Planning for the tax year end

Transcription

1 WARNING: The information in these articles was correct at the date of issue and may have changed. oracle January 2017 For adviser use only not approved for use with clients Planning for the tax year end In this edition: Tax year end planning for Annual Allowance Pension planning brought to life through our fictional Planning Matters family Tax allowances and exemptions Planning strategies for considerable tax savings for your clients Planning now for the residence nil rate band Advice opportunities the residence nil rate band presents for you Is three a crowd? The pensions vs ISA vs LISA debate And the hits just keep on coming! The expectations for investment markets in the coming year Active or passive management of your client bank? Use your client bank data to unlock business opportunities

2 The contributors Clare Moffat Clare Moffat is a Technical Manager and specialises in pensions. Helen O Hagan Helen is a Technical Manager specialising in tax and trusts. Helen holds the Diploma in Financial Planning from the Personal Finance Society and is an affiliate member of STEP. Graeme Robb Graeme is a Technical Manager at Prudential. He is a Chartered Accountant and Chartered Tax Adviser, specialising in tax and trusts. Les Cameron Les Cameron is Head of Technical at Prudential. Les specialises in the pensions technical arena. Paul Fidell Paul is Head of Business Development (Investments), specialising in the areas of investments, onshore and offshore tax planning and trusts. Structured CPD Readers completing this accredited issue of Oracle can claim 30 minutes CPD towards the CII/PFS member CPD scheme & CISI scheme. Having read this edition of Oracle you'll be able to: > Use tax year end planning strategies to help make tax savings for your clients > Understand the advice opportunities the residence nil rate band presents for you > Understand the implications of using pensions versus ISAs as tax wrappers and investment vehicles > Have an awareness of investment expectations for 2017 > See how you can actively manage your client bank to create new business opportunities To get your CPD certificate you need to visit our Test Centre and take the test. You can find this at: Graeme Ballantyne Graeme is a senior sales & marketing and operational management professional with over 25 years experience in leading blue chip organisations. Colin Simmons Colin is a Business Development Manager (Pensions) and Chartered Financial Planner. 4 Foreword 5 Planning Matters: A family of case studies Introducing our Planning Matters fictional family oracle 7 Tax year end planning for Annual Allowance Pension planning brought to life through our Planning Matters family Clare Moffat, Senior Technical Manager 2 For adviser use only not approved for use with clients

3 contents Tax allowances and exemptions Planning strategies for considerable tax savings for your clients Helen O Hagan, Technical Manager Planning now for the residence nil rate band Advice opportunities the residence nil rate presents for you Graeme Robb, Senior Technical Manager Is three a crowd? The pensions vs ISA vs LISA debate Les Cameron, Head of Technical And the hits just keep on coming! The expectations for investment markets in the coming year Paul Fidell, Head of Business Development (Investments) Active or passive management of your client bank? Use your client bank data to unlock opportunities to develop more business Graeme Ballantyne, Business Consultancy Manager Helping you demonstrate the value of financial advice How Prudential s tools and calculators can support your client conversations Colin Simmons, Business Development Manager Contact us Speak to a technical expert If you'd like more information on any of the topics covered in this edition of Oracle, you can speak to one of our experts. Our Technical Helpline team can help you with generic technical product queries, tax issues relating to life and pension products, trusts and pensions legislation. Our Technical Helpline is also backed up by a team of specialists who are on hand to work with you on any particularly complex cases or client planning strategies. > technical.helpline@prudential.co.uk > > Opening hours Mon Fri 10:00 16:00 Request an illustration Adviser Service Centre > Freephone > Fax > Prudential LANCING BN15 8GB > contact.us@prudential.co.uk > Opening hours Mon Fri 08:30 18:00 Alternatively you can visit our website at for an illustration. Your call may be recorded or monitored in order to improve our service. The following is based on our understanding, as at December 2016, of current taxation, legislation and HM Revenue & Customs (HMRC) practice, all of which are liable to change without notice. The impact of taxation (and any tax reliefs) depends on individual circumstances. For adviser use only not approved for use with clients 3

4 January 2017 Foreword Hello and welcome to the January 2017 issue of Oracle. In this edition we re taking a look at the opportunities that tax year end planning brings amid all the ongoing change in the economic, legislative and political environment. This brings opportunities for you to review your clients tax and financial planning for the current tax year and forward plan for the next tax year. We cover a range of topics in this edition to support you through this process. On technical topics, Clare Moffat, Helen O Hagan and Graeme Robb explore tax allowances and exemptions, pensions planning, and the residence nil rate band. In their articles, they refer to our Planning Matters fictional family and case studies that are designed to help you bring these topics to life with your clients. And Les Cameron tackles the pros and cons of pensions versus ISA versus LISA. Also in this issue, Paul Fidell writes about investment expectations for He looks into the process of asset allocation, the importance of acting prudently and explores what you can do to help steer your clients along the path ahead. And Graeme Ballantyne investigates how you can actively manage the data you have in your back office system to demonstrate your relevance to clients and unlock opportunities to develop more business from your client bank. We re committed to helping you develop professionally and our Oracle publications, which are packed with articles by our technical experts, business development managers, PruConsulting team and industry experts, all qualify as structured CPD. We d really appreciate your feedback on Oracle so we can continually improve it and ensure we re meeting your needs. Please oracle.editor@prudential.co.uk with your views and any suggestions for future editions. Thank you for your continued support. John Warburton CEO, Distribution Prudential UK & Europe 4 For adviser use only not approved for use with clients

5 For adviser use only not approved for use with clients A family of case studies Let s face it, many aspects of financial planning involve a lot of technical detail. At many of our face-to-face events, we ve had great success with bringing these technical topics to life through the use of practical case studies. Our Planning Matters microsite brings together a fictional family and explores their planning needs through a detailed case study for each of them. In the articles by Clare Moffat, Helen O Hagan and Graeme Robb coming next in this issue of Oracle, they explore some of these technical topics when tax year end planning, and they refer to our Planning Matters fictional family. To help set the scene, we ll introduce you to our family here. And you can visit the microsite if you d like to find out more at Each case study for each family member includes their own: Pen portrait Assets and liabilities Income and expenditure Meet the family John is one of Margaret s three sons. Having just become a new grandfather, he wants to make the most of his sizeable investment portfolio and defined benefit pension scheme so he can spend more time with his expanding family. Margaret is the head of the family and has estate and inheritance tax (IHT) planning high on her agenda. Her case study covers things like order of tax rules, dividends and savings income. It also looks at deed of variation and transferrable nil rate band planning. Visit our Planning Matters microsite at for the full case studies. For adviser use only not approved for use with clients 5

6 January 2017 Gavin is another of Margaret s sons who has no dependants. Now an IT contractor, an historic defined benefit transfer is reviewed in his case study to see why the decision was made to transfer. It also looks at salary and dividend methodology and save as you earn shares. David is Margaret s youngest son and a successful business owner. His case study has two parts. One where we look at his corporate investing opportunities and the other focuses on his retirement provision, including how extracting profits from his company can fit in. Jane is Margaret s daughter who is about to go through a divorce. Her mum has also asked her to act as a trustee. In her case study, the mechanics of sharing assets is explored as well as the duties and responsibilities she ll need to take on when becoming a trustee. Prudential s Technical team The Planning Matters case studies are brought to you by our Technical team. The combined team has more than 250 years financial services experience and supports the adviser community in many ways. For example, their Technical Helpline alone took around 14,000 enquiries from advisers in The topics advisers commonly request help with include inheritance tax, taxation of various tax wrappers, and trust issues from trust administration issues to identifying what trusts may be suitable for clients. Pensions planning is also proving problematic with advisers seeking help with Annual Allowance, transfers, tax relief and death benefit options. A lot of these topics are covered in the case studies! Tax year end planning with the family Over the next few pages, members of our Technical team explore some of the key opportunities when tax year end planning with your clients. To help bring these opportunities to life, we look at how they can relate to some of our Planning Matters family. For example, we look at: > David making a large employer contribution before the tax year end using carry forward from the previous three years > The impact Money Purchase Annual Allowance could have on Gavin should he take an Uncrystallised Fund Pension Lump Sum > Margaret making use of exemptions to reduce her estate and Residence Nil Rate Band planning now > The treatment of losses to help reduce John and Anne s liability to CGT You can access all the case studies as well as get access to other relevant support material we have on our dedicated Planning Matters website at 6 For adviser use only not approved for use with clients

7 For adviser use only not approved for use with clients Tax year end planning for Annual Allowance Last tax year end there was a lot to think about in relation to planning. The introduction of the tapered Annual Allowance and the implications of moving to a fixed Pension Input Period, the reduction in the Lifetime Allowance and potentially applying for protection, and the concern about changes to tax relief, to name a few. This year we don t have a reduction in the Lifetime Allowance but are the same issues still relevant? Clare Moffat, Senior Technical Manager, explores. Most of these issues are still very relevant and are areas that need to be considered. In this article, I ll also examine how they affect our Planning Matters family members. Using or saving your Annual Allowance Do any of your clients have unused Annual Allowance? If any unused Annual Allowance from 2013/14 is not used up before 6 April 2017 then it will be lost. To make use of prior years unused allowance requires that the current year s allowance is used first. This means carry forward is only appropriate for clients with relevant income over their 2016/17 Annual Allowance (unless the contribution is made by an employer, as employer contributions are not limited by the individual s relevant income). From 6 April 2016, all Pension Input Periods have been aligned with the tax year (6 April 5 April). However, for Pension Input Periods ending in the 2015/16 tax year, special transitional arrangements were made. Before that, Pension Input Periods may not have been aligned to tax years, and knowing this is of vital importance when working out carry forward. The introduction of the tapered Annual Allowance may mean that it s a good idea to use up any unused Annual Allowance from 2013/14 in the 2016/17 tax year to soften the blow of the taper. However, for people who expect to breach their tapered Annual Allowance in the future, perhaps they could retain any unused allowance from 2014/15 and 2015/16 to offset potential tax charges in future years. In David s Planning Matters case study, he was considering making a large employer contribution, which would be efficient from a corporation tax point of view. However, the large pension contribution was using up carry forward from the current year and the previous three years, including 2013/14. Therefore, if he wants to make this employer contribution and avoid an Annual Allowance tax charge then it needs to be cleared before 6 April 2017 to save losing his carry forward from 2013/14. The potential reduction in the Money Purchase Annual Allowance (MPAA) You may have clients who have triggered the MPAA and having been paying in contributions of more than 4,000. The government announced at the Autumn Statement that it intends to reduce the MPAA to 4,000 on 6 April 2017 and there is currently a consultation investigating the impact of this. For adviser use only not approved for use with clients 7

8 January 2017 This means that if you have clients who have triggered the MPAA and made contributions of less than 10,000, then it may be appropriate to make contributions up to 10,000 before 6 April However, moving into the 2017/18 tax year, if you have clients who have triggered the MPAA and are making regular contributions in excess of 4,000, they should review their contribution levels. The MPAA trigger date has been important since the introduction of the MPAA but this will be even more crucial if the MPAA reduces to 4,000. Essentially the MPAA applies when a client flexibly accesses their pensions. Bear in mind that a 40,000 overall Annual Allowance still applies for clients and it is only defined contribution inputs that are limited. Taking pension benefits under the small pots rules will not trigger the MPAA, nor will solely taking the pension commencement lump sum on a pot designated for flexi access drawdown. The MPAA only triggers when an income is taken from flexi access drawdown. Additionally, if a client has a capped drawdown plan you can, dependent on scheme structure, actually designate further funds toward the plan and provided that you keep the income within the GAD limits this will not trigger the MPAA. Taking a small Uncrystallised Fund Pension Lump Sum or a small income from drawdown may seem sensible at the point in time and it may be necessary at that time. However, it is essential to consider whether the client may want to fund contributions of more than 4,000 in the future. Perhaps another funding vehicle could be used? Returning to the Planning Matters family, Gavin finished his last contract in August Part of his case study was investigating how he could take his retirement income after making a large final contribution. One of the options was taking income from drawdown. If he went down this route then he would trigger the MPAA. Although it looks like Gavin might want to actually stop working, if he changed his mind and decided to start a new contract then he would be limited to the MPAA in force at that time. Definitely one for Gavin to consider when looking at the various retirement income options. Tax relief The talk about changes to tax relief has died down for a bit, but it s well known that the government has been thinking about this. What would a change to tax relief mean? Last year there was discussion of a flat rate, but this year there also seem to be discussions around potentially having different tax relief for different ages. What does this mean now? Any change to tax relief is unlikely to be better than the current system. Therefore, if you re a higher or additional rate taxpayer then it may be wise to make pension contributions before the last spring budget in March If the chancellor did make a change then it could be with immediate effect with anti-forestalling provisions. There s another reason to make contributions before the end of the tax year and that is to make sure that pension contributions help you out of any tax traps. If Margaret makes pension contributions for her daughter Jane before the end of the tax year, it means this efficient tax planning on a family basis can save the family money now and in the future, and Jane won t have a child benefit tax charge for 2016/17. In Margaret s Planning Matters case study she was in the position where she wanted to use the normal expenditure out of income exemption, to make pension contributions for family members. She has many grandchildren and paying pension contributions for them could give them a much better retirement. However, Margaret is also going to make pension contributions for her daughter Jane. Jane has recently gone through a divorce but she is unfortunately stuck in the child benefit tax trap at a time when family funds are low. When Margaret makes the contribution it reduces her estate subject to IHT, Jane receives the pension contribution that helps her retirement income need, and she can also can claim her higher rate relief. The icing on the cake is the fact that this pension contribution takes Jane out of the child benefit tax trap. Margaret has been waiting for the divorce to be finalised before she writes the cheque and this has now happened. Making the pension contribution before the end of the tax year means this efficient tax planning on a family basis can save the family money now and in the future, and Jane won t have a child benefit tax charge for 2016/17. 8 For adviser use only not approved for use with clients

9 For adviser use only not approved for use with clients Like John, those caught in the high earners tax trap, and who are in defined benefit pension schemes in the Pension Input Period, have to be mindful of the fact that the tapered Annual Allowance might apply and take this into account in any calculations. John, another member of our Planning Matters family, may also be thinking about making a large pension contribution if he decides to go ahead with the defined benefit transfer that we explore in his case study. This needs to be before he stops working so he has relevant earnings. This would be sensible as John is caught in the high earner s tax trap (reduction in Personal Allowance for those with income in excess of 100,000) and therefore paying 60% tax. A pension contribution to remove him from the tax trap would mean 60% tax relief. However, those caught in the high earners tax trap, and who are in defined benefit schemes in the Pension Input Period like John, have to be mindful of the fact that the tapered Annual Allowance might apply and take this into account in any calculations. Salary vs dividend vs pensions The change in dividend taxation meant that company owners taking dividends in the higher rate tax band would pay more in tax this tax year than last tax year. A combination of a low salary and dividends may still be the most efficient way to extract money for day-to-day spending, but taking more money out than is needed isn t tax efficient, as shown below. This table assumes that the 5,000 zero rate of taxation for dividends has been used up and the amount that will reach the individual s bank account if withdrawn via dividends after corporation tax and personal income tax liability against pensions being used (25% tax free cash taken, with the remainder taxed in the relevant banding). Salary Dividends Pensions Basic Rate 59.75% 74.00% 85.00% Higher Rate 50.97% 54.00% 70.00% Additional Rate 46.57% 49.52% 66.25% In David s Planning Matters case study, he was taking most of his remuneration from his business through a mixture of a higher salary and a lower amount of dividends. However, David could reduce his salary to the minimum needed for state benefits, increase the dividend taken to use up the rest of the basic rate band, and then make an employer pension contribution of the maximum possible to scoop up all his unused Annual Allowance (currently 170,000 if using Annual Allowance for this year and the three previous years). This would mean that employer and employee NI is saved, tax is substantially reduced and the amount actually in David s hand only reduces by around 7,000. Plus 170,000 in the future bank account. If extracted at basic rate tax on retirement, then he will only lose 15% of that 170,000 to tax. A win-win! Annual planning decisions Every year, your client's individual circumstances must be considered to decide whether there are planning opportunities to be taken advantage of before the end of the tax year. This is even more important if a client s circumstances are about to change. Our Planning Matters family members all have different planning considerations but pensions are a very tax efficient wrapper and should be considered. It s also crucial to make sure that clients are aware of areas which may change in the new tax year. For adviser use only not approved for use with clients 9

10 January 2017 Tax year end planning: Tax allowances and exemptions It s that time again when we need to think about tax year end planning and fully maximise tax allowances and exemptions. Helen O Hagan, Technical Manager, looks into the planning strategies that can deliver considerable tax savings for your clients. Inheritance tax (IHT) Consider Margaret from our Planning Matters family, who is a sprightly eighty year old with four children and several grandchildren. She s recently been widowed and IHT planning is high on her agenda. IHT is increasingly a concern for clients IHT receipts in 2015/16 were 4.7 billion, an increase of 22% on the previous year. We ve seen steady increases each year, but there are simple steps that can be taken to reduce a potential IHT liability. Exemptions > Annual 3,000 exemption > Small gifts exemption ( 250) > Normal expenditure out of income Annual exemption With the annual exemption, a client can give up to 3,000 in each tax year, either as a single gift or as several gifts adding up to that amount the client can also carry forward any unused part of the 3,000 exemption, but if not used in that year, then the carried-over exemption expires. Small gifts exemption The small gifts exemption of 250 can be given to as many individuals as required. As long as the gift to each donee doesn t exceed 250 the exemption applies. If, however, you gift even 1 over the limit, the whole exemption is lost in relation to that done. Normal expenditure out of income exemption Consideration could also be given to starting a pattern of gifts that would qualify for exemption under the 'normal expenditure out of income exemption'. This is particularly valuable given that the exemption has no monetary limit and instead applies where the taxpayer can show that a gift meets all three of the following conditions: > It formed part of the client s normal expenditure > It was made out of income, and > It left the client with enough income to maintain his/her normal standard of living Margaret has an excess of income and it makes sense for her to make regular payments into pensions for her family. Using the normal expenditure out of income exemption means she s immediately reducing her estate by the value of the gifts each year. 10 For adviser use only not approved for use with clients

11 For adviser use only not approved for use with clients Previously, Margaret set up a discretionary loan trust as she was nervous about gifting large amounts of money. Any growth is therefore immediately out of her estate. Over time, Margaret can consider writing off chunks of her loan if she no longer requires access. These write offs will constitute chargeable lifetime transfers (exempt if within the 3,000 annual exemption). This increases the amount available for the beneficiaries of her trust whilst reducing her estate. For certain clients, gifting may also help keep estates below the 2m threshold in order that the residence nil rate band is not tapered on death. This subject is covered by Graeme Robb in his article in this issue of Oracle. Gifting lump sum planning If a gift is not exempt it will fall into one of two categories: 1.Potentially exempt transfers (PETs) these are often gifts of cash or transfers into an absolute trust 2.Chargeable lifetime transfers (CLTs) these are normally gifts into discretionary trusts For those clients who wish to consider lump sum gifting, then the sooner the seven-year clock starts the better. Clients with existing bonds might consider placing them into trust if personal access is no longer required. A bond is an efficient asset to place in trust as it doesn t produce income, meaning there s no need for an annual tax return. Bonds are generally segmented, which means the trustees can assign segments to discretionary beneficiaries (as long as they re over age 18) who can subsequently encash at their own marginal rates of tax. Gifts into and out of trust do not trigger chargeable events for income tax purposes. The transfer into trust will be either a PET or a CLT depending on the type of trust used. David is Margaret's youngest son and a successful business owner. His case study has two parts. One where we look at his corporate investing opportunities and the other focuses on his retirement provision. In David s Planning Matters case study, he had an existing whole of life policy with a sum assured of 100,000, which had never been placed into trust. In that case, were he now to set up a discretionary trust then a CLT would arise. The value is normally market value, which in David s case was the surrender value of 28,000 given that he was in good health. There is, however, a special valuation rule (S167 IHTA 1984) that will apply, which means the value cannot be less than the total premiums paid (less any sums previously paid out). In this case, the total premiums paid are 40,000 and that will be the value that applies. Domicile From April 2017, those who have been resident in the UK for more than 15 out of the past 20 tax years will be treated as deemed UK domiciled for all tax purposes. Their foreign and UK assets will be subject to IHT. Once an individual has become deemed UK domiciled, they will need to leave the UK for six or more consecutive tax years to lose their deemed domicile status. (In practice, once the individual ceases to be UK tax resident, deemed tax domicile is likely only to be relevant for IHT purposes). The head of the family Margaret has estate and inheritance tax planning high on her agenda. Her case study covers things like order of tax rules, dividends and savings income. In Margaret s Planning Matters case study, her daughter-in-law Carol has a Spanish domicile of origin but has been living in the UK for 14 years. She has monies in Spain and she should consider placing these funds into an excluded property trust before she becomes domiciled in the UK. This will mean that once she s deemed domicile, those assets will remain excluded from UK IHT. For adviser use only not approved for use with clients 11

12 January 2017 Income Tax Insurance bonds For any clients who have realised a chargeable event gain on an insurance bond in this tax year, then a personal pension contribution will have the effect of extending the basic rate band by the gross contribution. A contribution made in this same tax year could prevent a top sliced gain from breaching the higher or additional rate threshold. The Prudential tax relief modeller will calculate the benefits of this for specific situations. Tax efficient investing For certain clients, the Enterprise Investment Scheme, Venture Capital Trusts and the Seed Enterprise Investment Scheme will be worthy of consideration. The respective tax reliefs are compared in an article in our Technical Centre. Individual Savings Accounts (ISAs) Our Technical Centre also contains an article on ISAs, exploring the different types and considering other aspects such as ISA transfers. In our Planning Matters family, John s wife Anne has 18,000 in a cash ISA and perhaps she might wish to consider a transfer to a stocks and shares ISA to potentially generate an improved return? We also consider last minute subscriptions, which is always important in the context of tax year end planning. CGT There are three key elements in tax year end CGT planning: > Realising losses > Ensuring use of the annual exempt amount (AEA) > Making negligible value claims (if it can be agreed with HMRC that shares are of negligible value, the loss arising is treated as a realised loss and is available for set-off against gains) Gains realised by a client up to the annual exempt amount (AEA) are CGT free. The current AEA is 11,100. Use it or lose it! If the client wishes to sell shares standing at a gain, and repurchase shortly afterwards, then remember the bed and breakfast anti-avoidance rules, which match disposals against acquisitions on the same day and against acquisitions within the 30 days following the disposal. These rules are intended to deter those simply looking to realise a gain, and increase the base cost for future disposals (or those looking to realise an allowable loss). The 'bed and breakfasting' anti-avoidance rules don t apply in the following situations: > Repurchase after 30 days > Repurchase of non-identical shares/units > Repurchase made by spouse > Repurchase within an ISA or pension A quick refresher on losses is also worthwhile. Clients are subject to CGT on total chargeable gains for the year of assessment reduced by: > Allowable losses > The AEA The treatment of losses depends on whether they are losses of the same year or losses of earlier years of assessment. Procedure for losses: 1.Deduct any current year losses from current year gains even if the net figure falls below the AEA. Any excess losses are then carried forward and set against gains which arise in the future. 2.If the net figure above exceeds the AEA, and there are unused losses brought forward from a previous tax year then deduct those losses, but just enough to reduce the net gains to the AEA limit. 3.If there are still unused losses from a previous year after they have reduced gains to the AEA, they can be carried forward to future years. What does this mean from a planning perspective? There is no point, from a tax perspective, in crystallising a loss when net gains in that same year of assessment are within the AEA. Losses crystallised in a year of assessment in which there are no gains will allow the full amount to be carried forward. If one spouse or civil partner has realised gains exceeding the AEA and the other spouse has uncrystallised losses, consider an exempt inter-spouse transfer followed by a disposal. In our Planning Matters family, we have a married couple, John and Anne. In the case of John, he owned income OEICs standing at a book gain of 40,000 and a rental property standing at a book loss of 30,000. John decided to encash these investments for planning purposes meaning that the 30,000 loss was deducted from his 40,000 gain giving rise to a net figure of 10,000, which is below his AEA of 11,100. Summary Simple planning strategies can deliver considerable tax savings for clients. It s important not to overlook the basics, and not to put off year end planning. Further support: Tax Relief Modeller Planning with EIS, VCT and SEIS article ISA planning article 12 For adviser use only not approved for use with clients

13 For adviser use only not approved for use with clients Planning now for the residence nil rate band Graeme Robb, Senior Technical Manager, writes about the residence nil rate band and the advice opportunities it presents for you when tax year end planning with your clients. In our Planning Matters family, we considered a widow Margaret, and married couple John and Anne, for whom the residence nil rate band (RNRB) is influencing planning even before its introduction. The broad idea behind the RNRB is that by 2020/21, the allowance of 175,000 will work in tandem with the existing 325,000 nil rate band (NRB) to enable a couple to pass on a total of 1m to children/grandchildren free of inheritance tax. If only it were that simple Overview An estate will be entitled to the RNRB if the individual dies after 5 April It only applies to the estate. It doesn t apply to gifts made during a person s lifetime even if those gifts become taxable because they ve been made within seven years of death. The individual must have owned a home, or a share of one, so that it s included in their estate. Direct descendants of the individual must inherit the home, or a share of it. For estates valued at more than 2 million, the RNRB (and any transferred RNRB) will be gradually withdrawn or tapered away. A direct descendant of an individual is defined as a child, grandchild or other lineal descendant of the individual (includes a spouse or civil partner of a lineal descendant including their widow, widower or surviving civil partner). A child will include step, adopted and foster children, and also a child where the individual was appointed as a guardian or special guardian for that child when they re under 18. Nephews, nieces, siblings and other relatives are not included. The home must be left to direct descendants so that it becomes part of the beneficiaries estate following the death. Where a home is left to beneficiaries who are a mixture of direct descendants and other individuals, the value of the home must be apportioned between direct descendants and others. An estate will also be entitled to the RNRB when an individual has downsized to a less valuable home or sold or given away their home after 7 July Gifts with reservation will qualify as HMRC treats the home as being included in the estate. So the RNRB may be available for that home if it s given away to a direct descendant. The maximum available amount of the RNRB will increase yearly, and for deaths in the following tax years it will be: > 100,000 in 2017/18 > 125,000 in 2018/19 > 150,000 in 2019/20 > 175,000 in 2020/21 In later years, the maximum RNRB will increase in line with inflation (based on the Consumer Prices Index). For married couples and civil partners, any unused RNRB can be transferred when the surviving spouse or civil partner dies after 5 April 2017 regardless of when first death occurred (see case study 2 later). For adviser use only not approved for use with clients 13

14 January 2017 Quantifying the RNRB The amount of the RNRB due for an estate will be the lower of: > The value of the home, or share, that s inherited by direct descendants > The maximum RNRB available for the estate when the individual died Any transferred RNRB from a deceased spouse s or civil partner s estate can be added to the amount of the RNRB due for an estate. The order of set-off is then as follows: 1.The combined RNRB is set against the value of the estate, then 2.The existing NRB (and any transferred NRB) is set against the remaining value of the estate. If the value of the home is less than the maximum available RNRB, the unused amount of RNRB can t be set against the other assets in the estate. But, the unused RNRB would be available to transfer to the survivor s estate when they die and leave a home to their direct descendants. Transfer of any unused RNRB to spouse or civil partner If the RNRB wasn t fully used upon first death, the unused percentage (not the unused amount) can be transferred to the survivor in a similar way to the existing NRB. This ensures that if the maximum amount of RNRB increases over time, the survivor s estate will benefit from that increase. The unused RNRB is known as the brought forward allowance. Where the first of the couple died before 6 April 2017 then 100% of the RNRB will be available for transfer unless the value of their estate exceeded 2 million and the RNRB is tapered away. Case study 1 A client dies in 2020/21 leaving a flat worth 100,000, and other assets of 400,000 to her son. She leaves the rest of her assets of 500,000 to her husband. > RNRB will be 100,000 (being the lower of 100,000 and 175,000) > NRB will be 325,000 Total value of estate 1,000,000 Exempt gift to spouse ( 500,000) RNRB ( 100,000) Taxable 400,000 NRB ( 325,000) Subject to IHT 75,000 RNRB unused amount transferable to husband s estate = 75,000 NRB fully utilised (no transfer to husband s estate) Case study 2 A client died in 2015 and left his entire estate to his wife. This was prior to the RNRB being available. On his death, the RNRB simply couldn t have been used, so 100% is available to transfer to his wife's estate. She subsequently dies in 2019/20 and leaves all her estate, including a home worth 400,000 to her daughter. In 2019/20, the maximum available RNRB is 150,000. His wife's executors make a claim to transfer the unused RNRB from her late husband. Total RNRB for his wife's estate will be 300,000 ( 150,000 + (100% x 150,000)) 14 For adviser use only not approved for use with clients

15 For adviser use only not approved for use with clients If an individual has had more than one spouse or civil partner and they make a claim to transfer the unused RNRB from each one, the total transferred RNRB cannot be more than 100% of the maximum available amount. Planning for remarried widows/widowers was considered in the Planning Matters case study of John and Anne. The home that the survivor lived in and leaves to their direct descendants doesn t have to be the same home that he/she lived in with their late spouse or civil partner to qualify for the RNRB. What is a home? The home that is included in the deceased s estate must have been lived in at some stage by the deceased. If the deceased owned more than one home, the personal representatives can nominate which one should qualify for the RNRB. A property that the deceased owned, but never lived in, such as a buy-to-let property, will not be eligible for the RNRB. It doesn t have to be in the UK but it must be within the scope of IHT. Those domiciled in the UK are subject to IHT on their worldwide assets. Non-UK domiciled individuals are only subject to IHT on their assets in the UK, so in those cases, the home must be located in the UK. The value of the home for RNRB purposes will be the open market value of the property less any liabilities secured on it such as a mortgage. When is a home inherited? Direct descendants will inherit a home if it s left to them: > On death in the deceased s will > Under the rules of intestacy > By some other legal means as a result of the person s death Where the home is not specifically mentioned in the deceased s will, it can be inherited as part of the residue of the estate, and where the residue passes to a number of different people, HMRC treats each as inheriting a proportion of the home. Direct descendants must become entitled to the home on the death of the deceased. Case study 3 In a client's will, there is a condition that her grandchildren have to reach age 25 before they can inherit her home. In cases such as this where the property is held in a trust subject to a contingency, the RNRB wouldn t apply. This is because the grandchildren have not inherited the home on her death. An estate could still be eligible for the RNRB if the deceased s personal representatives sell the home as part of the administration of the estate and pass the sale proceeds to the direct descendants. Case study 4 A client died in 2019/20 leaving his house, valued at 500,000, to three grandchildren as part of the residue of his estate (the maximum RNRB in 2019/20 is 150,000). The three grandchildren don t want to keep the property jointly. The personal representatives sell the property and distribute the sale proceeds between the three grandchildren. As the home passes to the grandchildren under the terms of his will, RNRB of 150,000 will be available. The direct descendants can also inherit the home if it s left to them as a result of amending the deceased s will by a deed of variation. Trusts The subject of trusts occurs where a home, or a share of one, is held in trust before an individual s death; or where it is transferred to trustees on death. The availability of the RNRB will depend on the type of trust as this determines whether HMRC treats the home as part of a person s estate for IHT purposes. It will also determine whether HMRC treats that person s direct descendants as inheriting the home. Where the deceased owned the home outright, the lineal descendants can inherit: > Absolutely > In a qualifying interest in possession trust, or > If a child of the deceased, in a trust for bereaved minors or an trust Gifts into a discretionary will trust will not benefit from the RNRB (even if the beneficiaries are limited to lineal descendants). Where the deceased had an interest in possession, the RNRB will not be available unless the lineal descendants either: > Receive an absolute interest, or > A successive qualifying interest in possession is created (i.e. a disabled person s interest) For adviser use only not approved for use with clients 15

16 January 2017 Tapering The RNRB will be reduced by 1 for every 2 that the value of the estate is more than the 2 million taper threshold which may increase in line with inflation after 2020/21. For taper purposes, the value of the estate is the total of all the assets less any debts or liabilities. The following are ignored: > Exemptions such as spouse or civil partner exemption > Reliefs such as agricultural or business property relief Also, ignore assets that are specifically excluded from IHT (excluded property). Tapering can also reduce the amount of RNRB available to transfer to a surviving spouse or civil partner, even if no RNRB is used on first death. Case study 5 A client dies in 2018/19 leaving an estate valued at 2,100,000. She leaves her 450,000 home to her husband and everything else to her children. Maximum RNRB in 2018/19 is 125,000. Her children don t inherit the home, so her estate cannot use any RNRB. The RNRB available to her estate is reduced by 50,000. If she had left her home to her children, the RNRB would have been 75,000. So the amount of unused RNRB is 75,000. In other words, the percentage of unused RNRB is 60%. Her husband dies in 2020/21 when the maximum RNRB is 175,000. His estate is 1.8 million (including the home now worth 500,000, which is left to his children). The amount of RNRB available to transfer to his estate 175,000 x 60 = 105,000. Her husband's estate qualifies for RNRB of 175,000 plus a further 105,000 transferred RNRB from her. Downsizing If an estate doesn t qualify for the full amount of RNRB, the estate may be entitled to a downsizing addition if all these conditions apply: > The deceased disposed of a former home and either downsized to a less valuable home, or ceased to own a home, on or after 8 July 2015 > The former home would have qualified for the RNRB if it had been kept until death > At least some of the estate is inherited by the deceased s direct descendants Where the deceased has downsized to a less valuable home, there will only be lost RNRB when the value of the home at death is below the maximum RNRB available to the estate. The downsizing addition cannot exceed the maximum amount of RNRB that would have been available if the disposal or downsizing hadn t happened. If the deceased disposed of more than one home between 8 July 2015 and their date of death, the personal representatives can choose which disposal is taken into account to calculate the downsizing addition. Where the downsizing occurs before 6 April 2017, HMRC treats the maximum available RNRB at that time as 100,000. Claiming the RNRB Although no formal claim is required, HMRC will need details of the amount due and supporting information on the IHT return following a death. A claim will however be necessary to transfer any unused RNRB from the estate of a deceased spouse or civil partner. The personal representatives of the survivor must make this claim within two years of the end of the month in which the person dies. In addition, a claim will be required for any additional RNRB as a result of downsizing/disposal before death. Again, the deceased s personal representatives have a two-year timescale. These time limits can be extended in some circumstances. Summary The RNRB provisions will be confusing for clients and will therefore represent an advice opportunity. It should be remembered that it only applies to transfers on death and therefore property gifted prior to death will not qualify. For high net worth clients, the 2m threshold will be particularly relevant and lifetime gifting (of other assets) might prevent a restriction of the RNRB. This planning was explored in Margaret s Planning Matters case study. The threshold applies to the value of the estate on death and does not include failed PETs. Bear in mind also that if all assets are passed to the surviving spouse/civil partner and the survivor passes away with a combined estate of more than 2.7m then the RNRB will be lost in its entirety. Although welcome, the RNRB gives rise to a further complexity in the world of estate planning. More than ever, advisers and solicitors need to work together for the benefit of clients. 16 For adviser use only not approved for use with clients

17 For adviser use only not approved for use with clients Is three a crowd? The pension versus ISA debate has raged on and off for years. Les Cameron, Head of Technical, asks if three s a crowd. I think the debate was arguably settled by pensions freedom when the biggest downside of pensions limited access and poor death benefits was fundamentally changed. Total access, albeit with potential income tax implications and better death benefit taxation was in my view a debate settler. There are of course several considerations in the debate, and a particular set of client circumstances may make the choice simple. I usually start off by a certain premise. When asked if they would rather have 100% of 80 or 85% of 100, the overwhelming majority of people would choose the latter. 85 is more than 80, I ll have the one that gives me the most money! That to me is the fundamental starting point. If you put 80 in an ISA you get that back. A basic rate taxpayer puts 80 in a pension, they get a 25% government top up (that s what basic rate tax relief is after all) making it 100. With tax free cash meaning only 75% of this is subject to basic rate tax ( 15) then you get 85 back. Different tax situations give different answers but there is one simple rule. The tax wrapper that has the greatest differential between the tax relief on entry and tax payable on exit returns the most money. For adviser use only not approved for use with clients 17

18 January 2017 With the ISA there is no tax relief on the way in and no tax on exit so that differential is 0%. In the basic rate taxpayer example above the differential is +5% (20% 15%) as the tax free cash reduces the effective rate of tax on exit by 25%. So, whilst acknowledging there are potentially many different moving parts to the pension / ISA decision if access is required pre 55, ISA wins you d not normally have access to your pension pre 55. If it s post 55 the pension wins, where there is any sort of positive tax differential which should be the norm, not many people go up a tax bracket as they enter retirement. In a nutshell, the one that gives the highest net return at the point the money is required wins. And now we need to have a fresh look at the pension ISA debate with the new Lifetime ISA on the horizon. And it effectively has tax relief on entry and potential for tax on exit. So, a quick look at the mechanics of LISA then we can get back to the debate. The LISA is a new variant on the ISA theme. This one, designed to encourage younger savers and help with the dilemma of whether to save for the first home or retirement by catering for both! The facts as they stand (at time of writing, it s still a bill and being debated in parliament) as at 12 December General It basically has all the same things as a normal ISA, no tax on income or gains, the allowable investments are the same, will be in your estate for IHT unless business relief qualifying assets are held, will be available for creditors and can be transferred between different LISA managers etc etc. Contributions are made from post-tax income and withdrawals, subject to certain conditions, will be tax free. However, given the government top up, there are some key differences. Eligibility From April 2017, UK residents and Crown Employees and their spouses or civil partners, aged between 18 and 40 can have one. Contribution Limit Contributions limited to 4,000 per tax year. This counts towards the overall ISA allowance of 20,000 from the 2017/18 tax year. For the 2017/18 tax year only, any Help to Buy ISA funds saved before 6 April 2017 can be transferred into a LISA without the value counting towards the LISA contribution limit. Thereafter any transferred-in funds will count towards the allowance. Government bonus Contributions made from the age of 18 up to the age of 50 get a top up. The top up is stated as 25% and is the equivalent of basic rate tax relief on a pension i.e. 80 becomes 100. For 2017/18 any Help to Buy ISA funds transferred in will qualify for the bonus. The bonus will be claimed directly from HMRC by the provider of the LISA. For 2017/18 this will be at the end of the tax year, thereafter it will be monthly in arrears. Withdrawals penalty free The government can make regulations on the purposes for which monies, including any bonus, can be withdrawn without suffering the penalty outlined below. These are currently: > any reason after age 60, > to buy a first home worth up to 450,000 at any time (conditions apply) from 12 months after first saving into the account, > on death, and > on terminal illness, where life expectancy is less than 12 months. Penalty access Where withdrawals are not penalty free then there is a government charge of 25% of the amount withdrawn. This is intended to recover the government bonus including any growth with a small additional charge. You could liken this to a tax on unauthorised withdrawals as it has the same effect as tax. It reduces the net return. The small additional charge is actually 6.25% when you run the numbers: Put 4,000 in and get the 1,000 bonus Charge = 25% x 5,000 = 1,250 Net return 3,750 Difference between amount invested and amount returned / 4,000 = 6.25% The charge will normally be paid directly to HMRC by the ISA provider. Special rules There are some tweaks being made to the rules for 2017/18. For 2017/18 only there will be no government charge on withdrawals from LISAs. However, if an individual wants to withdraw from the LISA in 2017/18, for any reason other than terminal illness, they must fully close the account. Doing so will essentially cancel that LISA account. There will be no government charge due on the closed account, but there will also be no bonus paid on it at the end of the tax year. You could open a new LISA later on in that tax year if you wished, without it contravening the ISA rules. So that s it on the new entrant to our debate, which brings us back to the debate itself. The underlying premise is that broadly speaking it is sensible to invest in the thing that gives you the highest net return at the time you need it. The determinant of highest net return is the entry / exit tax differential all the wrappers should have broadly the same tax treatment and charges whilst invested. 18 For adviser use only not approved for use with clients

19 For adviser use only not approved for use with clients The table below shows these tax differentials for our options: Tax status Tax differential Entry Exit ISA LISA with Penalty LISA Penalty free Pension after tax and PCLS 0% 0% 0% -5% 20% 20% 20% 0% 0% -5% 20% 20% 20% 20% 0% -5% 20% 5% 20% 40% 0% -5% 20% -10% 40% 0% 0% -5% 20% 40% 40% 20% 0% -5% 20% 25% 40% 40% 0% -5% 20% 10% 45% 20% 0% -5% 20% 30% 45% 40% 0% -5% 20% 15% 45% 45% 0% -5% 20% 11.25% Note the monetary return will be different to the tax differential above, as per the example for 6.25% monetary loss for the 5% small additional charge. Where the pension ISA debate could be summed up with when you want access, the change as I see it with LISA coming along is when you want access and what you want access for. As can be seen in the table above, a penalty free LISA is very attractive in most tax scenarios. It will always beat an ISA and normally be better than a pension. Where it is equal with the pension you would probably favour LISA as there is unlimited tax free access and no need to manage tax bands. Although the secondary considerations may then become the main driver to decide. A post penalty LISA is the opposite, it s not looking good other than in the most unusual circumstances. This is just number crunching of course; there will be other considerations. Will pensions change? The IHT / access to creditors advantages of pensions would seem to be a second order consideration at most times but probably all the time for an 18 to 40 year old. On IHT, perhaps grandparents or parents could be the ones doing the funding as part of their IHT planning? Helping your young ones onto the housing ladder with a government top up whilst reducing your IHT bill would appear very attractive. Probably the biggest one will be, how will the FCA view LISA instead of a matched employer contribution? It seems a bit like a pension opt out situation to me. Permissions would be needed for advising on a LISA where workplace pension contributions stopped as a result. And of course if you have generous employer matching then pension will win the numbers game above all the time. So where does LISA fit? I m sure the debate will develop as the bill winds its way through parliament and we won t have heard the last of it. Is three a crowd? There are myriad options when it comes to financial planning and there will most definitely be a place in the crowd for LISA. In general, all you need to do is find an 18 to 40 year old with disposable income who wishes to save and has yet to buy their first home, or are definitely of the opinion they will not need the money until they are over 60. For adviser use only not approved for use with clients 19

20 January For adviser use only not approved for use with clients

21 For adviser use only not approved for use with clients AND THE HITS JUST KEEP ON COMING! Paul Fiddell, Head of Business Development (Investments), explores the expectations for investment markets in the coming year. No prizes for guessing where the title for this article comes from, as it s a pretty famous one. But, apart from being a line used by the character played by Tom Cruise in the classic movie A Few Good Men, this could easily be used to describe the expectations for investment markets over the coming year. There are undoubtedly lots of things on the horizon, many of which could have largely unpredictable outcomes and, if nothing else, 2017 promises to be a year of some uncertainty. So what do we see as the big issues, and questions that advisers should be considering, for 2017? 1. Political Risks For a starter for ten, it is very clear from the political shocks of 2016; from Brexit, through a Trump win in the US Presidential elections and on to the defeat for Matteo Renzi in the recent Italian referendum, that politics are set to have an even greater influential, and potentially more treacherous, role in driving investment markets. This can only lead to greater uncertainty and volatility for investors. And when you consider that in 2017 we have general elections planned in the Netherlands, France and Germany, the latter two being amongst the big economic powerhouses in the EU as shown overleaf, and all with the potential for more political shocks, then it should be clear to all that markets could be in for a bumpy ride. For adviser use only not approved for use with clients 21

22 January 2017 Forthcoming general elections in Europe in 2017 Netherlands 4.6% of EU GDP* France 14.8% of EU GDP* Germany 20.6% of EU GDP* * Source: Eurostat. GDP figures are for 2015 and compare individual GDP against total for 28 EU countries. 2. The desire and ability to spend We re increasingly in a world where there s a greater focus on fiscal policy and spending to generate growth. Now whilst we ve been here before, the problem this time around is that gross debt in many developed economies is running at high levels. For example, based on IMF numbers and compared to GDP, the US and UK government gross debt is 108% and 89% respectively. That leaves little room for fiscal expansion and for policymakers to be too aggressive in their approach. It s also not inconceivable that one possible consequence we might see from this is that sovereign credit rating downgrades will become a growing feature over the next few years and that additional risk premiums might need to be built into several government bond markets. 3. What next for the UK? In the short term, after the referendum on the EU, we saw a largely currency fuelled rally in UK equities as Sterling devalued pretty rapidly. Obviously this was unlikely to be sustainable in the longer term and we now wait for the inflation tick up as companies who had previously hedged their currency positions unwind them. There have been a number of companies such as Mothercare reporting that prices will have to increase in 2017 to offset the higher import costs that they face once their currency hedging arrangements currently in place come to an end. 4. Late cycle valuations look high We have a number of developed economies that can be viewed as being in the late cycle phase with stretching valuations and softening of earnings. The US and UK definitely fall into this category with the Eurozone perhaps a little further behind. Our own research shows that starting valuation really starts to matter, in terms of explaining equity returns, over the medium to longer term. Measures such as cycle adjusted PE (price earnings) can explain around half of the variance of returns over a five-year term. Investor sentiment is relatively fragile and, whilst there is always the opportunity to capitalise on bouts of sentiment swings, getting on the wrong side of things could be costly for investors. 5. What next for China? This seems to be a question that has been with us for some time, but with multiple parts. How does the Chinese economy move from being largely investment led to one that s more consumption and service led? Are we looking at a hard or soft landing? What about the currency issue? Growth in China has recently stabilised, due to policy support and strong credit growth. Whilst it can be reasonably expected to see growth marginally slowing in the absence of further large stimulus, the concern is still the high and growing level of debt, particularly on the part of Chinese corporates. These vulnerabilities will continue to grow, complicating the task of rebalancing the economy away from investment and towards consumption, the implementation of deeper structural reforms, and allowing free market forces to play a greater role in determining the allocation of resources. If I was going there, I wouldn t start from here! So, in summary, the short term looks tricky, and the medium term outlook is cloudy, possibly bleak, and the old joke with the punchline, If I was going there, I wouldn t start from here, comes to mind. But we have to remember that it is when things are uncertain, there is a clear and present danger (to paraphrase Tom Clancy) that we extrapolate the few data points that are available from developments in places such as the UK and US, developments that have potentially seismic implications, and overreach our conclusions. 22 For adviser use only not approved for use with clients

23 For adviser use only not approved for use with clients Of course a bumpy ride doesn t have to have just negative consequences; market volatility can, and does, work both ways, and in certain respects we need that volatility to give us the risk premium that s often being searched for. That s not the problem or the issue. The problem is managing clients expectations during the period of volatility and helping them to navigate their way through these potentially very choppy waters. Asset allocation holds the key As is often the case, asset allocation will be a key decision for advisers and clients alike. Deciding upon which asset classes to use, in what blend and in what proportion, will be an essential element of driving returns and managing risk. This will not only take knowledge and expertise, but experience and nerve. Understanding that it s sometimes right to hold an asset allocation position for the medium/longer term, even though that may seem contrary to short-term news flow. Maintaining perspective is key and it s always important to place current events into a historical context. Prudential has been around since 1848, and Prudence has been the public face for all of those years since. She has looked down on wars, revolutions, liberations and great inventions; not to mention economic boom and bust. In modern parlance; she has been there, done it and bought the t- shirt. An interesting observation is that a prudent act was thought to combine memory, awareness and foresight, showing understanding of past, present and future. Clearly now is very much a time to act prudently in terms of asset allocation. At a very simplistic level, clients with funds to invest are going to be looking for capital protection at the very least and value protection if at all possible. There s a general consensus that returns available going forward are going to be lower than we have perhaps been used to. In those circumstances, what will harm you most is not the lack of growth per se, but the volatility and downside when it comes and it will! With limited upside, it won t take much of a downturn to wipe out your potential for growth, over and above the original investment amount, for a number of years. Just looking at the maths, at 4% pa growth, an 8% downturn takes 26 months to recover from, and that is just back to parity. The benefits of smoothing returns Smoothing, alongside a well-diversified multi-asset fund, can offer investors a degree of peace of mind during volatile times. Yes, the process will smooth out both peaks and troughs, and there may be times when the markets have a growth spurt and the smoothed fund appears to be lagging behind. However, this should be compensated for when the markets enter a period of downside volatility. Indeed it could be argued that there is a cost to not having smoothing in terms of the higher growth rate that will be needed for an unsmoothed fund, to compensate for the periods when the market is falling. This can be illustrated by looking at a hypothetical example of a smoothed return investment, growing by say 5% pa, and with fixed withdrawals being taken regularly. What is the additional growth required to match the value after 20 years, assuming investment growth is now not linear and there is an 8% fall in value every fourth year? The results, shown in the chart below, are surprising; it requires an additional 2.27% pa growth! So back to our friend Tom Cruise, and his statement that, The hits keep on coming promises to be a very challenging year with lots of hits ; more reason than ever to stick to a tried and tested process for asset allocation, to act prudently and to look to all mechanisms for helping your clients steer through the choppy investment waters ahead. 180, , , , , , , , ,000 90,000 Smoothed fund, linear growth of 5% pa, with no fails. Monthly withdrawals of 3% pa based on original investment. No smoothing, linear growth of 7.27% pa, assume 8% fall in value every 4th year, with first occuring at end 1st year. Monthly withdrawals of 3% pa based on original investment. 80, Months Source: Prudential. Hypothetical example purely for illustrative purposes only. The figures shown are based on an investment over 20 years and show the growth rate required to provide at least the same value at the end of the term under different conditions. Any plan charges or adviser charges are ignored for the purposes of this example. For adviser use only not approved for use with clients 23

24 January 2017 Active or passive management of your client bank? Graeme Ballantyne, Business Consultancy Manager, explores how you can utilise the data you have in your back office system to demonstrate your relevance to clients and unlock opportunities to develop more business from your client bank. 24 For adviser use only not approved for use with clients

25 For adviser use only not approved for use with clients Do you see using your back office system as a chore? Do you think it s someone else s responsibility to ensure the data is correct? Do you see your back office system as an asset or a liability? If you answered yes to either of the first two questions, and you think your back office system is a liability, then you re exhibiting a few of the characteristics that indicate you re taking a passive approach to managing your client bank. This can seriously impact your income potential. Relevance = potential for revenue for you The first question a client will ask themselves when they receive any communication from you is, How is this relevant to me right now?, and the second question will be, Do I need to take action on this right now? Challenge yourself to make sure that the communication you send to your clients this quarter allows your clients to answer both those questions with Yes. The key to making your communication relevant is threefold. First, keep the message simple and focused. Ideally it should be a single topic. Second, filter your client bank so you can identify clients that are similar ages; have similar life stages; have similar attitudes to risk; and have similar needs, goals or objectives. This allows you to keep the message simple, focused and relevant. Finally, focus on the benefits the client may receive by taking action with you now. Segmentation or filtering? Some firms have taken the opportunity to segment their clients into groups based on levels of wealth and/or adoption of different ongoing propositions. That s a start, but not all clients in your segments will have the same needs or preferences. By using filtering you can be very specific about the types of client you want to communicate with, which, in turn, makes it easier to increase the relevance of your communication. As an example, you could filter your clients that are aged over 50 into groups based on the following model: Where are you now? Explore each stage to see where you are in your retirement journey Pre - Retirement Some way off Nearly there At - Retirement Choices and decisions Then you could have a campaign to clients who are between 10 and 15 years away from taking their retirement income (some way off). You could include the following points in your letter/ You may need help to think through: > The age you may want to retire at > Deciding how much income you might need to live a comfortable life > Understanding the amount of savings required to create the income you want/need > Building confidence your money will not run out > Reviewing existing retirement plans and identifying any savings gaps > Understanding the different options open to you > Maximising savings and minimising tax and risk > Thinking about protecting some of the savings you already have Would this change the type of conversation you have with your clients? Using some of the tools and calculators you have at your disposal, would you find any opportunities to improve their prospects in retirement? That s just one small example, so think what you could achieve if you actively managed your client bank like that all the time! Greater freedom In - Retirement Slowdown Later Life > Do you now see your back office system as an asset? > Are you now going to actively manage your client bank? > Are you going to enjoy the increases in turnover and profit by being even more relevant to your clients? For more details about how the Business Consultancy team and their resources could help your business, please contact your Prudential Account Manager. Next steps > Read this edition of Oracle and identify the different characteristics of clients who may benefit from the opportunities discussed. > Look to filter your database (back office system) to identify clients who may benefit from the advice. > Create a compelling or letter to engage your clients. > Manage the communication process. > Review the results and adapt as necessary. For adviser use only not approved for use with clients 25

26 pruadviser.co.uk Helping you demonstrate the value of financial advice Extracting Company Profits Tool Business Development Manager Colin Simmons explores Prudential s range of tools and calculators, and how they can help support your conversations with your clients. Many of our subscribers to Oracle will be aware of the huge range of technical support Prudential provides advisers. One of the most frequently visited areas of our adviser website is the tools and calculators section. It contains a plethora of tools to assist advisers, ranging from calculators that help with school fees, taxation and inheritance planning, to our new Retirement Modeller. Around this time of year we have a lot of enquiries regarding end of tax year planning. This year, two tools in particular have proved very useful in respect of 2016 tax changes. 26 For adviser use only not approved for use with clients

27 Annual Allowance Calculator Retirement Modeller Extracting Company Profits Tool The Extracting Company Profits Tool allows an adviser to analyse the most efficient way to extract profits from a company, comparing salary, divided and pension contributions. April 2016 saw the introduction of a new 5,000 dividend allowance, meaning many company directors have reviewed their remuneration strategies to see if taking large dividends is the most tax efficient method. Our Extracting Company Profits Tool has assisted many advisers with this analysis. Annual Allowance Calculator Another change to taxation in 2016 was the introduction of the tapered Annual Allowance for pensions tax relief. There s often confusion about which method of calculation is required for working out the limits to either the threshold or adjusted income amounts that apply to the taper. To accommodate this, we ve added an additional feature to our Annual Allowance Calculator that uses a simple method to calculate an individual s tapered Annual Allowance. Visit find more information on extracting company profits or tapered Annual Allowance. For adviser use only not approved for use with clients 27

28 January 2017 Retirement Modeller We ve also recently launched a new and improved Retirement Modeller. It s an enhanced version of our already successful modeller and takes into consideration crucial regulatory aspects of retirement planning, including sustainability of income and underestimating life expectancy. The retirement modeller uses the expected returns from our PruFund range and shows survival probability data for life expectancy. Survival probability data gives a much clearer expectation to a client around the risk of drawdown. The modeller includes additional features like other income streams, guaranteed income benefits and an adviser note section. Its launch coincided with the launch of Prudential s new online retirement proposition the Prudential Retirement Account. Visit for more information. Example output from the Retirement Modeller 4 400k 40k 100% Contributions ( ) Fund value (at end of year) ( ) 300k 200k 100k 30k 20k 10k Income ( ) 75% 50% 25% Survival probability 0 0k The policy anniversary during the age displayed 0k 0% Other income Income Fund value Survival probability Contributions Source: Example output from the Prudential Retirement Modeller If you d like further information on any of our tools and calculators, please contact your Prudential Account Manager. 28 For adviser use only not approved for use with clients

29 Whilst I review my clients plans throughout the year, there is a peak of activity leading up to tax year end To help h you get ready and make the most of your tax year end conversations, t i ons, visit our tax planning website.. TIMETOTALK - TAX PLANS - When it s time to talk tax year end, our dedicated team of account managers and our online hub full of tools, calculators and expert technical support can help you prepare. We re here to help you get the most out of your client conversations. For UK financial advisers only, not approved for use by retail customers. Prudential is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is used by other companies within the Prudential group. Registered office at Laurence Pountney Hill, London, EC4R OHH. Registered number Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.