Pension allowance cuts protect and serve

Transcription

1 This presentation is intended for financial services professionals only and must not be relied on by anyone else Standard Life Pension allowance cuts protect and serve Bob Gordon Technical Manager Technical Solutions Today s agenda What s going on? Who s affected? Pension protection 2014 The advice challenge 1

2 What s going on? Pension tax relief in perspective Government expenditure /12* 74Bn 43Bn 35Bn 27Bn State benefits Armed Forces Pension tax relief Tax credits *source HMRC 2

3 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 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 *Source: Pensions Policy Institute report Tax relief for pension saving in the UK (July 2013) The Government s response State pension reform from 2016 to cap costs single-tier 144 a week from age 68? 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 *Source HMRC 3

4 Who s affected? Lifetime allowance changes 2014 How many clients are affected? ? 30,000* 250Bn+** 360,000* *Source: HMRC **Standard Life estimate 4

5 Lifetime allowance Which way is the wind blowing? Lifetime allowance It s a game changer for retirement planning Lifetime allowance changes 2014 A game changer for retirement planning Lifetime allowance cut to 1.25M from April ,500 pa DB pension fully uses reduced d LTA ( 1.25M/20) It s not going up again soon Real lifetime allowance could be much lower 700k fund breaks 6% growth for 10 years 45k DB pension hits 3.3% revaluation for 10 years Risk of 62.5k (25%)/ 137.5k (55%) windfall tax New protection options to lock-into a higher allowance 5

6 The real lifetime allowance Current fund to exceed allowance 1.25M 1.5M Years to go 4% 8% 4% 8% M 993k 1.334M 1.191M M 851k 1.232M 1.021M k 579k 1.013M 695k And this assumes pension saving stops now 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 Legacy Active Contributing Employer contribution? LTA value? Now At retirement (no more savings) At retirement (ongoing savings) Years to retirement? < 5 5 to 10 > 10 6

7 Segmenting your clients Prioritising action Already over 1.25M Must act before April Projected over 1.25M even if pension saving stops Must review soon action likely before April Projected over 1.25M if pension saving continues Set-up reviews target older clients before April Projected between 1M and 1.25M Review regularly - monitor progress Projected under 1M No immediate action needed Pension protection

8 Lifetime allowance cut 2014 The tax implications The lifetime allowance cut potentially exposes up to an extra 250, 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) HMRC view these charges as broadly tax neutral aim is to cancel out tax-relief on contributions and tax-free growth Lifetime allowance cut 2014 The real tax rate Even within the LTA most benefits are taxed 75% of retirement benefits are subject to income tax only the TFLS/ uncrystallised lump sum death benefit is taxfree Effective TOTAL tax rate on retirement Benefits within LTA (with 25% TFLS) Excess above LTA (taken as income) Excess above LTA (taken as lump sum) benefits Basic rate taxpayer Higher rate taxpayer Additional rate taxpayer 15% 30% 33.75% 40% 55% 58.75% 55% 55% 55% 8

9 Lifetime allowance cut 2014 The extra tax rate above LTA EXTRA tax rate on excess retirement benefits Basic rate Higher rate Additional rate taxpayer taxpayer taxpayer Income 25% 25% 25% Lump sums 40% 25% 21.25% But lump sums paid from excess funds on death before taking benefits (and age 75) face the full 55% extra tax hit these lump sums are paid tax-free within the LTA Pension protection 2014 Mitigating the tax hit There are 2 new options to lock-into a higher LTA beyond 5 April 2014 individual protection gives a personal LTA of M fixed protection gives a personal LTA of 1.5M Simplification? we ll now have 6 different limit it regimes! standard + enhanced + primary + fixed the 2 new options not to mention protected lump sums and low pension ages 9

10 Individual protection 2014 A higher LTA with no trade-off Individual protection gives LTA of M LTA based on fund value at April 2014 (up to 1.5M) 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 forms not available until Autumn 2014 (Finance Act 2014) If you re eligible for individual protection, do it Fixed protection 2014 A 1.5M LTA with a trade-off Fixed protection 2014 gives a personal LTA of 1.5M 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) 10

11 DB fixed protection and the relevant % To keep fixed protection, the DB value at 5/4/14 can t increase by > the relevant % in any tax year 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: career average benefits (i.e., the annual uprating % for Pens Sal) late retirements (LRFs) deferred benefits (PUPs) Pension allowance cut The advice challenge 11

12 The advice issues Fixed protection (stop contributions) Take benefits before April Individual protection (can continue contributions) Review investment strategy Advice options Final pension top-up Bring pensions together Other saving vehicles Advice issues Protect or not? considerations Individual do it if eligible (higher LTA with no downside) Individual, fixed, both or none? Fixed only way to lock into higher LTA if below 5/4/14 Both IP gives safety net if fixed is lost (if above 5/4/14) None more exposure to LTA tax, but might give best client outcome Employer contributions? 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? Personal contributions? Must personal contributions continue to get employer contribution? May be best advised to stop (esp voluntary/ AVCs) and save elsewhere? Should client pay a final pension top-up before 6 April 2014? 12

13 Advice issues Getting pensions in shape - considerations 5/4/14 payment deadline for fixed protection cases Pension top-up p Get it while you can carry forward, flex PIP rules, get tax relief Project benefits against LTA with and without top-up Easier to monitor progress towards LTA Consolidate 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 Review investments 2006 LTA covenant broken LTA frozen or reducing Changes risk/ reward equation 100% of downside v 45% of upside De-risk investments to target LTA to reflect reduced reward for risk-taking Advice issues Alternative saving strategies the options ISA Mutual funds Bonds Shares Spouse s pension Trusts VCT EIS Clients giving-up on pension saving need to find alternative saving vehicles and tax wrappers even clients staying in employer schemes should consider redirecting personal/ voluntary pension saving to other vehicles gives flexible decumulation options and potential safety net if plans don t work out 13

14 Advice issues Alternative saving strategies - considerations Fund spouse s pension Using both pension allowances reduces risk of LTA tax Spouse gets tax relief on client payments up to 3,600 or 100% of income Opens-up more tax-efficient decumulation options ISA Bonds Mutual funds ISA use allowance tax-efficient growth easy access Bonds investment choice tax-efficient tax planning/ assignment Mutual funds investment choice - flexibility Separate assets from personal wealth/ estate Trusts Retain control over who gets what and when Asset protection on death, divorce, bankruptcy Key advice considerations The advice challenge Already over 1.25M Projected > 1.25M (no more saving) Projected > 1.25M (with new saving) Projected 1M to 1.25M Must act before April Must review action likely before April Review soon older clients before April Monitor progress review regularly Take benefits before 6 April 2014? Protect or not? (fixed or individual) Protect or not? fixed only Top-up pension before 6 April 2014? Consider alternative saving vehicles and tax wrappers? Consolidate pensions? easier tracking, investment choice, benefit flexibility - but watch guarantees Review pension investments? potentially de-risk 14

15 Any questions? The legal stuff 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 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. 15

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