New world of retirement a new planning equation

Transcription

1 This presentation is intended for financial planning professionals only and must not be relied on by anyone else Standard Life New world of retirement a new planning equation Bob Gordon Pensions Consultancy Manager Technical Consulting Today s Agenda Pension freedom & choice Death & taxes TYE pension planning Future of advice 1

2 Today s learning objectives By the end of this session delegates should have an understanding of, and be able to articulate: 1. The real impact of pension freedom and choice on financial planning 2. Why this should be a catalyst to revisit clients, and their families, financial plans 3. What financial planning action as a result of the changes can give clients tangibly better financial outcomes Some words of warning we re going to talk about tax References in this presentation to legislation and tax are based upon Standard Life s understanding of UK law and HM Revenue & Customs practice in the UK as at the date of this presentation. Tax and legislation are likely to change. The value of tax reliefs depend on individual circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. These examples provide a suggested approach only other approaches may be equally suitable. Every client s circumstances will be different and require advice. Standard Life accepts no responsibility for advice which may be formulated on the basis of these examples. 2

3 Pension freedom & choice the tax-relieved saving pot Flexible drawdown for the masses with a legacy No more income for life rule for DC pensions Take what you want, how and when you want it 25% still tax free & 100% may be tax free on death At 55+, full and easy access to flexible pension savings Pensions are now a flexible tax planning and intergenerational wealth management vehicle Rethink what retirement (& tax) planning means Expect a huge increase in flexible income usage This will fundamentally change how clients access their pension Pension freedom & choice the drawdown advice opportunity 6% Users * x5 30% 18bn * + 25% Funds * x3 75% Wider drawdown use creates more demand for advice *Standard Life estimate 3

4 Death & taxes Pension death benefits a changed wealth transfer framework Two key changes to pension death benefit rules have revolutionised the role modern, flexible DC pensions play in wealth transfer planning Less tax More choice Pre 75: All benefits from DC paid tax free (within LTA) 75+: All benefits taxed as recipient s income (when/if drawn) IHT: Pension IHT protection remains Anyone nominated can now inherit a drawdown pot on death And it can cascade to their loved ones when they pass on But only under a flexible 2015 ready DC pension These rewrite the wealth transfer planning equation 4

5 Yes Yes Yes Non-dependants & inherited drawdown the importance of nominations Member nomination? No Surviving dependant(s)? No Administrator nomination? No Only lump sums can be provided inherited drawdown isn t an option Any nominated individual can inherit drawdown pot Only dependant(s) can inherit drawdown pot Any nominated individual can inherit drawdown pot No (or wrong) nomination may limit options Pension death benefits the age 75 issue & improved longevity 100% 80% 60% 40% 20% 78% 85% 97% 0% M60 F60 1 of C60 Chances of living beyond 75 Source: ONS English life tables ( ) 5

6 Inherited drawdown & tax conventional nomination to spouse Doug Dies at % nominated to spouse Jean Dies at 79 50% nominated to each of her sons No tax on withdrawals (as Doug died before 75) Mike Income tax on withdrawals (as Jean died after 75) Dave Inherited drawdown & tax alternative family nomination Doug Dies at 72 50% nominated to spouse Jean 25% nominated to each son No tax on withdrawals (as Doug died before 75) Mike Dave Half of Doug s legacy now passes to the sons tax free. It s about balancing tax efficient wealth transfer & Jean s needs. 6

7 Inherited drawdown & tax family nominations cascading the wealth Jean From Doug Dies at 79 50% nominated to each son Mike Mike Income tax on withdrawals Dave Dave (as Jean died after 75) Dies at 60 50% nominated to each daughter No IHT No LTA test Dies at % nominated to his son From Doug Amy Jo Access at any age Ben Ben No tax on withdrawals (as Mike died before 75) Income tax on withdrawals (as Dave died after 75) Inherited drawdown v bypass trust balancing tax v control Pre Pension Bypass trust Bypass trust Pension 7

8 Bypass trust which clients? Death before 75? Complicated family circumstances? Young or vulnerable beneficiaries? Beneficiary not good with money? Assess each case on its merits. It doesn t have to be all or nothing split nomination between pension and bypass? Revisit nominations now, do it again regularly and always at 75 Pension death benefits key advice points Right pension? Are your clients pensions 2015 ready? Do they give full death benefit flexibility (not just retirement)? Consider consolidating older pensions if they don t Right nomination? Right time? Review existing nominations in light of new rules/ options Name non-dependants so they can inherit drawdown Revisit nominations regularly and always at 75 Dying in the wrong pension, or with the wrong nomination, may mean your client s wishes can t be met Transfers in ill-health can have IHT implications Don t delay do it now Get your clients pensions in shape for every eventuality 8

9 AA changes a window of opportunity 2015/16 PIP & AA changes transition means higher AA for this tax year All PIPs aligned with tax year from 2016/17 15/16 Pre-Budget PIP(s) AA = 80k Start date to 8/7/15 9/7/15 to 5/4/16 AA = lower of 40k; or 80k less pre 9/7/15 input 15/16 Post-Budget PIP So some clients have up to an extra 40k AA this tax year 9

10 2016/17 annual allowance cut a lower AA for high income clients Annual allowance cut for those on income of 150k+ income not earnings (includes dividends, interest, rentals, ) Tapered AA cut for income between 150k & 210k reduced by 1 for every 2 income over 150k AA drops to 10k for those on 210k+ Can still use carry forward to pay more but any carry forward from a tax year where a reduced AA applied is based on that reduced AA Many clients won t know their AA until after TYE may need to fund to safe AA limit during tax year, then use carry forward to sweep-up unused AA in future years 2016 AA cut for high income clients who is caught? Reduced AA (normally) applies if a client s adjusted income is above 150k in a tax year Adjusted income = total income (without deducting pension contributions); + the value of any employer pension contributions But not if their threshold income is 110k or less Threshold income = taxable income (after deducting pension contributions); + the value of any employer pension contributions from new salary sacrifice arrangements started after 8 July 2015 Identify which clients may be affected & to what extent 10

11 Pension tax framework under review better the devil you know? Reduce complexity Best use of tax reliefs Increase engagement Aid retirement planning Consultation on change open mind no specific proposals seeking views & ideas Aims system to stand the test of time simplification increase saving You know the tax rules for contributions made now use them? AA changes: advice issues making the most of the funding window Pension top-up? High earners? Consider maximising HR/AR tax relief this tax year? Consider using higher AA to boost funding this year? Consider using available carry forward? Identify high income clients affected by 2016 AA cut Agree future pension funding/saving strategy for each client Consider funding in arrears using carry forward sweep-up? Company payments? Tax-efficient extraction of wealth from company Easy access to funds from 55 & efficient wealth transfer options Can save CGT, and / or IHT, on future sale of business Act now the clock is ticking 11

12 2016 LTA changes the third cut is the deepest Lifetime allowance cut 2016 a new advice need Lifetime allowance cut to 1M from 2016/17 50,000 pa DB pension fully uses reduced LTA ( 1M/20) Indexed by CPI from 2018/19 standard LTA exceeds 1.25M by 3% CPI Real lifetime allowance could be much lower New protection options to lock-into higher LTA fixed and individual protection

13 LTA cut 2016: who is affected? fund at April 2016 to exceed LTA Years to go 1M LTA (fixed) 1M LTA (CPI indexed from 2018) 3 889k 912k 5 822k 886k k 824k Assumptions No further pension saving after April 2016 Fund grows at 4% pac (after costs) CPI is 2.5% pac LTA cut 2016: the new protection options locking into a higher LTA Fixed protection 2016 gives a personal LTA of 1.25M But it means giving up on pension saving after 5/4/16 DC = no more contributions DB = increases after 5/4/16 stay within relevant % each tax year Individual protection 2016 gives LTA of 1M 1.25M Only available if pensions are worth > 1M on 5/4/16 Personal LTA based on fund value at April 2016 (up to 1.25M) No need to stop funding (or lose employer funding/db accrual) There s no downside to registering for IP

14 LTA cut 2016: advice issues LTA tax a price worth paying? When might it make sense to keep funding pensions even if it s likely to bust the LTA? Giving up on free money from an employer? Is alternative remuneration/reward on offer? Does it stack up? Compare the net outcomes in retirement Be very wary of opting-out of DB accrual it s valuable Getting higher tax relief on contributions than will be paid on retirement income/death benefits? Is your client a higher, or additional, rate taxpayer? Can you manage their affairs so they don t pay higher rate tax in retirement? LTA cut 2016: advice issues LTA tax a price worth paying? Gain / loss after LTA tax Tax relief on contributions 20% 40% 45% 0% 6.3% 25% 36.4% Tax on withdrawals 20% 25% 0% 9.1% 40% 43.8% 25% 18.2% 45% 48.4% 31.3% 25% And pension savings are (normally) protected against IHT 14

15 LTA cut 2016: advice issues key pension advice considerations Protect or not? Pension top-up? Consolidate? Fixed 2016, individual 2016, individual 2014 or none? Always go for individual if eligible there s no downside Would no protection give the best outcome, despite LTA tax? Consider pension top-ups before 6/4/16 protection point? Consider 15/16 AA, available carry forward & tax relief Project against LTA with and without top-up Easier to monitor against LTA with a single view? Modern, flexible DC pension may improve planning options? Watch out for guarantees but don t let the tail wag the dog Don t delay get in shape for April 2016 now The future of advice 15

16 Why advice is key to better outcomes meeting clients financial needs How much income to take Which tax wrappers to use Where to invest How to provide for loved ones Tax efficient Legacy Sustainable 16

17 Withdrawal rate The need for advice inflation & the need for real growth What return above inflation is needed to meet the client s goal? Years in retirement % 0.00% 1.25% 2.04% 2.56% 5% 1.85% 2.91% 3.56% 3.98% 6% 3.49% 4.39% 4.93% 5.27% 7% 4.98% 5.75% 6.19% 6.47% 8% 6.36% 7.02% 7.39% 7.62% Invest for real growth to support income needs 17

18 Return The need for advice investment growth with less volatility Target return / volatility managed portfolio Market portfolio Time High volatility in decumulation risks pound cost ravaging Tax optimisation & flexibility variety is the key Basic framework for effective tax planning in a world of pension freedom & choice Pension ISA Fill them fast Funds Bonds Make them last ISA Funds Bonds Pension Saving Decumulation Flexible DC pension: the first wrapper to fill, the last to empty? 18

19 Use ALL tax allowances (2015/16) could life after work = life after tax? Source Allowance ( ) Capital ( ) Pension (personal allowance) 10,600 3,533 Offshore bond (0% savings band) 5,000 10,000 Collectives (CGT allowance) 11,100 22,200 Dividends (within basic rate band) 24,106 Grand total 86,539 That s over 170,000 tax free income in 2015/16 for a couple but it s a year by year planning exercise Creating a retirement plan getting the building blocks in place Leaving a legacy Adding a buffer rainy day money Flexible income meeting lifestyle aspirations Baseline income covering the essentials 19

20 Any questions? Standard Life Assurance Limited is registered in Scotland (SC286833) at Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH. Standard Life Assurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority Standard Life. Images reproduced under licence. 20