14.25 – 15.05
Pensions in 2013
Adrian Mee
Consultant, Mattioli Woods
www.ifa.org.uk
PENSION PLANNING FOR INDIVIDUALS AND
BUSINESSES
Institute of Financial Accountants – Birmingham
17 October 2013
Pensions and wealth management group
•
AIM listed – market cap circa £66 million
•
Established 1991 – over 20-year proven and stable track record
•
Assets under advice and administration - £4billion
•
330 staff; 54 consultants (offices in Leicester, London, Aberdeen and
Glasgow)
•
6,000 small self-administered scheme (SSAS) and self-invested personal
pensions (SIPP) clients
•
Strong client retention - 98%
•
“Through personal and proactive delivery of trusted advice, building
long-term client relationships remains our core objective.”
Agenda
•
•
•
•
Contributions
— Annual allowance and pension input periods
— Tax relief and lifetime allowance
Investments
— Connected transactions to fund business
— Investment strategies for long-term growth
— Choice of pension vehicle
Drawing benefits & succession planning
— Annuities and drawdown
— Flexible drawdown and scheme pension
— Death benefits
Auto-enrolment
Contributions
Background
• A-day
• Annual allowance
• Lifetime allowance
2006
2007
COALITION
2008
2009
2010
2011
2012
2013
2014
2
0
1
2
2
/
0
1
1
3
1
2
/
0
1
1
2
0
2
/
0
1
0
1
9
/2
0
1
0
0
8
/2
0
0
0
9
7
2
/
0
0
0
8
6
/
0
7
AA
£215k
£225K
£235k
£245k
£255K
£50K
£50K
£50k
LTA
£1.5m
£1.6m
£1.65m
£1.75m
£1.8m
£1.8m
£1.5m
£1.5m
ANTI-FORESTALLING
£40k
£1.25m
Current rules (tax year ending 5 April 2014)
•
Annual allowance - £50,000 gross per individual
— personal = reference to earnings
— employer = ‘wholly & exclusively’
•
•
•
•
•
Carry-forward unused allowance – previous three years (2010/11
onwards)
Must utilise current year’s relief first
Carry-forward from earliest year
Must have been a member of a UK pension scheme in all years to be
utilised
Defined benefit schemes – 16 x benefit increase (!)
Lifetime allowance
Lifetime allowance (LTA)
•
•
•
Limit to tax-efficient size of fund
£1.5million for tax year ending 5 April 2014
£1.25million from 6 April 2014
Consequences of exceeding LTA
•
•
•
No tax-free cash on excess
55% tax (if drawn from the fund)
25% if paid as ‘taxable’ income
New rules
With effect from 6 April 2014
• Annual Allowance reduces to £40,000
• Will affect pension input periods (PIPs) that end on or after 6 April 2014
• SIPP vs SSAS
but…
No change to carry forward rules (£50,000 limit for previous years unused
relief still applies)
and…
...LTA reduces to £1.25million
Fixed protection 2014
•
•
•
•
Only protects tax-efficiency of fund to £1.5million
Future contributions will revoke fixed protection
Anticipated investment growth?
Care should be taken with small policies, auto-enrolment and accruals in
defined benefit schemes
N.B. Lump sum death benefits tested against LTA at time of death rather
than point of payment
Proposal for personalised protection (PP)
• Personal protection factor depending on fund size
• Ability to continue to contribute
• To qualify, must have accrued pension fund as at 5 April 2014 of at least
£1.25million
• Maximum protection £1.5 million
PIPs
Pension input
period - 20 April
Company year-end
30 April 2013
No further contributions until 20 April
2014 onwards
13/14
£50k
6 April
2013
£40k
14/15
5 April 19 April
2014
2014
Spreading
When will spreading apply?
• Four stage process
—
—
What contribution has to be paid in current chargeable period?
If there has been a change in the length of chargeable periods adjust the
periods to the same length
— Compare the RELEVANT contributions in the current & previous chargeable
periods to work out if there has been an excess and, if so, how much
— Is the excess more than £500,000?
Certain contributions do not need to be spread
• These are contributions to pay for:
—
—
Cost of living increases to pensions in payment to pensioner members
Benefits for future service for members joining the scheme in the current
chargeable period
Spreading
Over what period will relief be spread?
Amount of relevant excess
contributions
Period of spreading of tax relief
£500,000 or more but less than £1m
2 years
£1m or more but less than £2m
3 years
£2m or more
4 years
Unallocated contributions
• Employer contributions only
• ‘Wholly and exclusively’ test applies at point of payment for tax relief
purposes
• Personal contribution rules applicable at point of allocations i.e. 100% of
earnings
• Unallocated contributions to be allocated to members under future PIPs
Which pension?
Market overview
Full self-investment
SIPP/SSAS
Stakeholder
• Managed/pooled funds
• Managed/pooled funds
• Individual shares
• Fixed interest
• Cash
• Commercial property
Personal
pensions
Insured/
broker
SIPP
• Unquoted shares
• Structured products
• Connected loans
(SSAS only)
• Unconnected loans
Market overview
• Stakeholder £20,000 at 1.5% = £300 p.a.
SIPP/SSAS £20,000 at true cost = £2,000 p.a.
• Stakeholder £150,000 at 1.5% = £2,250 p.a.
SIPP/SSAS £150,000 at true cost = £2,000 p.a.
•
Multi-member schemes
•
•
•
•
Regulatory issues & concern
Capital adequacy
Proposed rules for SIPP providers
The future?
Key thematic review
concerns
•
•
•
•
Poor compliance with regulatory requirements
Poor systems and controls around client money and asset rules
Inadequate controls around investments held including non-standard
investments
Insufficient capital to absorb unexpected liabilities
FCA consultation paper
CP12/29
•
•
Proposed new capital regime for SIPP operators
Two-tier approach
–
–
•
•
•
•
•
Initial capital requirement based on assets under administration
Additional capital surcharge for non-standard assets
Non standard assets includes commercial property
Final rules to be published in second half of 2013 with a one year
transitional period
Capital requirement increased from 6-12 weeks expenditure to typically
1-2 years expenditure
In some cases, up to six years
Mattioli Woods already meets requirements
Market issues
•
•
Some providers will not have sufficient income to increase capital in
time
New business risk
Potential additional capital required for one new client
•
•
Standard assets £499
Including non standard assets £1,746.50
This requirement is for each new client
•
•
Set up fees are below these levels at the moment
How can IFAs justify a move to providers?
‘Size matters…?’
Example
•
•
•
Curtis Banks takes on £3bn of Alliance Trust assets
Possible increase to capital is £4.9million
2011 turnover = £1.75million
What about other providers?
•
•
PY set up cost = £160
Hornbuckle Mitchell set-up cost = £295
‘Future fees…?’
Investments
Investing for growth
Our approach for self-investment
•
•
•
•
Income-driven
Capital stability
Connected transactions
Other options
Sale and leaseback
Existing pension policies
SSAS/SIPP
Bank borrowing (50% limit)
£250k cash
•
•
•
•
•
Rent received by scheme gross
Rent payments reduce CT
Part ownership/syndicate
Personal lending
In specie contribution
Property
Ltd Company
Obstacles - flexibility
Mattioli Woods position on property
•
Many providers will not allow:
–
–
–
–
•
commercial split with residential
agricultural land
care homes
overseas property
Mattioli Woods currently allows all of the above!
Loanbacks
Overview – employer loans
•
•
•
•
•
•
Maximum amount of loan
Interest rate
Term of loan
Equal annual instalments
Security
Suitability?
“ need for consultancy…”
Loanbacks
SSAS
Fund value £500k
(Max loan £250k)
Loan of £250k
Security
Ltd Company
Term: 5yrs
Interest rate: min 1% over base
Repayments: at least annual
capital & interest
Unquoted shares
Overview
•
•
•
•
•
•
Unquoted shares in member’s company can be purchased
HMRC see scope for abuse – complex rules
Cannot be used as ‘shell’ to hold taxable property
Dividends/voting rights?
Long terms strategy – sale of company
Entrepreneur’s relief and/or Business Property Relief
“ need for consultancy…”
Investment strategy
for balance of fund
Investing for growth
Diversification
• Structured products
–
–
–
capital stability
above-inflation returns
staggered investment strategy
• Commercial property syndicates
–
–
capital stability
income generation
• Discretionary portfolio management
–
–
–
–
Model portfolios (client risk profile ‘balanced’)
Investment into shares/fixed interest
Quarterly rebalancing
Annual risk profile review
Example valuation
Investment yields
Investing for income…
Property
-
7% p.a.
Loanback
-
6% p.a.
Balanced
(portfolio)
-
3.15 p.a.
SPB
(portfolio)
-
8.15% p.a.
Portfolio
running yield - 6% p.a.
The compound effect…
The compound effect…
The compound effect…
The compound effect…
Self-investment
Other investment options
Non-standard/unregulated investments – unquoted shares,
domain names, intellectual property & goodwill
• Other providers
—
—
—
—
Either say NO, or
Too aggressive (valuations)
Tax consequences – if not commercial
Trading
• Risk
• Suitability?
Drawing benefits
&
passing it on
Taking benefits
Benefit structure
• 25% tax-free cash
• Annuity?
• Capped drawdown
— Rule change
— 120% of GAD x crystallised fund
— 3 year reviews
— Investment & interest rate risk
Planning opportunities
• Flexible drawdown
— Income tax liability
— Must meet £20,000 minimum income requirement
— Gift excess to children/grandchildren
But…
Possible IHT liability on the gift!!
• Scheme pension
—
addresses IHT issue
Scheme pension guarantee period
Scheme pension
• Adopt new scheme rules
• Income (subjective vs objective)
— Actuarially assessed on a case-by-case basis
— Health
— Underlying asset allocation
— Triennial reviews
— Payment may continue after death using a guarantee period
Scheme pension –
guarantee period
Benefits of the guarantee period on death
•
•
•
•
•
Maximum 10-year guarantee period
Paid to any person(s)
Payments not part of member’s estate - no IHT
Income is taxed at recipient’s marginal rate only
Exhaust fund within guarantee period
‘Can ensure fund is paid out subject to income tax, not 55%
tax’
Scheme pension –
distinct approach
Guarantee period – how it works (assuming a 4% return)
Age 75
Fund
-
£1,000,000
Scheme pension
-
£91,125 p.a. (10-year guarantee)
Residual fund
-
£924,619
Income payments
-
£126,858 p.a. (to exhaust fund over 8 years)
Higher - 40%
-
£405,945
Basic - 20%
-
£202,972
(55% tax)
-
£503,504
Tax saving
-
£97,559 to £300,532
Terrie dies after 2 years
Income tax liability
compared with recovery tax charge
My clients don’t like
pensions!
‘Easy wins’
Immediate vesting
•
•
•
•
•
Gross contribution of £50,000
Tax relief at 45% is £22,500 so net cost is £27,500
Lump sum entitlement is £12,500 (25% of £50,000)
This reduces net cost of contribution to £15,000
Income of around £2,000 per annum (gross)
‘£2,000 income from £15,000 is 13.33% yield!’
•
•
Salary sacrifice will save NI and further improve picture
Does not factor in any investment return – long term compound effect
‘Easy wins’
Avoid High Income Tax Benefit Charge (HITBC)
•
•
•
•
•
One earner in household at £60,000 (gross)
Currently claim £1,900 per annum
Under new rules can be claimed but will be effectively taxed at 100%
Pension contribution of £10,000 will get 40% tax relief and avoid HITBC
This saves £5,900 in tax – or a net cost of £4,100
‘Over ten years this could generate £140,000 pension pot at a
cost of £41,000’
‘Easy wins’
Avoid 60% tax trap
•
•
•
•
•
Earners over £100,000 start to lose personal allowance
An income of £18,880 removes personal allowance*
Pension contribution of £18,880 would achieve 60% tax relief
Net cost of contribution is £7,552
Salary sacrifice can improve picture further – save NI
‘Over ten years this could generate £263,000 pension pot –
giving £65,750 lump sum and £9,800 income’
*2012/13 tax year
Auto-enrolment
Where are we now…?
Why now?
• 49% of UK population saving for retirement
• 50% who have company pension do not join
• What about state pensions?
Ratio of workers to pensioners
1901 – 10:1
2005 – 5:1
2050 – 2:1
What do employers have
to do?
•
•
•
•
•
•
•
•
Know their staging date – How?
Decide on the pension arrangement(s) to be used
Assess their workforce eligibility
Communication
Auto-enrol eligible jobholders and keep records
Pay minimum contributions
Post auto-enrolment (employer duties)
Compliance (the Pensions Regulator)
Who gets auto-enrolled?
Worker type
Eligible
jobholders
Non-eligible
jobholders
Entitled workers
Earnings
Enrolment Duty
Employer
Contributions
22 - SPA
£9,440+
Must be
automatically
enrolled
Yes
16 – 21 or
SPA – 74
£9,440+
Have a right to opt in
Yes
Have a right to join
No
Age band
16 – 74
Above £5,668 but
below £9,440
16 - 74
Up to £5,668
Contributions
Dates
Total minimum
contribution
Employer minimum
contribution
Oct 2012 to Sept 2017
2%
1%
Oct 2017 to Sept 2018
5%
2%
October 2018 onwards
8%
3%
Contributions
Salary, wages, overtime, bonuses,
commissions
Statutory sick pay
Qualifying earnings
include
Statutory maternity pay, ordinary
or additional statutory paternity
pay
Statutory adoption pay
Qualifying earnings are between : £5,668 and £41,450
Different definitions of earnings:
• Qualifying earnings
• Tier 1: Basic x 9%
• Tier 2: 85% x 8%
• Tier 3: Total x 7%
Things we hear
Employer attitudes
The reality
‘We are OK as we pay enough into our
scheme’
Every scheme needs to be looked at for
various reasons
‘We will wait until the last minute as there is
no rush’
The process takes a lot longer than most
expect
‘We can produce the correct data no problem’
Most cannot
‘NEST will do everything for us’
NEST will be a receiver of information from
the employer
‘We will just auto-enrol everyone so we do
not need to worry’
All workers still need to be classified and
communicated with in the correct way
‘We will just use the postponement option to
delay’
How long? That does not stop the
communication timetable
‘Everyone will opt out anyway so it will not
end up costing us anything’
The opt-out rates are low, and the employer
cost needs to be accounted for
The solution
Our Auto-enrolment Hub & support services
The Kudos Auto-enrolment Hub provides an end-to-end technological solution,
with facility options, for all employers covering all aspects of their
auto-enrolment journey.
Kudos Hub advantages
• Saves on costs on manual administration
• Ensures independence and ownership of data
• Future flexibility and freedom (not tied to a provider)
• Helps employers manage their business risk
• Employee communication hub
• Allows integration immediately of several schemes (merger/acquisition)
• Aligned with our “TRS” and “Flex” offering on the Kudos Create platform
Top 10 Client Tips
1.
Be sure of their staging date(s)
2.
Prepare early
3.
Engage all stakeholders
4.
Establish their costs and budget
5.
Review the existing scheme(s)
6.
Make sure staff data is clean and complete
7.
Decide how you will process Auto-enrolment
8.
Have a project plan
9.
Communicate and engage with employees early
10. Embed it in your client processes
Remember:
Auto-enrolment does
not finish at staging
date, that’s when it
starts
How we can help
•
Tailored service designed to support you and your clients
•
Personalised delivery through one of our experienced consultants
•
Technical support as and when required
•
Solutions which interact with planning already in place
•
Comprehensive service range for your clients
•
High-quality administration with dedicated account managers
•
Effective communication through newsletters, events and exhibitions
Next steps
• Free follow-up meetings with professional contacts and partners
• Free initial meetings with clients on a no-obligation basis
Summary
Key points
•
Pension legislation - constant change despite ‘simplification’ in 2006
•
Proactive consultancy – detailed knowledge to identify opportunity
•
Choice of provider – security, administration and flexibility key
•
Transparent fees – clear and open charging, commercial view
Next steps
• Free follow-up meetings with professional contacts and partners
• Free initial meetings with clients on a no-obligation basis
• Seminar series spring/autumn and bespoke presentations in house
Any questions?
Disclaimer
The views provided in this presentation are for general information purposes only and represent the
opinion of the authors based on market conditions at the time of writing, which are subject to
fluctuations, and interpretation of current and proposed legislation and HMRC practice, which are
subject to change. Nothing in this document represents investment advice of any nature whatsoever,
and it does not constitute an offer or solicitation to purchase or sell any financial
instruments. Accordingly, to the extent permitted by applicable law, Mattioli Woods plc and Kudos
Independent Financial Services Limited do not accept any liability or responsibility for the information
contained in this presentation or any investment decision or other action that may be taken in reliance
upon the information contained in this presentation. Mattioli Woods plc and Kudos Independent
Financial Services Limited accept no responsibility for any errors of fact or opinion and assume no
obligation to provide you with any changes to their assumptions.
Mattioli Woods plc. Registered in England No 03140521. MW House, 1 Penman Way, Grove Park,
Enderby, Leicester, LE19 1SY.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.