Act (Northern Ireland) 2001 also includes powers to appoint or replace trustees in certain circumstances. The provisions allow that the appointment or retirement of a trustee is able to take place at the instigation of beneficiaries where all the beneficiaries are of full age and capacity, and taken together as a group who are absolutely entitled to the trust assets.

In summaryWhen considering whether to take on the role of a trustee, individuals should be fully aware of the implications. Failing to comply with the terms of the trust, or trust law, means that they are ‘in breach of trust’ and may be personally liable for any financial loss suffered by the trust or a beneficiary which results from the breach.

This is when the advice of a professional adviser can be valuable.

We say• Trustees need to familiarise themselves with

the trust deed

• Be fully aware of their duties

• Understand the implications of breaching their duties


[email protected]



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SEGREGATING A PORTFOLIOmaximising choice with tax deferral

An often understated benefit of investment bonds is the ability to defer tax on a portfolio – a tax liability can only arise on certain events, other than these the policyholders do not have to worry about including the investment on their tax returns. This makes a bond simple from a policyholder tax perspective, not only for individual policyholders but also for trustees.

The use of different tax wrappers can produce different outcomes for investors and, with increasing awareness and knowledge, advisers are seeking more variety in the assets that can be held within each wrapper. For the right client it can be important to make sure that the widest possible investment choice is available within a single product.

The lack of any UK or local tax in an international bond can increase the potential for long-term growth and also allows the policyholder to use a myriad of investments, as the provider does not have to account for tax on any income or growth within the bond itself. The exception to this is where UK property-rich collectives are held so care needs to be taken with these holdings depending on the type of collective used and the double tax treaty between the provider’s jurisdiction and the UK.

The absence of most, if not all, taxes allows gross roll-up, or near gross roll-up. This can increase the net return and the longer the investment is held, generally the greater the impact of no tax drag. This tax efficiency can help increase returns; a £1m portfolio growing at 5% each year net of charges with no tax would grow to £1,628,895 after ten years and £2,653,298 after twenty years. A similar return on a portfolio paying 40% tax on the 5% growth each year would reduce the potential returns to £1,343,916 and £1,806,111 respectively. As you can see the tax drag on an investment can be substantial and whilst there could be tax on the portfolio when growth is realised, with an effective exit strategy the impact can be managed.

This lack of internal tax for an international bond allows the provider to use a wide variety of assets; insured life funds, collective investments, platforms and discretionary portfolios.

Platforms can be an attractive option for those seeking to utilise a wider range of investments and can reduce the transaction charges from the bond provider. However the investor will be paying a platform charge and so this will need to be weighed up against the potential transaction charges.

For example someone who is not anticipating the need to switch often may prefer to invest directly under the bond as the transaction charges may be cheaper than the platform charges. For those anticipating active and frequent switching, the platform charge may be a more attractive option.

The use of a discretionary investment manager means that the adviser and investor can work together to select a suitable manager to run a portfolio. The investor can then nominate this manager and they will operate to the agreed mandate and in many cases they will do so as custodian, taking ownership of the assets under the bond.

Whether the bond holds collectives, platforms or a discretionary portfolio, and some bond providers allow a combination of multiples of all three, the underlying assets are usually cash deposits and collective investments; for example unit trusts, OEICS and investment trusts.

Although some other assets are allowed, restrictions arise due to The Personal Portfolio Bonds (Tax) Regulations 1999 [PPB regs] which effectively limit the type of assets investment bonds can use. The assets permissible under these regulations, broadly include insured life funds, unit trusts and OEICs, approved investment trusts and cash deposits. Other investments such as some ETFs are also allowable, but notably direct investments in shares and corporate bonds are not permissible.

Investing in a wide range of investments, such as direct investments in equities and corporate bonds, would breach these rules and incur a 15% annual deemed chargeable gain - irrespective of how the investment has performed. This can be very expensive for the investor.

When selecting a discretionary fund manager, advisers and investors will want to do so based on the investment manager’s expertise and style. Restricting the investments in which they can invest could constrain the manager’s options as, unless they run bespoke collectives, the investment manager will need to find suitable funds to use.

NEIL JONES


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These funds could take a similar investment approach to the discretionary manager’s in-house style and for many could be an acceptable solution as the discretionary manager can select the asset allocation for the portfolio and the fund manager who they believe is best suited to those assets. For example some fund managers may be better at managing North American or Far East equities than others, and some may be better at managing fixed interest assets than others. The discretionary manager can utilise this expertise as required.

What if the investor and adviser want to utilise the discretionary manager’s own expertise and provide them with true discretionary powers, not limited by the PPB regulations?

They could do this outside a bond wrapper but would lose access to the valuable benefit of tax deferral – how could they combine these requirements?

The PPB regulations state that where non-permissible assets are used the bond will be treated as a personalised bond if those assets are ‘selected by, or by a person acting on behalf of, the holder of the policy or contract or a person connected with him’.

By removing or distancing the client and their adviser from the selection of the underlying assets the PPB rules do not apply. The underlying investments are then only limited by what a life assurance provider can invest in. The limitations are set by the provider’s regulator and, if the provider is based on the Isle of Man or Ireland, will include direct investments in equites, bonds and so on.

The investment manager can be nominated and appointed with a broad mandate agreed with the investor, however any ongoing communications must go through the provider and not direct to the investor or their adviser. The investor and their adviser must not be allowed to influence the underlying asset selection and suitable compliance processes need to be in place to ensure this cannot, and does not, occur. Whilst this type of investment may not be suitable for all, it can offer distinct advantages:

• The investment manager can construct a truly bespoke portfolio designed to meet specific objectives - for example income generation. This can be valuable where the investment has a specific purpose and could apply to trustee investments such as under a discounted gift trust.

• The investment style adopted by the discretionary manager can be used without being constrained by the style of underlying collective funds being used allowing the investor to potentially benefit from the manager’s expertise.

• The charges could be lower than using actively managed collectives as trading direct holdings could be more cost-effective than trading and holding funds which will include the costs from the underlying fund manager.

• The chance of inadvertently holding non-permissible assets is reduced as the bond allows a wider investment choice.

Due to the compliance process that needs to be in place, this solution is not available under every international bond from every provider. Canada Life offers such a solution through the open architecture products it markets from companies in the Isle of Man and Ireland – it is known as the Segregated Portfolio Service.

Under these products it is a standard investment option. If the adviser and investor no longer want to use the service or want to start using it, then they can switch in and switch out at any time without the need to surrender the bond.

An investment bond can hold multiple funds, have assets on multiple platforms and use multiple discretionary managers for permissible assets, all under the same wrapper. To maintain clarity, if using the Segregated Portfolio Service, whilst multiple discretionary managers can be used for multiple mandates, it cannot be combined with the other investment options such as the use of a platform or a non-SPS portfolio of funds.

The use of an Irish jurisdiction also offers VAT advantages as the discretionary manager’s fees should not be chargeable due to the way in which the Irish Revenue Commissioners treat VAT on the fees.

A single international bond can use a variety of different investment solutions under a single account and will be able to provide an appropriate approach for almost any investor. Coupled with the distinct tax advantages an investment bond can offer, products with a comprehensive range of investments available, that allow flexible exit strategies such as effective segmentation, can provide a great solution for many investors. It can also add value to an adviser’s proposition and help establish effective relationships between client, adviser and investment managers.

We say• Investment manager can construct a truly

bespoke portfolio

• Chance of holding non-permissible assets is reduced

• Investment style adopted by the discretionary manager can be used without being constrained


[email protected]



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Let’s talk wealth

At Canada Life we have decades of experience

helping clients to pass their wealth securely from

one generation to the next, with our range of

award winning solutions from the UK, Isle of Man

and Ireland.

So, if you want to help your clients pass their

estate to their loved ones, mitigate the effects of

IHT with unrivalled fl exibility, and provide access to

an extensive range of investment options, talk to

your Canada Life Account Manager or call

0345 722 6232.

www.canadalife.co.uk/wealth

Canada Life Limited, registered in England no. 973271. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Telephone: 0345 6060708 Fax: 01707 646088 www.canadalife.co.uk Member of the Association of British Insurers. Canada Life International Limited, registered in the Isle of Man no. 33178. Registered offi ce: Canada Life House, Isle of Man Business Park, Douglas, Isle of Man IM2 2QJ. Tel: +44 (0) 1624 820200 www.canadalifeint.com Canada Life International Assurance (Ireland) DAC, registered in Ireland no. 440141. Registered offi ce: Irish Life Centre, Lower Abbey Street, Dublin 1, Ireland. www.canadalifeinternational.ie Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority. Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland. MAR02671 – 1119R

Make sure your clients pass on their wealth


technical eye

TAPERED ANNUAL ALLOWANCE

The main pension announcement in the recent Budget saw changes to the horribly complex Tapered Annual Allowance (TAA) rules. Many of us would have liked to see the TAA scrapped altogether and while the Chancellor didn’t go that far, the measures do significantly limit the impact on clients.

The new rules apply to benefits built up from 6 April 2020, and mean both TAA income limits increase by £90,000. Threshold income, which broadly speaking is taxable income less personal contributions to a pension, goes up from £110,000 to £200,000. Adjusted income, which in simple terms is taxable income plus employer pension payments, rises from £150,000 to £240,000. The TAA is triggered when both the threshold income and the adjusted income exceed their designated limits.

The positive aspect means many more people will be able to pay in up to the normal annual allowance of £40,000 a year (or build up benefits to the value of £40,000 for those in defined benefit schemes). The downside is the annual allowance can, in future, fall as low as £4,000 for the highest earners, rather than £10,000. However this only affects those with adjusted income in excess of £312,000.

Tapered annual allowance can continue to be carried forward from the previous three tax years in the same way as the normal annual allowance.

These changes are largely due to the impact of the previous TAA rules on doctors, many of whom have high earnings and build up significant pension benefits. This has resulted in some doctors receiving high tax bills or seeing their future pension benefits reduced, which in turn has made some reluctant to take on additional overtime.

The Budget announcements may help reassure some doctors they can take on additional work without worrying about unexpected tax bills, which the Government will want them to do given the potential impact of coronavirus on NHS resources.

The TAA has also affected some private sector employees. Difficulties have arisen as many haven’t known final earnings figures until either very late in the tax year or until the following tax year. Which makes planning pension payments difficult. These changes don’t remove that particular complexity but it does significantly reduce the numbers of people who are affected.

It’s worth noting the new rules apply in respect of the 2020/21 tax year, and so won’t help people who are affected by the tapered annual allowance in this tax year.

This feels like a sticking plaster solution. It doesn’t solve the underlying problem but it does remove, for now, the impact on many of the people hit by the complex TAA rules. While there is much to be uncertain about over the next few months, the Government is due to have another Budget in the autumn, which gives a further opportunity for a more fundamental reform of the pension tax rules.

ANDREW TULLY

We say• The increase in both tapered annual allowance

limits is a positive for clients

• More people will be able to pay in up to £40,000 a year

• Changes doesn’t remove complexity but will reduce the number of people affected.


Example of Tapered Annual Allowance In 2019/20

Hassan has an annual salary of £190,000, and receives an employer pension contributions of £16,000. His adjusted income is £206,000. This is £56,000 over the threshold of £150,000.

His tapered annual allowance is £12,000 (normal £40,000 AA reduced by £1 for every £2 income exceeds £150k), and so he will either have to use carry forward or face a tax bill.

In 2020/21

He receives a pay rise from 6 April 2020 and his new salary is £210,000 and the employer pension contribution is now £20,000. His adjusted income is £230,000.

This is below the new adjusted income threshold of £240,000 so he has an annual allowance of £40,000.

[email protected]


TAA


technical eye

Over the last few years, advice for those approaching, and in, retirement has increasingly taken centre stage for many in the industry. The Product Intervention and Product Governance Sourcebook (PROD), issued in January 2018, alongside the recent ‘Dear CEO’ letter to adviser firms are examples of the FCA’s increasing focus on this part of the market.

From a client perspective, significantly more people are entering drawdown, even those with smaller pots, and they are staying in drawdown for longer. Having a clear strategy for different client segments means your firm can help both your clients and your firm mitigate the risks which emerge as clients move through later life.

It may also help find ways of simplifying and bringing to life complex topics such as income sustainability and longevity in a way that clients can understand.

The starting point for most advisory firms is the establishment of a CIP. This requires the firm to consider their approach to segmentation of their clients, not based solely on age and size of wealth, but also focused around the knowledge and experience a client may have with financial instruments. Whilst there is no hard and fast structure that a CIP could take, nor a CRP to mention it, it would not be unusual to see the following approach being adopted by the firm in establishing which services and products would be available to their clients when formulating the CIP.

CENTRALISED RETIREMENT PROPOSITION (CRP)

JOHN CHEW

Products

List types of products available in the market e.g. bank, NS&I, ISA, Bonds, Equities, VCT’s, Pensions, Life Insurance, etc.

List investment / fund options available if applicable

Types of vehicles investments could be held in. Onshore, Offshore, Wrap or Platform, Investment only, Off Platform. Stand alone. Digital only etc.

Cash flow modelling, CRM system(s)deterministic or stochastic models, DFM’s Data hubs, external suppliers / links P.I. insurer, DB transfer, Panel providers / restricted etc

Services/

Tools and

Calculators

Investment Firm advises

on Y/N

Wrappers Reason for

decision to

use or not

The table below shows a CIP:


technical eye

By considering and structuring the CIP in this manner, this demonstrates to the FCA that the firm fully understands both the product and processes being utilised to support the advice, recommendations and service offering to their clients. The CIP is all about having a structured investment process that aims to deliver a robust solution that is both repeatable and consistent during the growth phase. However, in the case of a CRP, the considerations are much wider than just investment, and should include all of the

risks clients face as they move through later life. Nowadays retirement is no longer a cliff edge set at 65. Many more clients gradually ease from working into retirement, for example by phasing tax-free cash withdrawals. So there needs to be consistency and a working link between your CIP and CRP to reflect this. A CRP needs to evolve from a CIP.

The CIP may have created for a firm a broad segmentation of clients categorised by inexperienced, experienced and personalised with different products and services being offered during the growth stage. The CRP will need to capture both the gradual movement from work into retirement and the later stage of life leading to an extension of the original segments by a further four or more each addressing the different needs and requirements of the firm’s clients. Also the CRP will also need to consider which phase the client is in and how / when they might transition into the next stage.

Other elements forming part of the CRP is the firm’s approach to assessing client’s changing circumstances which can be many and varied. A fundamental document is the firm’s vulnerable client policy which should be embedded in to

All aspects of servicing and advice recommendations and reviewed and updated regularly. This policy should cover the four FCA areas of client vulnerability, these are, Health determination, Life events, Resilience to deal with capacity for loss and Capability to understand risks. The FCA has this at the front of their approach to regulation and suitability of advice.

The firm will need to demonstrate it has a robust approach to this and how advice / services are provide to support spending hierarchy in the different stages a client is in. Inflation and the impact upon income when assessing a sustainable withdrawal strategy alongside investment and product strategy also needs to be clearly defined and evidenced for each client segment.

30Age: 7040

INCOME

80

GROWTH

50 9055-70

Level of client engagement

WE

ALT

H

HigherHigher

Centralised Retirement Proposition: evolution not revolution

START

SAVING

LONGTERMCARE

BUILDING

SAVING

PASSIVERETIREMENT

WEALTH

GRADUAL MOVE FROM

WORK TO RETIREMENT

ACTIVERETIREMENT


technical eye

In addition, the firm may wish to consider as part of the CRP,

• Longevity – how does the firm determine the retirement timeframe?

• What is the practice view on Power of Attorneys (POA), Wills a nd use of Trusts for clients?

• How does the firm meet COBS 9.3.3 (FCA’s guidance on assessing suitability)? - Consider the clients’ current (and I would suggest ongoing) state of health when clients are in drawdown

• What strategic plans are in place to cater for Long Term Care?

• The firms review process and its ability to identify changes in health and circumstances?

• A signed ‘rules of engagement form’ which sets how the firm will engage with the client and encourages the client to engage with them. This could also include a ‘Withdrawal Policy Statement’ to assist in managing how monies are drawn and parameters around future decision- making, goals and use of assets.

• What (if any) fees / retainers are being charged by the practice?

When considering how clients’ needs are met during retirement, The CRP may differ not only from the investment strategy offered within the CIP, but may include new products and services and identify different risks faced during retirement. An obvious situation is when assessing capacity for loss, identifying when annuities play a part in of the firm proposition and for which clients. It needs to consider if lifetime mortgages could be suitable and when in a client retirement journey would they best be utilised if at all. Also, if a client has the cognitive capacity to understand the benefits and drawbacks of this as part of their retirement strategy.


technical eye

We know that the investment strategy when taking an income during the retirement phase is different to that in the growth phase, and different solutions may be needed. Sequence risk is a key consideration when taking an income and there are a number of methods commonly used to manage this risk. One option is holding funds in cash equivalent to, say, two years’ income. ‘Pot’ investing is a similar concept where income is drawn from the lowest volatile fund with money rebalanced regularly. Taking natural income is favoured by some, while others may opt for volatility managed funds. All of these strategies have some benefits and some downsides. The CRP should set out the reasons for using a particular strategy along with supporting evidence, bearing in mind there may be different strategies for different client segments.

A further thought regarding managing sequence risk which supports the ‘Pot’ investing approach is to utilise more than one fund. Diversification of assets can be achieved by investing into a single risk rated or targeted fund. However, the strategy still can suffer an impact caused by unit encashing from the fund to provide an income stream. Using a ‘Pot’ strategy either via a DFM or a provider meeting the risk profile of the client can reduce or remove the impact of unit encashment.

Defined contribution

pension

Defined Benefit pension

Investments onshore Investments offshore

Holiday (second) home

Main residence

Income from state pension

Buy-to-let Property

ISA

Not just about pensions


technical eye

We say• CRP can help firms set out their strategies

• CRP can help firms category clients

• CRP should relate to client’s needs, objectives and reflect their chances in circumstances


Finally the CRP should relate to your client’s needs, objectives and reflect their chances in circumstances or even their level of financial knowledge both at outset and at their regular reviews.

Some may see CRP as the latest fad in retirement planning, but it can help firms set out their strategy in a number of key areas such as sustainability of income and longevity. These are areas many clients simply don’t understand and being able to articulate a clear strategy, with evidence to support it, may help clients understand why recommendations are being made, and the benefits these may bring to them and their family.

[email protected]


Money Markets

Fixed Income

Equities

Percentage of 1,000 simulations where Drawdown pot lasted 30 years

£50,000 5.3% 9.2% 20.8% 7.1%

£75,000 91.7% 75.1% 73.1% 98.3%

£100,000 99.7% 97.5% 91.1% 100%

At Retirement One thousand simulations

ABI0-35

Sector

ABI20-60Sector

ABI40-85Sector

POTStrategy

The below example highlights a £4,000 p.a. index at RPI for

different investment levels compared to a combined 3 fund

‘Pot’ strategy.

These figures are based on simulated performance for illustration purposes

Source: Canada Life Investments & Morningstar. Figures based on the ABI Mixed Investment 0-35, ABI Mixed Investment 20-60 & ABI Mixed Investment 40-85 to month end Oct 2018. Calculated a thousand simulations on the actual returns of the ABI Mixed Investment sectors. Each simulation randomly mixed the last 30 years of returns (to account for sequencing risk) to help calculate the likelihood of the pot lasting. Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested


technical eye

Two seamless controls. One perfectly tuned income.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales

no. 973271. Registered offi ce: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. MGM Advantage Life Limited, trading as Canada Life, is a subsidiary of The Canada Life Group (UK) Limited,

and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales no. 8395855.

Registered offi ce: 6th Floor, 110 Cannon Street, London EC4N 6EU.

MAR02881 - 0320

With The Retirement Account you can switch

guaranteed income on or off. You can do the same

(or the opposite) with fl exible drawdown income.

Or set the dial for either at any level in between.

When your client’s needs change as they phase into

retirement, The Retirement Account changes with them.

To fi nd out how The Retirement Account

can help future-proof your retirement business,

call 0800 912 9945 or visit canadalife.co.uk/adviser

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