TECHTALK NOVEMBER 2017 ISSUE 7 VOLUME 16

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1 TECHTALK NOVEMBER 2017 ISSUE 7 VOLUME 16

2 2 techtalk WELCOME TO THE NOVEMBER EDITION OF TECHTALK EDITOR Paul Rutkowski Paul is a senior manager within Scottish Widows, having joined the Group in He has over 20 years of experience across a broad spectrum of financial services roles including workplace pensions, individual pensions, proposition management and business development. In this edition of TechTalk, I m delighted to introduce a wide and varied set of articles. Alongside our usual technical authors, we have brought together insight and ideas by a number of guest authors including Robert Cochran, Iain McGowan and Gareth Davies. So I m hoping that there will be topics of interest for all advisers. If you glance across to the contents page, you ll find a full list of the articles and authors for this edition, including a brief summary of each article. This month s articles fall into three key themes. Technical planning updates and opportunities ranging from the FCA s defined benefit advice consultation paper CP17/16, through pensions and divorce, to taking advantage of the small pots rules. Client vulnerabilities whether that s longevity risk, loss of mental capacity, or the blot on the financial planning landscape that s pension scams. Pensions engagement from what might get the self-employed on board, to a report from our Pensions Awareness bus tour. The Financial Planning team isn t just responsible for bringing you Techtalk. Advisers and paraplanners can access a wide range of supporting material produced by the same team. Just visit the Scottish Widows Adviser Extranet and go to the Financial Planning page: If you d like to find out more about how we can support you with defined benefit advice, please get in touch with your usual Scottish Widows contact or go to: Enjoy the read. Paul Rutkowski

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4 4 techtalk LONGEVITY RISK AND THE IMPACT ON RETIREMENT PLANNING Accounting for longevity is one of the biggest challenges facing investors in retirement. IAIN McGOWAN Iain joined Scottish Widows in 1999 and is Head of Fund Proposition. He has previously held leadership roles in distribution and proposition management. Iain is a member of Scottish Widows Independent Governance Committee, which has responsibility for oversight of the scheme members interests, is Chairman of our Luxemburg SICAV and is a Director of various property investment vehicles. On the face of it, the pension reforms of 2015 simply gave investors much greater choice and flexibility when it came to accessing their savings. But the changing face of retirement means they were just one part of a much bigger picture. Retirement is increasingly a phased affair, not only in terms of working patterns but also in the way that later life finances are structured. There are several reasons for this, the foremost being demographics. Accelerating life expectancy means that a 65-year old man in the UK has an average of 18.5 more years of life ahead of him, while women of that age will live on average for another 20.9 years, according to the most recent data from the Office for National Statistics. These are averages, of course someone could live for just one or two years in retirement, but there s also a growing chance that they could live to 100. A retiree with sufficient savings to get them to 85 could still be left with an empty pension pot if they live beyond that point. A study by the Pensions Policy Institute (PPI) and sponsored by State Street Global Advisors (SSGA) suggests that people tend to underestimate their life expectancy compared to national projections. In particular, survey participants in the 55 to 70 age range significantly underestimated their chances of surviving to older ages (i.e. beyond age 90), indicating that they may fail to understand the need to protect themselves against longevity risk A 65-year old man in the UK has an average of 18.5 more years of life ahead of him, while women of that age will live on average for another 20.9 years

5 techtalk 5 At the same time, however, there is a tendency to overestimate the level of income to expect in retirement. The average annual income that people expect in retirement is 27% ( 6,445) lower than the amount they will need in order to be financially comfortable in retirement, according to research by Opinium. This is due partly to the unexpected outgoings that can arise in retirement, such as ongoing debt repayments (including mortgages), financial support for children and the need to fund long-term care. The latter can have a particularly disruptive impact on later life finances. Costs vary across the UK as care is devolved. But in England, for example, average residential and nursing care costs amount to around 700 and 1,000 a week respectively. All of this was relatively immaterial in the days when a large proportion of workers retired with defined benefit (DB) pensions that provided security of income until death. But the demise of DB schemes, coupled with inadequate private pension provision, makes rising life expectancy somewhat problematic. With the shift from DB to defined contribution (DC) schemes has come a shift towards greater individual responsibility for retirement provision and for mitigating the implications of longer life expectancy. The chief risk in planning for longevity lies in not knowing exactly how long income will be required in retirement, with the possibility of financial assets being depleted to the point of running out of money. Avoiding that scenario in retirement requires careful planning that accounts for variables including investment risk, inflation and the risk of unplanned expenditure such as long-term care. It also involves taking account of mortality drag. This refers to the need for drawdown investments to work harder as an investor becomes older for them to provide the same level of income as an annuity. While annuitants living longer than average benefit from the cross-subsidy inherent in risk pooling, drawdown investors have no such pooled risk in place. The chief risk in planning for longevity lies in not knowing exactly how long income will be required in retirement, with the possibility of financial assets being depleted to the point of running out of money.

6 6 techtalk The average annual income that people expect in retirement is 27% ( 6,445) lower than the amount they will need 27% This is just one reason why, despite their waning popularity, annuities remain a key component of the at-retirement product suite. While investors are now much more likely to enter drawdown when they reach retirement, the option to convert at least a portion of the pension fund to an annuity at a later point remains open. The difficulty of maintaining a sustainable income from drawdown ensures that annuities will continue to be used as a longevity hedge. Longer life expectancy can create other potential difficulties associated with managing finances. Ageing is associated with cognitive decline, which can (for example) affect the ability to make decisions. ABI research suggests that reduced cognitive capacity leads people to seek less information when making decisions; A report by SSGA described cognitive decline as one of the most challenging intergenerational issues facing the investment industry. become more likely to choose an option when it is framed as a gain rather than a loss; and find it difficult to take new information on board, among other behavioural consequences. As longevity rises more people will be affected by cognitive decline, as well as conditions including dementia and Alzheimer s disease. This can extend to investment selection, already a potentially complex undertaking for those unable or unwilling to take financial advice. A report by SSGA described cognitive decline as one of the most challenging intergenerational issues facing the investment industry. It noted that while financial decision making skills can deteriorate quickly as our cognitive abilities decline peaking for most people in their early to mid-50s our tendency to self-assess remains intact. The consequences of this can include an excess of confidence in our financial decision making skills, further underlining the value of advice in mitigating the risks associated with cognitive decline provided advisers are willing and able to broach this difficult subject with their clients. The various implications of increased longevity merely add to the challenges faced by those needing a sustainable retirement income. There are no easy answers here, but recognition of the risks created by the simple fact that we re living longer is a good basis on which to build a robust investment strategy.

7 techtalk 7 PENSIONS AND DIVORCE: SHARING AND ATTACHMENT ORDERS EXPLAINED Divorce settlements often result in pension sharing orders, although pension attachment (earmarking in Scotland) is still available. We explain the main consequences for pension benefits. BERNADETTE LEWIS Bernadette joined the group in She has over 35 years experience in Financial Services with both intermediaries and providers. She has broad and deep technical experience across pensions, protection, tax and trusts. Many peoples homes and pension funds are their most significant assets. This means pension benefits are normally taken into account when sorting out the financial settlement between divorcing married couples or civil partners going through dissolution. (All subsequent references to spouses divorcing also cover dissolutions of civil partnerships unless specified otherwise.) In England, Wales and Northern Ireland, the financial settlement is generally based on the value of all the pension rights each spouse had when they split up. The divorcing couple apply to the court for a pension sharing or attachment order. In Scotland, only the increase in the value of each spouse s pensions between the date they married and the date of separation is taken into account. The sharing or earmarking might be achieved by a legally binding agreement instead of a court order. PENSION OFFSETTING It s also possible to use offsetting a clean break option that leaves pension benefits undisturbed. For example, one ex-spouse might keep their existing pension benefits in their entirety while the other keeps the marital home. PENSION SHARING Pension sharing orders are available where divorce proceedings began on or after 1 December 2000, or for dissolutions of civil partnerships from 5 December Pension sharing orders are a clean break option, which award the member s exspouse a percentage share of the cash equivalent transfer value (CETV) of the member s pension scheme. If a scheme has more than one arrangement, the same percentage applies to them all. If someone has more than one scheme, the pension sharing order can award the member s ex-spouse different percentages of each scheme.

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9 techtalk 9 A pension sharing order creates a pension debit against the member s rights, matched by a pension credit for their ex-spouse. The exspouse can normally transfer their pension credit into their own pension arrangement then deal with their pension credit benefits as they wish. Some public sector schemes will only provide the member s ex-spouse with an internal pension credit, so the ex-spouse becomes a pension credit member with their own separate rights, but still subject to the scheme rules. Other schemes can offer this option, but must also offer an external transfer. Pension sharing is also an option for crystallised pension benefits. If the crystallised benefits have been used to provide an annuity, the ex-spouse can either use their share of the CETV to continue to receive an annuity from the existing provider, or take an external cash transfer to make their own choice of pension arrangement. The member s annuity is reduced to take account of the pension debit. But it might be possible to re-set up their annuity on a single life basis if it originally provided for a spouse s pension. Pension schemes have four months to implement a pension sharing order, starting from the later of the date the order takes effect, and the date the administrators/ trustees receive all the required documents and information. While you d expect the ex-spouse to want to sort this out quickly, delays of several years are not unknown. Most providers won t act until they receive written transfer instructions from the member s ex-spouse in respect of their pension credit. In the meantime the policyholder still has the right to claim or transfer benefits in the usual way. The pension debit member can normally rebuild their pension benefits. PENSION DEBITS AND TAX When a pension sharing order comes into effect, the CETV creates a pension debit against the member s benefits. This directly reduces the value of the benefits in money purchase schemes and leads to an actuarial adjustment in defined benefit schemes. If the debit comes out of uncrystallised funds, this reduces the value of benefits tested against the member s lifetime allowance (LTA) when there s a subsequent benefit crystallisation event (BCE). This might reduce the likelihood of the member suffering an LTA charge. A pension debit has no effect on a member s scheme level protected tax-free cash, even though it involves a partial transfer out of the member s benefits. HMRC s Pensions Tax Manual (PTM) section PTM confirms this. who ve accessed benefits flexibly being caught by the money purchase annual allowance. There can also be disadvantages for someone with individual protection 2014 or 2016 (IP 2014/ IP 2016), as a pension debit can reduce the value of their protected LTA. For IP 2014, a pension debit from 6 April 2014 onwards retrospectively reduces the value of the member s pension savings originally used to calculate their protected LTA as at 5 April For IP 2016, pension debits from 6 April 2016 onwards adjust the value of their pension savings as at 5 April When calculating the deduction, the pension debit is reduced by 5% for each full tax year that s elapsed since 2013/2014 for IP 2014 and since 2015/2016 for IP This could result in someone losing all the benefit of IP 2014 or IP 2016, and reverting to the standard LTA if they have no other form of protection. The reduced LTA only applies to BCEs after the effective date of the pension debit. EXAMPLE Danny has IP He had 1.7 million of pension savings on 5 April 2014, making his protected LTA 1.5 million. Danny crystallised 600,000 via flexi-access drawdown in December 2015, taking tax-free cash but no income. That left 60% of his protected 1.5 million LTA available or 900,000 in monetary terms. Danny got divorced and a 450,000 pension debit came into effect on 15 June As two complete tax years had passed since 2013/2014, there was a 10% reduction in the pension debit deducted from the value of his pension savings for IP 2014 purposes (from 450,000 to 405,000). That reduced the value of his IP 2014 to million. In monetary terms, his remaining available LTA became 60% of million or 777,000. Depending on fund growth assumptions, Danny could consider rebuilding his pension fund via further contributions, as he s not caught by the money purchase annual allowance. The pension debit member can normally rebuild their pension benefits. However, there can be barriers to this, such as losing enhanced or fixed protection. There s also the possibility of higher earners being caught by the tapered annual allowance, or those

10 10 techtalk Pension credits can adversely affect people with enhanced or fixed protection. PENSION CREDITS AND TAX When a pension sharing order comes into effect, the CETV creates a pension credit for the member s ex-spouse. A pension credit isn t pension input, so it has no effect on the recipient s annual allowance. The credit becomes part of the recipient s own pension pot and is tested against their own LTA at any of the usual BCEs. If the pension credit is paid out of funds the original member crystallised from 6 April 2006 onwards, it s termed a disqualifying pension credit. The recipient can t take any tax-free cash from this source. However, they can still choose when to use the credit to provide pension benefits for themselves subject to minimum pension age legislation and any relevant scheme rules. They can benefit from LTA enhancement via a pension credit factor see HMRC s PTM for full details. Some pension credit members who made a claim by 5 April 2009 will have an LTA enhancement via a pre-commencement pension credit factor. This takes account of the pre-6 April 2006 treatment of pension debits and credits. Pension credits can adversely affect people with enhanced or fixed protection. It s possible to pay a pension credit into an existing money purchase arrangement without losing these forms of protection. However, paying a pension credit into an existing defined benefits or cash balance arrangement might lead to benefit accrual and the loss of protection. In addition, the recipient automatically loses protection if they pay a pension credit into any new arrangement. (HMRC s PTM covers enhanced protection. Similar rules apply to fixed protection.) TRANSFER DATE / EFFECTIVE DATE The transfer date for a pension debit is the effective date of a pension sharing order. Provided a valid appeal hasn t been lodged, the effective date is the later of the date of the decree absolute or 28 days after the order has been made. (Based on regulation 9 of the Divorce etc (Pensions) Regulations 2000 and the timescale for lodging an appeal against a pension sharing order.) PENSION ATTACHMENT (EARMARKING) Pension attachment orders are still called earmarking orders in Scotland. They can cover all the main types of UK occupational and personal pension schemes, but can t apply to state pensions. This option has been available for divorce proceedings since 1 July 1996 and for dissolutions of civil partnerships from 5 December In England, Wales and Northern Ireland, an attachment order can specify that some or all of a member s pension benefits must be paid to the ex-spouse when the member starts taking benefits. The order can also cover tax-free cash and lump sum death benefits. In Scotland, an earmarking order can only cover tax-free cash and lump sum death benefits. Survivor s pensions on death can t be earmarked in any of these jurisdictions. All these orders normally apply to benefits earned up to the divorce date. But if an order doesn t specify this, it covers all the member s benefits up to their retirement date. The order can: Specify that a member must take any available tax-free cash and pay all or part of it to the ex-spouse. Restrict tax-free cash to maximise the pension benefits available to the ex-spouse. Specify that any lump sum death in service benefits are paid to the ex-spouse by instructing the scheme administrator/ trustees to do so, or instructing the member to nominate their ex-spouse. Cover a lump sum payable on death under a guaranteed annuity. While most couples would probably prefer the clean break option of a pension sharing order, there can still be a role for pension attachment. It s sometimes the only practical solution, such as when the member belongs to a small self-administered scheme and the main asset is the company s own property. Or there might be a significant age difference: a pension credit recipient can t normally access pension benefits before age 55, but there s no minimum age requirement for receiving an income from their exspouse via pension attachment. Pension attachment does have disadvantages. The ex-spouse only receives the benefits when the member takes theirs, with personal pensions offering considerable control over when and how to take benefits. Also, the ex-spouse loses their entitlement to pension benefits if the member dies first, or on remarriage although they can cohabit to avoid this. Remarriage shouldn t normally affect the ex-spouse s entitlement to any lump sum benefits, but the order will specify this. The member can normally transfer their benefits even if an attachment order is in place, although some orders require the ex-spouse to give their consent. In all cases, the transferring scheme must inform the ex-spouse of the transfer and pass relevant information to the new provider, which must then comply with the order.

11 techtalk 11 PENSIONS ATTACHMENT AND TAX Where an attachment order is in place, any crystallised benefits are tested against the member s LTA, with no effect on their ex-spouse s LTA. The member is liable to income tax on the whole pension, including the amount paid to their ex-spouse. The ex-spouse has no income tax liability in respect of the payments. This might not be tax-efficient, if the ex-spouse has unused personal allowance, or is taxed at a lower rate than the member. To avoid confusion, the attachment order should explicitly state that the ex-spouse is entitled to a percentage of the member s net pension benefits after tax. EXAMPLE Michael s pension benefits are subject to an attachment order following his divorce from Kathleen. He receives pension income of 31,500 a year. The order specifies that Kathleen is entitled to 50% of the net benefits after tax. After allowing for his other income, Michael pays higher rate tax of 12,600 on the pension benefits, so both he and Kathleen are entitled to 9,450 of the net benefits. Even though Kathleen is a basic rate taxpayer, she can t reclaim any of the tax Michael has paid. Michael and Kathleen s divorce proceedings started before 1 December 2000, so they don t have the option of applying to the court to substitute a pension sharing order. PENSION PROTECTION FUND The Pension Protection Fund (PPF) protects members of defined benefit schemes if the sponsoring employer becomes insolvent and the scheme has insufficient assets to pay benefits of at least the level the PPF would provide. PPF compensation then replaces the pension benefits. If the PPF takes on a scheme, it takes any existing pension sharing and attachment orders into account. If someone gets divorced after the PPF takes on a scheme, compensation sharing and attachment orders are available, but a pension credit recipient can t take a CETV to their own choice of scheme. Ex-spouses receive benefits based on the PPF s compensation rules. STATE PENSION Pension sharing orders can cover additional state pension for those who reached state pension age (SPA) by 5 April Or the protected payment element of the new state pension for those who reach SPA from 6 April Additional state pension is based on SERPS and the state second pension. The protected payment element of the new state pension is based on the converted value of additional state pension as at 5 April 2016 under the transition rules. Divorcees reaching SPA by 5 April 2016 who haven t remarried are sometimes able to use their ex-spouse s national insurance record to increase their basic state pension without affecting the ex-spouse s entitlement. This option doesn t apply to anyone reaching SPA from 6 April INTERNATIONAL ASPECTS Separating couples face complications if they re divorcing overseas and want to take UK pension benefits into consideration. They ll need to obtain a UK court order before a UK provider will implement any pension sharing or attachment provisions. If a UK provider takes the risk of acting on a foreign court order, it might make an unauthorised payment leading to tax charges. As the couple may need to establish a UK connection in order to obtain a valid court order, they should seek specialist legal advice at an early stage. There can also be problems for couples divorcing in the UK courts where one or both spouses have overseas pension benefits. The 2016 case of Goyal v Goyal points to the UK courts accepting that pension sharing legislation doesn t extend to overseas pensions. Again, it s a question of seeking specialist legal advice on suitable financial remedies. It s possible to transfer a pension credit to a qualifying recognised overseas pension scheme (QROPS), but the options may be more restricted since the 2016/2017 introduction of a 25% overseas transfer charge for transfers to QROPs in circumstances that don t meet specified conditions.

12 12 techtalk DB ADVICE AND CP17/16 THE FCA AWAKENS We examine the direction of travel in the defined benefit (DB) advice market following the FCA s consultation paper and in the context of the pension freedoms reforms. GARETH DAVIES Gareth Davies is a Specialist Pensions Development Manager for Scottish Widows, dealing with technical and legislative aspects of both corporate and individual pensions. Gareth has over 25 years experience in the life and pensions industry working for major product providers, and over ten years experience as a pensions specialist. Gareth regularly speaks at industry and trade events and he is a Chartered Financial Planner, a Fellow of the Personal Finance Society and holds the Investment Management Certificate. Prior to April 2015 the DB advice market had often been a contentious subject (and many would say it still is!), with many historical poor practices and subsequent negative headlines meaning that it had been viewed as too high risk to get involved in. This has therefore meant many clients with deferred DB pensions have not been able to get access to the collective expertise and experience that exists within the advisory community in order to fully understand this valuable asset. In this article, I will examine the profound changes experienced in the at retirement (decumulation) space since pension freedoms, the impact of these changes on DB advice and also review the FCA s latest DB update, CP 17/16, which provides us with some much needed clarity around the regulator s current thinking, and an indication of the future direction of travel in the DB advice market. The publication of the FCA consultation paper CP 17/16 in June 2017, covering the advice process and regulatory requirements of DB pension advice, has provided a fantastic opportunity to pause and reflect on all that has happened over the last two and a half years since the seismic pension freedom and choice legislation came into force. We ve also taken the opportunity to work with the regulator on shaping the future of the DB advice landscape. The consultation closed in September, and Scottish Widows response was broadly supportive of all of the proposed recommendations. The consultation paper focusses on four key areas of the DB advice market: context of pension freedoms behaviours relevance of the transfer value analysis (TVA) role of the pension transfer specialist personal recommendation taking account of an individual s circumstances Let s have a more detailed look at each of these four areas in turn. PENSION FREEDOMS BEHAVIOURS Firstly in order to explore the context of pension freedom and choice, we need to review the last couple of years or so of customer behaviours. According to the latest FCA statistics published in its September Data Bulletin on the retirement income market, it is clear that the annuity market continues to contract. Annuity sales are at their lowest level since pension freedoms were introduced, while the demand for flexible access to pension pots via income drawdown is large and continues to grow. More than twice as many

13 techtalk 13 pots are moving into drawdown than are purchasing annuities a true case of drawdown for the many, not just the few! In conclusion, it would appear that people are now attaching much more value to flexibility and control than they are to certainty of income. In addition to these fundamental changes in customer behaviours, it is worth noting that we have had the perfect storm of economic factors of low interest rates (and therefore gilt yields) and rising inflation. Together with relentlessly improving mortality expectations, cash equivalent transfer values have never been higher for many schemes. Therefore for many clients this will be the largest asset they now own, and more people than ever will be looking for help. Sadly this demand for advice has probably also been further intensified by news and headlines surrounding the impact on members pensions in the DB schemes of failing companies and organisations. TVA RELEVANCE Secondly, the FCA has turned its attention to the TVA, commenting that Advisers often focus in some cases almost exclusively on the TVA element rather than making a rounded assessment of suitability based on all relevant factors. It now believes that too much focus on critical yield as a metric for an advice recommendation is leading to poor outcomes for customers. It therefore proposes to replace it with an overarching requirement to undertake appropriate analysis of all of the client s options, which will be referred to as the appropriate pension transfer analysis or APTA. This will include a prescribed comparator to show a financial indication of the value of the benefits that are being given up. The analysis will include the following: an assessment of the client s outgoings and therefore potential income needs throughout retirement the role of the ceding and receiving scheme in meeting those income needs, in addition to any other means available to the client effectively obtaining an understanding of the client s potential cashflows consideration of death benefits on a fair basis, for example where the death benefit in the receiving scheme will take the form of a lump sum, then the death benefits in the ceding scheme should also be assessed on a capitalised basis, and both should take account of expected differences over time the prescribed transfer value comparator (TVC). This should lead to much more rounded conversations based around robust cash flow modelling requirements, and will undoubtedly help the customer to more fully understand their options and therefore drive better customer outcomes. EXAMPLE OF FCA TRANSFER VALUE COMPARATOR The transfer value offered instead of your pension income is: 120,000 How does this compare with the amount you need to buy the same income on the open market? , Transfer value offered Estimated current replacement cost of your pension It could cost you 140,000 to obtain a comparable level of guaranteed income on the open market. This means the same retirement income could cost you 20,000 more by transferring.

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15 techtalk 15 Annuity sales are at their lowest level since pension freedoms were introduced. ROLE OF THE PENSION TRANSFER SPECIALIST Thirdly, the FCA has reviewed the role of the pension transfer specialist. Currently advice on pension transfers, pension conversions, and pension opt-outs must be given or checked by a pension transfer specialist, who must be a fit and proper person with specific qualifications. The existing requirements do not specify what is intended when a pension transfer specialist checks, rather than gives, advice on the transfer or conversion of safeguarded benefits. This has led to a lot of the more recent headlines in the trade press regarding outsourced DB advice practices and processes, where the specialist simply runs or even checks the TVA that has been produced, rather than looking at the overall recommendation and client s needs as a whole. The regulator has now made it clear that this does not meet its expectations, and we have seen this played out in the form of temporary suspensions of outsourced DB advice propositions. Any IFA outsourcing its DB advice proposition in the future will have to work far more closely with the third party to evidence that all of the client s circumstances and requirements have been considered. PERSONAL RECOMMENDATIONS This leads nicely onto the final area of personal recommendations. The proposals are that the adviser must now consider the client s income needs and expectations and how these can be achieved, the receiving scheme investments and risk profiling, the way the funds will be accessed and any alternative ways of meeting the client s objectives and the wider circumstances of the individual. Again, this much more joined up approach should lead to an improved customer experience when the DB advice is being outsourced. It is also good to see that the regulator is considering moving to a level playing field when advisers are reviewing legacy DB pension assets. It now proposes to remove the historical requirement to start from the position that a transfer would not be suitable, albeit for the majority of clients it still believes that a transfer may not be the best outcome It remains our view that keeping safeguarded benefits will be in the best interests of most consumers. However, the introduction of the pension freedoms has altered the options available and for some consumers a transfer may now be suitable when it wasn t previously. We therefore propose to remove the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable. HOW DO YOU SOLVE A PROBLEM LIKE CONTINGENT CHARGING? The term contingent charging in relation to transfers describes when an adviser is only paid, or is paid significantly more, if the client goes ahead with the transfer. This has long been a source of concern for the regulator, and this is brought into even sharper focus in the DB advice space where the FCA feels that transfer dependent remuneration structures could lead to poor customer outcomes. Although there is no perfect solution to address this concern, I believe a possible solution to help mitigate this risk could be a preadvice stage of information gathering and subsequent client discussion, before the client is engaged in a full advice process leading to a recommendation being made. The benefit of this approach is that more people can get access to some initial guidance around their DB asset, and also more advisers will be able to evidence where a transfer did not proceed, but a client charge was still levied for the initial work done. CONCLUSIONS In conclusion, my view is that it is now time to change the conversation, from a binary outcome led one (to transfer or not to transfer) to a true legacy asset review, client focussed discussion. In essence, this is not about DB transfers, this is about DB advice. This is the main driver behind the FCA consultation paper, which summarises its position as follows We want to provide advisers with a framework which better enables them to give the right advice so that consumers make better informed decisions. Now that we have some clarity around the direction of travel from the FCA, I believe we can all start to approach this area of financial planning with more confidence than ever. We have been told to expect a policy statement from the FCA in the first quarter of 2018, and therefore for the final word on this subject, I will turn once again to CP 17/16 A successful outcome will be measured by a reduction in the number of complaints against advisory firms, fewer interventions by the FCA in this area, fewer customers becoming the victims of pension scams and greater certainty and confidence amongst advisers as to the expectations for this type of advice. I think that is certainly something on which we can all agree that this is what a good outcome looks like!

16 16 techtalk PENSION SCAMS GOVERNMENT UNVEILS NEW MEASURES IN THE FIGHT AGAINST FRAUD We offer a perspective on the Government s recent response to the pension scams consultation. COLIN CLARK Colin s career in pensions spans over 30 years. In his current role as Proposition Development Manager he oversees a broad spectrum of closed pension products, focusing on delivering against Lloyds Banking Group s commitment to maintain its proposition and fair treatment for longstanding customers. HM Treasury and Department for Work and Pensions have published their joint response to the pension scams consultation. Unfortunately whilst the package announced in August contains some welcome initiatives, important details and timelines still need to be agreed and doubts remain on its overall effectiveness. The consultation was launched in December 2016 but the issue of pension scams has been a major concern since at least February 2013 when The Pension Regulators Scorpion campaign was launched. Since then we ve seen Project Bloom (the cross-government multi-agency task force set up to tackle pension fraud) and the FCA s own ScamSmart initiative. In 2015 an industry code of good practice was published, aimed at strengthening trustee/administrator due diligence for pension transfers and outlining good practice for customer communications, warnings and discharge of liability. Despite this, tangible progress towards protecting vulnerable pension customers has not been as rapid as many would have liked. And scams continue to be a blot on the pension landscape and wreck people s retirement plans. THE RESPONSE TO THE DECEMBER 2016 CONSULTATION First off the Government wanted to agree on a clear definition for pension scams to assist identification, record-keeping and prevention. It has achieved this objective. AGREED PENSION SCAMS DEFINITION: The marketing of products and arrangements and successful or unsuccessful attempts by a party (the scammer ) to: release funds from an HMRC-registered pension scheme, often resulting in a tax charge that is not anticipated by the member persuade individuals over the normal minimum pension age to flexibly access their pension savings in order to invest in inappropriate investments persuade individuals to transfer their pension savings in order to invest in inappropriate investments where the scammer has misled the individual about the nature of, or risks attached to, the purported investment(s), or their appropriateness for that individual investor.

17 techtalk 17 Now let s look at a quick summary of what was announced to combat pension scams. We can see three key proposals: 1 Banning cold calling in relation to pensions A number of different types of phone conversation are proposed to fall within the scope of the ban including: offers of a free pension review, or other free financial advice or guidance assessments of the performance of the individual s current pension funds inducements to hold certain investments within a pensions tax wrapper including overseas investments promotions of retirement income products such as drawdown and annuity products inducements to release pension funds early inducements to release funds from a pension and transfer them into a bank account inducements to transfer a pension fund introductions to a firm dealing in pensions investments offers to assess charges on the pension offers to trace lost pension pots offers to consolidate pension pots The ban will cover electronic communication texts and s. There will be no ban imposed in relation to the cold calling on all investment products. The ban will not be limited to transfers between pension schemes it will also cover scenarios where consumers are encouraged to release funds from a pension perhaps using the new pension freedoms options and transfer this to a bank account, before investing in an inappropriate product. There will be limited exemptions to the ban where: a consumer has expressly requested information from a firm an existing client relationship exists. The ban will not prevent firms from issuing pensions-related marketing material to the public via traditional or social media. The Information Commissioners Office (ICO) will enforce the ban. There will be no criminal sanctions and custodial sentences applied as part of this legislation and ICO cannot take action against overseas firms, unless the calls are made on behalf of a UK company. The Government will work with ICO to ensure consumers can easily report cold calls. There will be further activity to inform consumers about the ban and the need to be wary of fraudsters. Next steps The Government will work on the final details of the ban during the course of 2017 and will bring forward legislation when Parliamentary time allows. OUR VIEW The cold-calling ban grabbed the most headlines when the response was published but is arguably the least effective of the measures announced and the one with the most detail still to come when parliamentary time allows. There was widespread support for this during the consultation because everyone recognises the damage that pension scams do and few consider that pensions cold-calling offers positive benefits. However the real value of any ban is more likely to attach to an effective consumer awareness campaign and the deterrence or disruption of scamming activity rather than any realistic hope of prevention or punitive enforcement, particularly in the absence of criminal sanctions or the threat of a prison sentence. Determined scammers may view the threat of a fine with equanimity or simply move operations offshore to escape the reach of the ICO. SUGGESTED ACTIONS We will wait with interest for further details to emerge. Of particular concern will be how the Government can deliver on its stated intention of future proofing the legislation so that it addresses the potential development of scam activity designed to circumvent the ban, whilst at the same time not disrupting legitimate activity and business development. Making the reporting of scams easy and worthwhile may also be a challenge. Readers may also be interested to consider an alternative view on this from Aries Insight s Ian Neale. This can be accessed here:

18 18 techtalk 2 Limiting the statutory right to transfer The statutory right to transfer will be limited to: transfers in to personal pension schemes operated by firms authorised by the Financial Conduct Authority (FCA) transfers in to authorised Master Trust schemes transfers where a genuine employment link to the receiving occupational pension scheme could be evidenced. Scheme members will be primarily responsible for providing evidence of earnings demonstrating an employment link. Next steps The Government will actively engage with industry, consumer groups and other stakeholders on how best to implement the employment link and also add overseas transfers to QROPS to the statutory transfer criteria. It will also consider whether due diligence for scheme trustees/managers should be enshrined in legislation; and, in an apparent contradiction to the policy objective, whether trustees or managers should have the power to amend their scheme rules in order to accommodate legitimate non-statutory transfers where there is no such power already. The master trust authorisation regime won t be fully rolled out in Legislation to cover the new statutory right will need to align with the roll out of the authorisation regime. An appropriately drafted statutory right to transfer is a sensible move. OUR VIEW Strengthening pensions legislation alongside the other measures proposed is useful in terms of supporting the principle of freedom and choice for consumers. We agree that an appropriately drafted statutory right to transfer is a sensible move. It restores the position that was widely understood before February 2016 s High Court judgment on Hughes vs Royal London overturned this so in theory should be relatively simple to reinstate into due diligence activity. Once again though the devil is in the detail and how effective this measure is will depend on the exact requirements for providing evidence of an employment link. Our experience shows that determined scammers will seek and often find ways to circumvent legislation. Reliance on legislation to prevent scams also places an onerous burden for policing and prevention on pension scheme trustees/managers; this has proved to be inefficient and/or ineffective despite best efforts. It delays the transfer process, which nevertheless remains subject to the standard statutory timescales (unless exceptionally an extension is granted), and causes an increased volume of complaints. Overall it requires diversion of significant technical and legal resource, ultimately to the detriment of the majority of consumers and shareholders. Plans to extend the new statutory rights to include QROPS are welcome. Without this all transfers to QROPS would also be subject to the full rigours of lengthy due diligence which would be impractical. There are suggestions that some QROPS are used for pension scam activity and this may be a particular problem for schemes/customers based in the EU, where the HMRC criteria are less stringent and there is no overseas transfer tax charge. Brexit may change all that; meanwhile we expect to continue viewing all overseas transfers, regardless of residence or destination, as worthy of additional warnings, including the risks of pension scams. SUGGESTED ACTIONS Again there is little alternative but to wait for further details to emerge. Meanwhile signposting delays in making changes to strengthen legislation are never ideal as this can encourage the very kind of activity that the amendments seek to prevent.

19 techtalk 19 3 Making it harder to open fraudulent schemes Changes to scheme registrations All new occupational pension scheme registrations are to be made through an active company. HMRC will be given discretion to register legitimate schemes with a dormant sponsoring employer. There will be a right of appeal for rejected scheme registrations. This will extend to existing pension schemes registered with a dormant sponsoring employer, with the same discretion so that HMRC can decide not to de-register a legitimate dormant employer scheme. Draft legislation for this has been published and it will appear in the Winter Finance Bill in Consent of the sponsoring employer Sponsoring employers will need to consent to the opening of a new occupational scheme with their support. SSASs For SSASs, the Government will not pursue the option to require pensioneer trustees. OUR VIEW Stronger powers in relation to the dormant employer are welcome but a determined scammer could find ways to circumvent this. It is also unclear the extent to which HMRC will be able to exercise its new (de)registration powers in relation to dormant employers whether for new or existing schemes. In practice this may be another measure intended more as a deterrent because there are sure to be a number of genuine schemes that have dormant employers and HMRC will need to be very clear on grounds for deregistration in particular or face challenge. Furthermore the penalties for deregistration the removal of tax reliefs and imposition of a deregistration charge fall on the victim rather than the perpetrator and there must be some doubt as to the likelihood of any or all of this money being recoverable where a scam has been perpetrated. The real value of any ban is more likely to attach to an effective consumer awareness campaign SSAS Perhaps the most disappointing aspect of the response concerns SSAS. Whilst we don t support the nuclear option of banning SSAS, we think stronger measures could and should have been taken against rogue schemes. It s widely accepted that single member SSAS have been the vehicle of choice for scammers and many industry commentators have called for governance and regulatory oversight to be strengthened in this area remember single member schemes don t even have to register with The Pensions Regulator. It s strange that the Government resolutely refuses to require additional safeguards for SSAS at a time when we see increased governance and oversight requirements elsewhere. The Government says this is because scheme members should be free to choose their own investments. But they can also do this with SIPPs which are subject to stronger FCA regulation and oversight. Most would agree that this is suitable in terms of protecting customers and strengthens consumer confidence. To leave SSAS free of any comparable oversight is tantamount to saying that the Government believes scheme members should be able to choose to circumvent measures designed for their own protection and leaves them more exposed to scams. It s true that HMRC introduced the Fit and Proper test for scheme administrators with effect from 1 September Since then the number of new scheme registrations has fallen by 12% (2016/17) according to HMRC s own statistics but fraudulent schemes persist. SUGGESTED ACTIONS We don t expect HMRC to deregister swathes of existing dormant employer schemes from 6 April 2018 and legitimate schemes should be safe. However advisers might want to consider reviewing existing schemes. Where such schemes are dormant, could be wound up and/ or benefits transferred or otherwise secured for the members, now might be a good opportunity to explore options. This could also complicate due diligence processes. Where there are doubts about the employer status HMRC may be less likely to confirm that the scheme is registered and revert to the non-committal stance of neither confirming nor denying that the scheme is registered.

20 20 techtalk CONCLUSION There is clear consensus that action needs to be taken now to combat pension scams. As I write the Work and Pensions Committee has announced an inquiry into Pension Freedoms and one of its areas of focus will be how freedom and choice to cash in pensions has played into the hands of scammers, determined to find new ways to liberate pension savers of their retirement savings. We think more could be done to combat scams, especially in the SSAS space and current timescales are not sufficiently urgent. And the onus should be less on pension providers and scheme trustees as pension transfer gatekeepers. A sustained programme of consumer engagement, information and awareness should be pursued. More attention should be given to highlighting the risks for UK resident customers of unregulated offshore advice and use of pension vehicles such as QROPS and the potential for poor outcomes and tax penalties arising from high risk or fraudulent offshore investments.

21 techtalk 21 MENTAL INCAPACITY: WHO S CONTROLLING YOUR CLIENT S AFFAIRS? A retired judge s concerns about lasting powers of attorney prompted us to look at the role of powers of attorney and their alternatives in financial planning. BERNADETTE LEWIS Bernadette joined the group in She has over 35 years experience in Financial Services with both intermediaries and providers. She has broad and deep technical experience across pensions, protection, tax and trusts. Lasting powers of attorney (LPAs) made the news in August 2017, when retired Court of Protection Judge Denzil Lush expressed concerns about the potential for abuse by attorneys and his view that deputyship orders are preferable. This article explores these concerns. It also prompts advisers to consider mental capacity as part of personal and business protection, inheritance tax or retirement planning. PROVISION FOR MENTAL INCAPACITY As LPAs and deputyship orders are only used in England and Wales, let s start with a summary of the provision for mental incapacity in each part of the UK. England & Wales Scotland Northern Ireland Lasting power of attorney: property and financial affairs Lasting power of attorney: health and welfare Enduring power of attorney (created before 1 October 2007) Provision someone with mental capacity can create for themselves Continuing power of attorney Welfare power of attorney Combined power of attorney Enduring power of attorney Provision the courts create for someone without mental capacity Deputyship order Intervention and guardianship orders Controller

22 22 techtalk The alternatives to POAs also carry disadvantages. LPAs, continuing powers of attorney (CPAs) and enduring powers of attorney (EPAs) are all special types of power of attorney (POA). Once registered, an attorney can continue to act for a donor (or granter in Scotland) who s lost the mental capacity to deal with their own financial affairs. In England, Wales and Scotland, it s also possible to appoint attorneys to deal with health and welfare matters for someone who s lost mental capacity. If someone becomes mentally incapacitated and there s no valid POA in place, the courts have to appoint someone to look after their affairs. ARE POAS UNDULY RISKY? It appears Denzil Lush s concerns about LPAs were prompted by the limited controls over attorneys actions. In contrast, deputyship orders always involve Court of Protection oversight. Deputies can only do things specifically authorised by their deputyship order, and have to get the court s permission to do anything else. If a deputy misuses funds, the estate can claim on a guarantee bond. This is a form of insurance that s paid for out of the estate. Similar provisions apply to intervention and guardianship orders in Scotland, and controllers in Northern Ireland. The resulting publicity might mean people choose their attorneys more carefully. Or it could lead to fewer POAs being set up. If so, it s important to understand that the alternatives to POAs also carry disadvantages. Obtaining a deputyship order or equivalent is time consuming and expensive. The deputy, guardian or controller can be heavily restricted in what they can do. Until the court order s been granted, it s not normally possible to access bank accounts, savings or investments. Debts can build up in the meantime although lenders or service providers may be willing to waive associated fees and interest. In addition, it s excessive to conclude that there s a complete lack of oversight of attorneys. Concerned family members or third parties can contact the Office of the Public Guardian in England and Wales, Office of the Public Guardian (Scotland), or the Office of Care and Protection in Northern Ireland. Resulting interventions have led to financially abusive attorneys being prosecuted, found guilty of theft or fraud, and imprisoned. However, it s not always proved possible to recover the funds. There are other safeguards, too. In England and Wales, when someone creates an LPA, a certificate provider has to confirm they understand

23 techtalk 23 Interventions have led to financially abusive attorneys being prosecuted. the significance of this and aren t under any pressure. LPAs must always be registered before the attorney can act. In Scotland, there s a requirement to establish that someone is mentally competent before they set up a CPA. In Northern Ireland, it s possible to include specific provisions to prevent EPAs being used before being registered otherwise, this is possible provided the donor is still mentally competent. Legislation applying to England, Wales and Northern Ireland restricts attorneys powers to make gifts. See, for example, Public Guardian Practice Note Gifts available from The courts will actually set aside any LPA provisions attempting to get around these protective restrictions. Advisers should be aware that this means an attorney always needs court permission before making significant gifts on a donor s behalf, such as for inheritance tax planning. In Scotland, the granter will have decided what their attorney is and is not allowed to do, normally with their own legal adviser s guidance. Advisers always need to check whether a specific CPA authorises the attorney to carry out any proposed actions on the granter s behalf. There are also codes of practice which set out, among other things, when the attorney is required to keep their own and the donor s assets separate. See, for example, Mental Capacity Act 2005 code of practice available from and Adults With Incapacity Act 2000 code of practice for continuing and welfare attorneys available from CONSIDERATIONS FOR ADVISERS The question of whether or not a client should set up a POA could be a natural part of a wider protection conversation. Or it could come up in connection with inheritance tax planning. After all, this could become pointless if unscrupulous family or friends defraud a vulnerable client of their assets. In connection with pension planning, a client s retirement income could be at risk if they lose the cognitive capacity to manage their flexi-access drawdown. As explained below, there s even a role for POAs in business continuation planning. Where advisers are involved, they can stress the importance of choosing attorneys carefully. An attorney obviously needs to be trustworthy. They also need to be competent to deal with the donor s financial affairs. Perhaps including acting on ongoing advice where there s any complex planning in place. Family dynamics are yet another factor. If a particular family member is appointed as an attorney, what pragmatic and emotional concerns will other family members have? A BUSINESS POA? When advisers discuss keyperson and shareholder or partnership protection, they could also prompt owners to think about what would happen to their business if they lose mental capacity. In England and Wales, a solution might involve separate LPAs to cover a client s business needs and their private property and affairs. In Northern Ireland, it s also possible to create more than one EPA appointing different attorneys to do different things. Scottish based clients can discuss their business needs with their legal advisers in the process of creating a bespoke CPA. In practice, business owners will need specialist legal advice, linking business and mental capacity law. For example, a business POA needs to take account of any articles of association or partnership agreement. An attorney obviously needs to be trustworthy. MENTAL CAPACITY AND VULNERABLE CUSTOMERS Procedures to support vulnerable customers, such as including relatives in conversations, fit into the current legal approach of treating mental capacity as a continuum. The underlying assumption is that someone should be as involved as possible in decisions relating to themselves, with as much appropriate support as necessary. However, there are limits to the support friends and relatives can provide. Informal supporters can t deal with contracts or legal commitments on a vulnerable person s behalf. Once someone s lost the mental capacity to deal with their own financial affairs, only someone who s legally authorised can make related decisions for them. That means either an attorney authorised by a registered LPA, CPA or EPA, or a deputy, guardian or controller operating in line with a court order. In addition, people with the mental capacity to deal with their own financial affairs can still be vulnerable to undue influence. Perhaps following bereavement or because of aging. Family members may naturally want to be involved with key decisions, such as whether to make significant lifetime gifts as part of inheritance tax planning. However, a private conversation allows an adviser to establish a client s personal wishes. Or where the worst is feared, could help uncover an abusive situation. It s always going to be a client s personal choice whether or not to set up a POA. But where suitable, a POA can ensure that someone trustworthy, that the client has personally chosen, looks after their financial affairs if they lose the mental capacity to do this for themselves.

24 24 techtalk SMALL PENSION PAYMENTS STILL HAVE AN ATTRACTION Favourable rules still exist enabling small lump sum pension payments to be withdrawn without some of the tax consequences that normally apply. JEREMY BRANTON Jeremy has over 30 years experience in the financial services industry covering a number of technical and marketing roles. He joined the group in 2006 as a tax and trusts specialist and also offers technical support on pension and protection planning. Pension freedoms are proving to be very popular with the public latest Government figures reveal almost 1.25 million pension pots had been accessed for the first time by March 2017 (FCA Data Bulletin September 2017). Sitting alongside the wider range of retirement income options now available, rules still exist permitting a small lump sum to be withdrawn from a pension without some of the tax consequences that normally apply. FLEXIBILITY COMES AT A PRICE Since 6 April 2015, money purchase pension scheme members have had the flexibility having attained minimum retirement age and subject to the scheme allowing it of withdrawing as much or as little of their pension fund as they require. However, drawing pension income flexibly triggers the money purchase annual allowance (MPAA), a measure introduced to counter any potential abuse of pension freedoms by introducing a cap on further pension saving. Introduced in 1.25M pension pots had been accessed for the first time by March 2017 April 2015, with an initial limit on further money purchase pension saving of 10,000 per year, the MPAA reduces to 4,000 from tax year 2017/2018. Contributions above this threshold give rise to an annual allowance excess taxed at the member s marginal rate of income tax. Employer and member contributions count towards the MPAA. Consequently, individuals taking only a modest sum out of their pension perhaps to fund a special holiday or repay debt, could face an unexpected tax charge if they receive generous workplace pension provision. This applies if they take an uncrystallised

25 techtalk 25 Taking just tax-free cash after crystallising funds through flexi-access drawdown won t trigger the MPAA. funds pension lump sum (UFPLS) or income from a flexi-access drawdown plan. However, taking just tax-free cash after crystallising funds through flexi-access drawdown won t trigger the MPAA. Unlike the tapered annual allowance which reduces the standard annual allowance in a year where earnings are above a prescribed level, the MPAA continues to apply to subsequent years and can t be revoked. Additionally, the usual ability to apply unused annual allowance from up to three previous tax years to pay a higher pension contribution is unavailable where the MPAA applies. Our article Bare bones: the money purchase annual allowance provides further detail on the application of the MPAA. SMALL LUMP SUM PAYMENT RULES Specific rules relating to the encashment of small value pensions informally known as the small pots rules pre-date pension freedoms. They were introduced mainly to provide an alternative to purchasing an annuity with a low value pension unlikely to represent value for money. Originally, the rules permitted two lump sums of up to 2,000 each to be taken as cash, this was subsequently increased to three payments of up to 10,000 each. Subject to satisfying certain conditions, withdrawals made under these rules will not trigger the MPAA. Nor are they treated as benefit crystallisation events (BCEs) unlike the position when taking income from a flexi-access drawdown plan or taking a UFPLS. Consequently no use is made of the member s lifetime allowance. NON-OCCUPATIONAL SCHEMES To take a small lump sum payment from a non-occupational pension such as a personal pension, stakeholder plan or FSAVC the following conditions must be met: The member must have reached minimum retirement age of 55, or is eligible to take retirement benefits earlier due to ill health grounds or a protected pension age. The payment must not exceed 10,000 at the date it s paid.

26 26 techtalk All rights under the arrangement from which the small lump sum is taken must be extinguished. A maximum of three small lump sum payments may be taken during a member s lifetime. The limit to the number of payments that can be taken applies at arrangement level. A lump sum could therefore be taken from separate schemes or from separate arrangements within the same scheme. This would allow a member to take a small pot from an arrangement within a scheme despite their total benefits in the scheme exceeding 10,000. It may be possible to reorganise arrangements(s) in a non-occupational scheme to take advantage of the small pots rules. EXAMPLE Dom aged 55 has built up the following benefits in personal pensions, held within the same registered scheme as single arrangements: Personal Pension 1 19,500 Personal Pension 2 6,000 Personal Pension 3 3,500 Total 29,000 OCCUPATIONAL SCHEMES Similar provisions allow a small lump sum payment of up to 10,000 to be taken from an occupational pension scheme with the same favourable treatment. Unlike with a personal pension plan, the 10,000 limit must extinguish all benefits under the scheme itself. No limit applies to the number of different occupational schemes the small pots rules could be applied to provided the member s entitlement under each scheme doesn t exceed the 10,000 limit. A member holding benefits valued above this level in a defined benefit scheme may be able to access them as a lump sum payment via the trivial commutation rules see below. HMRC s Pension Tax Manual provides full details of the conditions applying to small lump sum payments from non-occupational and occupational registered pension schemes at PTM RESTRUCTURING BENEFITS Subject to the way a scheme is structured it may be possible to reorganise arrangements(s) in a non-occupational scheme to take advantage of the small pots rules. A client with a single arrangement of 15,000 could split this into two arrangements each worth 7,500. Another client with 100 arrangements each worth just under 300 could consider merging them together into three larger arrangements each worth just under 10,000. It may also be possible to transfer funds internally between arrangements to meet the eligibility conditions. A word of warning for those holding lifetime allowance protection. Creating new arrangements to split pension pots as opposed to reorganising existing ones could jeopardise enhanced protection or any of the versions of fixed protection. Those affected may still be able to make use of the small pots rules by making multiple permitted transfers to the same number of arrangements in a new scheme, if a provider would support this, as this wouldn t invalidate the above forms of lifetime allowance protection. His main retirement provision will be provided from a defined contribution occupational scheme under which he s entitled to an 15% contribution from his employer based on his pensionable earnings of 65,000, provided he also contributes 5%. He s heard about pension freedoms and is keen to access his personal pensions to fund a once in a lifetime cruise holiday and approaches his adviser before taking any further action. Although it appears Dom would be restricted to encashing only the two lower valued plans under the small pots rules, the adviser checks with the provider which confirms it s possible to split personal pension 1 into two arrangements and to consolidate the two remaining plans. Once this has been done he will be able to take the entire benefits in this way, of which a quarter of the total value 7,250 is free of tax. The rest is taxed at his marginal rate. Personal Pension 1 9,750 (arrangement 1) Personal Pension 1 9,750 (arrangement 2) Personal Pension 2 9,500 (includes consolidated benefits from personal pension 3) Total 29,000 Taking benefits in this way has avoided triggering the MPAA had personal pension 1 been taken as an UFPLS. This could have resulted in an annual allowance excess and resulting tax charge if occupational pension scheme contributions continued.

27 techtalk 27 TAXATION OF SMALL POTS If a small lump sum payment comprises uncrystallised benefits, 25% of the amount paid will be free of tax. The remainder will be added to the member s other income for the year and taxed at their highest marginal rate. Providers are required to deduct tax at the basic rate from the taxable element with members recovering overpaid tax or settling any additional tax due directly with HMRC. A pension in payment can also be taken as a small lump sum in which case the entire payment will be taxed as income. For the triviality payment to be treated as an authorised payment, the member must have some lifetime allowance available at the point at which the lump sum is paid. 25% of the uncrystallised rights are paid tax-free TRIVIAL COMMUTATION The ability for a member to take their whole defined contribution fund as a lump sum under pension freedoms has mostly removed the need for trivial commutation from these types of schemes, although it remains an option for small scheme pensions and annuities. However, trivial commutation remains available for defined benefit schemes the member is given a one-off 12 month window within which to commute trivial funds subject to the following conditions: Where the member hasn t previously drawn or become entitled to benefits under the scheme, or has commuted benefits but still has uncrystallised benefits available, 25% of the uncrystallised rights are paid tax-free, the remainder is taxed as income. Payment of a trivial commutation lump isn t a BCE so doesn t use up any lifetime allowance. However, for the triviality payment to be treated as an authorised payment, the member must have some lifetime allowance available at the point at which the lump sum is paid. Technically it would be possible for an individual with pension savings valued above 30,000 to make use of both the small pots and triviality rules. This is provided the small lump sum payment(s) was taken first and left residual pension savings valued below the triviality limit. This is possible because small pots are not tested against the lifetime allowance. More details on trivial commutation may be found in HMRC s Pension Tax Manual at PTM The member must have reached minimum retirement age of 55, or is eligible to take retirement benefits earlier due to ill health grounds or a protected pension age. Total pension saving doesn t exceed 30,000 this includes both uncrystallised funds and any previous crystallisations tested (or deemed tested for pre-2006 funds) against the lifetime allowance. The payment extinguishes entitlement to all rights under the scheme. The member hasn t previously been paid a trivial commutation lump sum from any registered pension scheme apart from within the previous 12 months. The member has some lifetime allowance available.

28 28 techtalk PENSIONS FOR THE SELF-EMPLOYED Insufficient participation in pension planning by the self-employed, exacerbated by confusion around differing working practices, requires an integrated approach by Government. This article examines the issues and looks at suggested solutions. SANDRA HOGG Sandra is a Chartered Tax Adviser with over 35 years experience as a financial planning expert in the insurance industry and as an accountant advising owner managed businesses and high net worth clients. The Taylor Review delivered a set of stark statistics about how few self-employed people are saving for their retirement highlighting that only 13.1% of self-employed people were participating in a pension in 2014/2015, dropping to only 4.2% amongst year olds. By way of confirmation, Taylor also quoted statistics of 27% saving into a pension from a 2015 report by the Resolution Foundation and 23% intending to rely on pension savings in retirement from the Wealth and Assets Survey. At 4.81 million, self-employed people represent more than 15.0% of all people in work in the UK according to the Office for National Statistics (ONS) report for June This is an increase of 23,000 compared with the same time last year. It seems clear from these statistics that a large and growing proportion of the working population isn t saving for retirement. By contrast, automatic enrolment has reportedly been a great success so far, with almost seven million employees having been enrolled in a pension scheme by nearly 300,000 employers. Furthermore, the Government expects automatic enrolment to lead to around ten million people newly saving or saving more by 2018, generating around 17 billion a year more in workplace pension savings by 2019/2020. Employers have played a huge part in this success, contributing almost 60% of the 82 billion saved into workplace pensions in The estimated average amount of contributions for workers of medium or large firms has increased to 8% of employee earnings, four times higher than the current minimum contribution rate. The self-employed aren t required to automatically enrol themselves.

29 techtalk 29 Date Employer's staging date to 05/04/ /04/ /04/ /04/2019 onwards Employer minimum contribution 1% 2% 2% 5% 3% 8% Total minimum contribution (including 1% employee contribution) (including 3% employee contribution) (including 5% employee contribution) Of course, the self-employed aren t required to automatically enrol themselves and they can t benefit from the advantages of employer contributions. The Government has acknowledged that something needs to be done to resolve this and reduce the potential that the taxpayer has to pick up additional costs associated with ill health or inadequate retirement saving. It also acknowledges a growing population of people working in what is known as the gig economy, often classed as something between self-employed and employed and working in multiple jobs, who may not qualify for automatic enrolment.

30 30 techtalk THE GIG ECONOMY Innovations in digital technology like apps and adware have enabled new business models where marketing promotion can reach a much bigger and more targeted audience than a small business could ever have managed before. They have also changed the way sellers and buyers interact, often resulting in a quicker and more convenient buying experience. This has broadened the range of people who can make money from selling products or from using their particular skills to provide a service. The gig economy is where, instead of a salary, workers get paid for the gigs they do, such as deliveries or taxi journeys. Well known examples include Uber and Deliveroo. The Chartered Institute of Personnel and Development estimates that approximately 1.3 million people (4% of all in employment) are working in the gig economy in the UK. Only a quarter of gig economy workers responding to their survey said that it s their main job, suggesting most use gig economy work to boost their overall income rather than depend on it. And their research shows that income earned from gig work is typically low, with median reported income ranging from 6 to 7.70 per hour. Somewhat disappointingly, but perhaps not surprisingly, the Government has said it doesn t expect to make policy decisions on these areas during Nevertheless, changes to National Insurance contributions for the self-employed, the current method for providing them with state funded ill health and retirement benefits, are likely to be imminent. NATIONAL INSURANCE CONTRIBUTIONS FOR THE SELF-EMPLOYED The self-employed currently pay two classes of National Insurance Class 2 and Class 4. The Government has already announced plans to abolish Class 2 National Insurance contributions from 6 April 2018 and to reform Class 4 from the same date. This is important, because Class 2 National Insurance contributions build up entitlement to the state pension, maternity allowance (at the standard rate), bereavement support allowance and contributory employment and support allowance for the self-employed. Conversely, Class 4 National Insurance contributions don t qualify the selfemployed for any benefit entitlements. The Class 2 National Insurance rate is a weekly rate set at 2.85 per week for the tax year ended 5th April It s payable if profits from the self-employment exceed the small profits threshold currently set at 6,025. However, even where profits are below this level, the self-employed person has the option to pay Class 2 contributions voluntarily. This provides great value as it s considerably cheaper than voluntary Class 3 contributions, which currently cost per week. Class 4 National Insurance is currently payable at the main rate of 9% on profits between the lower profits limit of 8,164 and the upper profits limit of 45,000, and at the additional rate of 2% on profits above the upper profits limit. Class 4 National Insurance contributions are due to be reformed from 6th April 2018, so that they will become the means by which the self-employed get an entitlement to the above state benefits. The Government published a response to its consultation paper in December 2016: The gig economy is where, instead of a salary, workers get paid for the gigs they do. 2-national-insurance-contributions/abolition-of-class-2- national-insurance-contributions Further information is expected this Autumn. It remains to be seen if the Class 4 National Insurance increase to 10% in 2018, and 11% in 2019, that was announced by Philip Hammond in his March 2017 Budget, and then swiftly withdrawn, will re-materialize.

31 techtalk 31 A person is self-employed if they run their business for themselves and take responsibility for its success or failure. CLARITY NEEDED There s a huge diversity in working practices, often with different tax treatments and employment rights. HMRC has attempted to provide some basic definitions, which I ve summarised below: Worker Has a contract or arrangement to do work or services personally for a reward. Although, bearing in mind that today it s only 8,297 a year ( a week), like anyone else, the self-employed probably wouldn t want to be relying solely on the State Pension for their retirement. WHAT MIGHT HELP TO INCREASE SELF- EMPLOYED PENSION FUNDING? A number of ideas have been put forward to Government, including: When a self-employed person delivers their self-assessment return to HMRC, as well as paying their income tax and National Insurance liability, they could also be required to pay a percentage of income towards a pension unless they are already paying in a sufficient amount or they choose to opt out. Provide an incentive for self-employed people to pay into a pension, similar to the employer contribution, which acts as an incentive for the employee not to opt-out of the pension scheme. This might be achieved by providing self-employed people with a National Insurance saving even more of an incentive if the rate of Class 4 National Insurance increases. Introduce digital payment software that automatically transfers money directly into a pension so that it becomes as much of a norm as when an employed person has their employee contributions deducted at source. Ensure self-employment is considered alongside employment in Government policy decisions. A solution that goes some way to reduce confusion over the status of employment and self-employment and the rights and benefits available could be the key to encouraging further pension saving. Employee Self-employed Director of a Limited Company Only has a limited right to send someone else to do the work. Has to turn up for work even if they don t want to. Their employer has to have work for them to do. Isn t doing the work as part of their own limited company in an arrangement where the employer is actually a customer or client. An employee is someone who works under an employment contract. All employees are workers, but an employee has extra employment rights and responsibilities that don t apply if workers aren t employees. A person is self-employed if they run their business for themselves and take responsibility for its success or failure. Self-employed workers aren t paid through PAYE, and they don t have the employment rights and responsibilities of employees. Company directors run limited companies on behalf of shareholders. Directors have different rights and responsibilities from employees, and are classed as office holders for tax and National Insurance contribution purposes. An office holder is a person who s been appointed to a position by a company or organisation but doesn t have a contract or receive regular payment. A director of a small or medium business is unlikely to have an employment contract, however if they work for the company and receive payment they will effectively also be classed as an employee. If you require more information, please see:

32 32 techtalk Innovations in technology have often been the driver for diverse working practices consider the massive growth in IT contractors in the 1980s. Legislation has invariably struggled to keep up and has often been developed to tackle differing issues without being as joined up as it perhaps could be. Much of the legislation around automatic enrolment has developed from the same legislation that covers the National Minimum / Living Wage and Working Time Regulations, including the definition of worker. THE UBER CASE The 2016 Employment Tribunal ruling that Uber drivers are workers for the purpose of the Employment Rights Act 1996, the National Minimum Wage Act 1998 and the Working Time Regulations 1998, means they are entitled to the minimum wage and paid leave. Taylor suggests that Government should retain the current three-tier approach to employment status [employee, worker and selfemployed] as it remains relevant in the modern labour market, but rename as dependent contractors the category of people who are eligible for worker rights but who are not employees. Currently, self-employed people and so called dependent contractors are responsible for their own pension provision. It appears that there are likely to be a large number of employees who perhaps should be being offered a pension under automatic enrolment, but aren t, as their status falls somewhere between employed and self-employed. Additionally, it shouldn t be forgotten that there s a large and growing band of contractors and small businesses that are operating as one person limited companies. The directors are effectively classed as employees, however as they are highly unlikely to have given themselves an employment contract, they cannot be a worker and are therefore always exempt from automatic enrolment. Any Government review needs to consider these people alongside the self-employed. Ultimately, an integrated approach to pension saving is vital if this situation is to ever be resolved. Despite Uber s contention that Uber is simply a technology platform that puts drivers in touch with passengers, the Tribunal held that the reality is that Uber is in the business of providing taxi services and engaged the drivers as workers for this purpose. It remains to be seen if Uber will need to automatically enrol its drivers into a qualifying pension scheme. Uber was granted leave to appeal, with the hearing set for 27 September so the outcome is unknown at the time of writing.

33 techtalk 33 REFLECTIONS FROM A BUS At Scottish Widows we have just finished a four week tour of the country meeting literally thousands of people and talking about their pensions. Here I ll share a few observations. ROBERT COCHRAN Robert leads the Scottish Widows Workplace Pension Specialists team and the Employee Presentation Team his team create messages and material for adviser, employer and employee Pension Seminars and Engagement Events. Robert is a zealot about simplifying pension engagement. Week one of the tour was all about the general public alongside the Pension Geeks we visited five cities from Edinburgh to London on the Pension Awareness double decker bus. The general public could come on board the bus and ask any questions about pensions. We also had representatives from the DWP who have a great outreach service for vulnerable adults and these guys were really busy on the bus dealing with numerous queries about state pensions. Pension Wise were also on board, as were some advisers. KEY OBSERVATIONS WEEK ONE The happiest people I met were all pensioners. They were all people who had a guaranteed income for life coming in they knew how much they would receive each month and felt liberated by it. In Birmingham we were near the theatre and many pensioners stopped by on their way to see the Miss Saigon matinee. It was best summed up by one pensioner in Leeds he was 86 and fit The happiest people I met were all pensioners. as a fiddle, been retired since age 55 and just loved life he had a regular steady income, felt rich, he even wanted to show us his bank statement! What was also of interest was a recognition amongst this group that younger people would not have it as easy, a genuine compassion for the retirement outlook for younger people and a recognition of the importance of the work we were all doing raising Pension Awareness. Younger people were not interested in a guaranteed income for life, on the whole. Almost everybody we spoke to over week one was interested in the amount of their fund and their tax free cash element. They were not thinking about their longevity and how this would be funded over time it was all about the fund values and lump sums. This is I guess the instant legacy of Pension Freedoms and it s no wonder we currently have two FCA reviews and a newly announced Pensions Freedom inquiry by the Parliamentary Work and Pensions Committee. Other observations from week one there is a huge amount of confusion about state pensions despite the recent simplification and few people know how state pensions and private pensions interact. Helping out one guy on the bus who had passed state pension age and hadn t realised he had to claim it was the simplest way of making someone happy over week one. There are also some people who are doing their very best to save for retirement but are being let down by the current system. Younger people were not interested in a guaranteed income for life.