“Bold, modern, progressive”
SBG
AXA Wealth
This presentation is directed at Professional Financial Advisers only.
It should not be distributed to or relied upon by retail clients.
Agenda
• Pension changes – headlines.
• How will consumers react to change?
• Some of the unknowns and some of the pension planning opportunities.
• Is higher rate tax relief on pension contributions at risk?
• The value of cash flow modelling
Pension Changes - Headlines 2014/15
• New – effective from 27 March 2014
• Capped Drawdown maximum GAD 150%
• Flexible Drawdown Minimum Income Requirement £12,000
• Trivial commutation limit increased to £30,000
• Small pots limit increased to £10,000 per arrangement and a maximum
number of payments increased to 3
• The purchase of an annuity can be deferred for longer than 6 months after
taking PCLS, to allow individuals to benefit from the proposed new rules
The closing date for responses to the
consultation is Wednesday 11 June 2014.
The 10 questions posed in the consultation consider the
application rather than the creation of the legislation, for
example;
•
“what more can be done to ensure the guidance is
available at key decision points during retirement?”
•
“how can the government design the new system
such that it enables innovation in the retirement
income market?”
Why has the Government proposed to change the way in which
pension benefits can be taken?
George Osborne
“The annuities market is currently not working in the best interests of all
consumers. It is neither competitive nor innovative and some consumers are
getting a poor deal. It is time for a bold, modern and progressive reform.”
“This is the most fundamental change to how people can access their
pension in nearly a century.”
Chancellor v Regulator…..
What retirement planning vehicle would you normally consider for a client
with less than a £100,000 fund?
Source:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf
Falling out of love with annuities?
FCA’s Thematic review of annuities: Findings
– 60% of consumers do not switch when they buy an annuity.
– For standard annuities an estimated 79% could get a better deal on the
open market.
– For enhanced annuities an estimated 91% could get a better deal on
the open market.
Estimated annual income gains by consumers from purchasing an annuity on the open market
Standard
Average fund size used for annuity purchase
Enhanced
£17,000
£26,800
£1,000
£1,630
£67
£135
6.7%
8.3%
Average annual income achieved from existing pension provider
Average amount of annual increase in income
Average proportion annual income could be increased by
Source: http://www.fca.org.uk/static/documents/thematic-reviews/tr14-02.pdf
Saving less for retirement
• Government concerned that a lack of choice at the point of retirement will
undermine confidence in longer term saving.
Source for table:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_
210314.pdf
and living longer*…..
1948
65 male
2012
1948
2012
12 year life
expectancy
65 male
65 female
21 year life
expectancy
15 year life
expectancy
65 female
24 year life
expectancy
• Government concerned that annuities might not be the correct product for
everyone - rates have reduced as life expectancy has increased.
*Source::
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_21
0314.pdf
Current tax system for accessing DC at retirement
Tax free lump
sum
Full
withdrawal
Annuity
(at marginal rate)
£30,000
(previously £18,000)
Pension pot
Full
withdrawal
Capped
drawdown
Flexible
drawdown
£310,000*
*This is a stylised assumption based on an individual with a full basic state pension of £5,744 per year, who takes the
max. PCLS from their DC plan and purchases a single life, level, no guarantee annuity worth £14,256 p.a. (an annuity rate
of 6.1%) at age 65.
Future tax system for accessing DC at retirement
Tax free lump
sum
Full
withdrawal
(at marginal rate)
Pension pot
Annuity
Drawdown
/ other
products
The projected impact on tax revenues of the measures to introduce
greater flexibility and choice to defined contribution pensions.
Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293759/37630_Budget_2014_Web_Accessible.pdf
How many retirees will use their pension pot to
buy an annuity, according to research?
• Poll of 1,000 scheme members conducted by Hymans Robertson
Options
Percentage
Use “most or all” of their pension pot to buy an annuity when they
retire
25%
Take most of their pension pot as cash to spend in other ways and
some to buy an annuity
32%
Not buy an annuity and take their whole pension pot as cash to
spend in other ways
12%
Not buy an annuity, keep control of their money and draw an
income from the pot each year
31%
Source: http://www.hymans.co.uk/news-events/newsroom/the-budget-pension-reformsonly-25-of-retirees-will-use-pension-pot-to-buy-an-annuity,-according-to-research.aspx
Other survey “highlights”
•
Defined contribution scheme members closer to retirement take a more negative
view of the value of annuity.
•
34% of scheme members aged over 51 felt that annuities “are not flexible enough
for (my) retirement plans compared to 20% of people under 51.
•
38% of scheme members aged over 51 felt that annuities were “poor value for (my)
savings” compared to 21% of people under 51.
•
61% of DC scheme members agree that they are confident about self-managing
the money built up in pension pots throughout their retirement compared to 19%
who aren’t.
Still early days and when the moment of truth comes what price will
individuals place on the value of a guarantee?
Source: http://www.hymans.co.uk/news-events/newsroom/the-budget-pensionreforms-only-25-of-retirees-will-use-pension-pot-to-buy-an-annuity,-according-to-
Question
What proportion of your current pension clients will
look for ongoing advice when taking income
from their pension fund?
A.Above 75%
B.50-75%
C.25-50%
D.Below 25%
Some of the unknowns…
• What will the pension death benefit tax charge be?
• Can you crystalise some funds and continue to contribute to pension?
• Can over 75’s contribute if they have already crystallised funds at an earlier
date?
• What will pensioners bonds look like?
• What will guidance look like for a consumer?
• Will the minimum age to access private pensions increase?
NISA v pensions – a high level summary
NISA
Pension
High tax rate on entry
High tax rate on exit
Access pre age 55*
Death during investment period**
Death after taking cash from pension
?
Does the power of tax relief swing the pendulum in favour of
the pension wrapper?
*Date that pension can be accessed could increase in the future.
** Is the NISA invested in BPR qualifying AIM stock / estate below the NRB / beneficiary a spouse or civil partner?
Funding for Flexible pensions….
Effective net contribution
Net benefit
BRT
PCLS
£25
Pension £60
TOTAL £85
Basic Rate Taxpayer
£80
Higher Rate Taxpayer
£60
Additional Rate Taxpayer
£55
Gross
£100
HRT
PCLS
£25
Pension £45
TOTAL £70
ART
PCLS £25
Pension £41.25
TOTAL £66.25
Bonus Vs Dividend Vs Pension cont.
• Assuming £200,000 profit to extract, £100,000 each for two directors
who are currently higher rate tax payers.
Bonus
Dividend
Pension**
Profit
£100,000
£100,000
£100,000
Corporation tax
£0
£20,000
£0
Employer’s NIC
£12,127
£0
£0
Net profit for
distribution
£87,873
£80,000
£100,000
Employee’s NIC
£1,757
£0
£0
Employee’s I.T.
£35,149
£20,000
£0
Net benefit
£50,967*
£60,000*
£100,000
•
*Consider also the potential loss of personal allowance and increased income tax liability by £4,000 (£10,000 X 40%)
•
** Assumes sufficient carry forward of annual allowance is available
Bonus Vs Dividend Vs Pension cont: The net benefit
Bonus
Dividend
Pension
Profit
£100,000
£100,000
£100,000
Total tax and
deductions
£49,033
£40,000
£0
Net Benefit
£50,967
£60,000
£100,000
Flexible Drawdown
BRT
£25,000 PCLS + £60,000
£85,000*
HRT
£25,000 PCLS + £45,000
£70,000
ART
£25,000 PCLS + £41,250
£66,250
*If withdrawn as one lump sum some will be taxed at 40%
Higher rate taxpayers are on the increase….
• Over the last 30 years the number of 40p taxpayers has risen by 400% with
4.4m paying higher rate in 2014, up from 930,000 in 1984.
• More than a million people have been pulled into the 40p tax band since 2010.
• A further 313,000 pay the top rate of 45p.
• Whilst only 16% of taxpayers pay the higher or additional rates of tax, the top
10% of taxpayers now account for 59 per cent of total income tax
contributions!
Our simple tax relief system for 2014/15!
20%
relief
40%
relief
60%
relief
40%
relief
Or even a combination of these rates
45%
relief
Question
What proportion of your current higher rate tax paying
clients will be effected by the new Lifetime allowance of
£1.25mill?
A.None
B.Less than 5%
C.5 -20%
D.Over 20%
Cashflow Modeling
• Cashflow
• Assets
• Expenses
Cashflow
25
Assets
26
Expenses
27
Summary
• Now more than ever clients need advice.
• Professional connections also need help and advice – are they up to
speed with all the changes in pension legislation?
• This is an advice rich area for advisers
Thanks for listening
Important information
Information about tax is based on AXA Wealth’s interpretation of current legislation and HM Revenue &
Customs' practice. Tax treatment can change and depends on your client’s personal circumstances.
The information contained in this presentation does not constitute advice. It is designed for financial
adviser use only and is not intended for use with individual investors. Any sample screen shots displayed
are correct at date of issue but may be subject to change.
AXA Wealth, Winterthur Way, Basingstoke RG21 6SZ. Telephone number: 01256 470707. As part of our
commitment to quality service and security, telephone calls may be recorded.
AXA Wealth includes the following companies: Architas Multi-Manager Limited (No. 06458717), AXA
Portfolio Services Limited (No. 01128611), AXA Wealth Services Limited (No. 02238458) and AXA Wealth
Limited (No. 01225468). All of these companies are registered in England and limited by shares. Their
registered office is 5 Old Broad Street, London EC2N 1AD.
Architas Multi-Manager Limited, AXA Portfolio Services Limited and AXA Wealth Services Limited are
authorised and regulated by the Financial Conduct Authority. AXA Wealth Limited is authorised by the
Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential
Regulation Authority. Each company promotes and distributes its own products. AXA Wealth Services
Limited also promotes and distributes the products of AXA Isle of Man Limited and certain AXA Life
Europe Limited products in the United Kingdom. Details of the companies offering specific products are
shown in the product literature
AXA Wealth is a marketing brand used by AXA Portfolio Services Limited.