HDC Pension Transfer Seminar

Transcription

1 HDC Pension Transfer Seminar April 2017 HDC 3 rd April 2017

2 Welcome Aim of Today: Increase your understanding of Pension Transfers Motivation Execution Compliance requirements How Explore reasons for Pension Transfers Explain Critical Yield Calculations & TVAS reports Provide a clearer understanding of what we do and how we can help Practical application with case study examples and explanations

3 Agenda Why Review a Defined Benefit Scheme? Short Refreshment Break An explanation of HDC/HDIFA and the services we offer Reasons to Review Lunch Case Study One Case Study Two What s in a Critical Yield? Case study Three

4 What Would You Like Covered?

5 Why Review a Defined Benefits Scheme? Heather Dunne ACII FPFS Chartered Financial Planner For Professional Authorised Financial Advisers Only HDC is a Trading Style of Heather Dunne Consulting Limited. Registered in England and Wales. Company No: Registered office: Units 4-6, Burnt House Farm Business Park, Bedlam Lane, Smarden, Ashford, Kent TN27 8PG

6 DB Schemes Must Review, Cannot ignore No longer Safe & Secure If they ever were Error & Omissions as dangerous as advice! 6

7 Gilt Yields Source: Bloomberg 7

8 DB Schemes 1. Death Benefits 2. Pension 3. Tax Free Cash 4. Choice/Flexibility/Control 5. Long Term Security 8

9 Death Benefits - Scheme The current lump sum death benefits under Defined Benefits Schemes are likely to be comparatively small usually a return of personal contributions, possibly with interest Sometimes a multiple of pension Spouse/Dependant Pensions & Contracting Out 9

10 Death Benefits - PP Return of fund Tax Free lump sum Limit is the Lifetime Allowance Nominee Accounts 10

11 Pension - Scheme Benefits due are fixed at Date Of Leaving Revalued (increased from then until retirement) In line with Inflation (RPI/CPI) Capped at 5%/2.5% pa 11

12 Pension - Personal Pension Benefits depend on the fund and Sustainability Annuity rates available at retirement Investment performance may provide a higher return increasing the potential benefit 12

13 Tax Free Cash - Scheme Post A Day 25% rule applies 25% of the cost of providing the pension HMRC 20 x Pension Valuation Factor Scheme Commutation Factor (15) 13

14 Tax Free Cash - Scheme Commutation Factor Pension Tax Free Cash Residual Pension 20 30, ,000 22, , ,462 20, , ,571 19,286 14

15 Tax Free Cash - PP Always Tax free cash 25% of fund Larger on transfer This may be Improved by good investment performance Reduced by Poor Performance 15

16 Choice & Control - Scheme The scheme decides when and how the member draws benefits Cash & Pension in format prescribed by scheme legislation 16

17 Choice & Control - PP Client decides when to draw benefits within HMRC rules At any time after 55 At any time before 75 Client decides format phased/drawdown Cash and no income Cash in stages 17

18 Investment - Scheme Scheme Trustees control investments Adjust to match liabilities The company controls wind up option Meet the shortfall crystallised 18

19 Investment - PP Client controls Investment Provider choice 19

20 Security - Scheme Most schemes are in deficit What can scheme trustees do? Reduce benefits Obtain more funding Improve performance 20

21 Security - Scheme What underpins the scheme? Company Employer Covenant Evaluating that What is the last resort? Pension Protection Fund - PPF 21

22 Pension Protection Fund - PPF PPF funded by Levy on remaining Defined Benefit Schemes Investment return on the assets held The PPF restricts the benefits: Revaluation at 2.5%/CPI (lower than scheme) 100% at retirement 90% if pre retirement Benefit Cap ( 37K/ 33K at age 65) May refuse Early retirement Cannot TV out 22

23 Security Personal Pension Client makes the investment decisions Assess Attitude to Risk Choose investments suitable to that level of risk Provider - separate from company & adviser Protection via: Financial Conduct Authority Professional Indemnity Insurance Financial Services Compensation Scheme Financial Ombudsman Service 23

24 Successful Advice is Suitable Advice 24

25 Refreshment Break

26 HDC & HDIFA Our Services How We Can Help

27 What We Do Support for advisers on Pension Transfers (HDC) Full transfer service for advisers without Pension Transfer Permissions (HDIFA) DB & DC with GMP Transfers

28 Fees - HDC TVAS Report Only 200 Per Scheme Initial Report Full Report 500 Per Scheme 1200 First Scheme Each Additional

29 Fees - HDIFA Initial Report 500 Per Scheme Full Report Transfer Subject To Our Tiered Charging Structure Based on the Total Transfer Value

30 HDIFA Charging Structure Transfer Value Fee On The First 150,000 (Minimum Of 100,000) 2% On the Next 350,000 (i.e. 150,000 to 500,000) 1% On The Next 500,000 (i.e. 500,000 to 1m) 0.5% On The Remainder (i.e. 1m plus) 0.25%

31 Initial Report Process Case Submitted with Data Sheet and Letter Of Authority Data Gathering TVAS Preparation TVAS Review Initial Report Prepared Initial Report Issued

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33 Full Report Process Full Report Documents Submitted & Reviewed Full Report Drafting Begins Full Report Completed Report Issued (HDC) Report Issued with Transfer Forms (HDIFA)

34 The Transfer Process (HDIFA) Provider = Your Choice Reasons Why Wording & Research Provided Prepare Client Agreement Meet Client with IR obtain Signed Agreement HDIFA Prepare Presentation Pack Meet Client with Full Report & Get Forms Signed We Submit To New Provider We Will Keep You Updated On A Weekly Basis Change of Agency Completed Takeover ongoing client Care

35 Timescales Initial Report Working Days Once Scheme Info Received Full Report Working Days after receiving all information from you Transfer Anything from 2 weeks to 2 months + Expectation Mangement Whole process will take around 6 months

36 Further Information Please Just ask We are all here today to help you and offer guidance on: Fees Process Technical queries Individual cases you may have in mind

37 Case Study Workshop

38 To Transfer or Not to Transfer? More Appropriate Single/No dependants Early/Late/Phased/Retirement High Capacity For Loss Adventurous Attitude to Transfer Investment experience/aims Controlling Director/self employed Lifetime Allowance Ill Health/Severe Ill Health Low revaluation/indexation Flexibility Less Appropriate Married Young Children Desire for certainty of income Low Capacity for Loss Lack of investment experience Low socio economic class No clear objectives generic not specific TV less than 20 x pension Protected Tax Free Cash Protected Early Retirement Age

39 Case Study One Please refer to case study data sheet number one In your groups, please take a few minutes to gather your thoughts on this case Refer to the set of questions we have provided

40 The Questions 1. What did you learn from the Data Sheet? 2. Are there any areas for concern? 3. What else do we need from the client? 4. What is the initial verdict?

41 Lunch Break

42 Case Study Workshop

43 Case Study Two Please refer to case study data sheet number two In your groups, please take a few minutes to gather your thoughts on this case Refer to the set of questions we have provided

44 The Questions 1. What did you learn from the Data Sheet? 2. Are there any areas for concern? 3. What else do we need from the client? 4. What is the initial verdict?

45 What do we need to know about the Scheme?

46 Everything! 46

47 TVAS - Data 47

48 TVAS - Data 48

49 TVAS - Data 49

50 TVAS - Data 50

51 What s in a Critical Yield? Heather Dunne ACII FPFS Chartered Financial Planner For Professional Advisers Only HDC is a Trading Style of Heather Dunne Consulting Limited. Registered in England and Wales. Company No: Registered office: Units 4-6, Burnt House Farm Business Park, Bedlam Lane, Smarden, Ashford, Kent TN27 8PG

52 Critical Yields - Agenda 1. Calculation of a Transfer Value 2. Calculation of a Critical Yield 3. Supplementary Critical Yields 4. Examples 52

53 Transfer Value What is a Transfer Value? Best Estimate of cost to the scheme of providing benefits 53

54 Deferred Benefit Benefit fixed at Date of Leaving Revalued to retirement RPI/CPI/5%/2.5% PPF/GMP Revaluation 54

55 Pension Due at NRA Revaluation at 2.9% Pension Due at NRA Pension Due at DOL Revaluation at 2.3% Pension Due at NRA 55

56 What effects the Cost of a Pension? Benefits included: Spouse, Dependants, Children Indexation level applicable Individual Circumstances Marital Status, Mortality, Morbidity, Gender How the cost is met Mortality Gain Underlying Investments 56

57 CETV Pension Due at DOL Revaluation Pension Due at NRA What Discount Rate? Conversion???? Capital Cost of Pension Due at NRA 57

58 CETV Adjustment Pension Due at DOL Revaluation Pension Due at NRA Conversion Cash Equivalent Transfer Value Discount Capital Cost of Pension Due at NRA 58

59 What is a Critical Yield? The growth required to match the benefits due from the ceding scheme at the scheme NRA So why isn t the Critical Yield the same as the Discount Rate? 59

60 TVAS Assumptions ASSUMPTIONS This report uses various assumptions which are prescribed by the Industry s Regulators and are subject to regular review. Valuing Scheme Benefits The Annuity Interest Rate is the annual rate of investment return used in calculating the Annuity Rates for the evaluation of scheme benefits and for converting the projected fund in the individual plan into a pension. The individual plan's pension amount assumes payments are made monthly in advance. The mortality rates used to determine the annuity are based on the CMI tables PCMA00 and PCFA00 including mortality of the male and female annual mortality projections models in equal parts. No allowance is made in these annuity rates for enhanced or ill health annuities. 60

61 TVAS Assumptions 61

62 TVAS Assumptions Reviewed Monthly Pre Retirement Post Retirement AIR N/A 1.5% RPI 2.5% 3.55% CPI 2.0% 3.03% Mortality CMI Tables PCA00 for M&F, plus adjustments 62

63 Calculation of the Critical Yield Pension Due at DOL TVAS Revaluation Scheme Revaluation TVAS Pension Due at NRA Scheme Pension Due at NRA conversion Annuity Cost Critical Yield Cash Equivalent Transfer Value Discount Capital Cost of Pension Due at NRA Capital Cost of Pension Due at NRA 63

64 Critical Yield For Annuity Purchase Currently Classified as Joint Life Single Life Normal Retirement Age Intended Retirement Age Pension Protection Fund 64

65 Critical Yield 5.6% -1.6% 65

66 Critical Yield 4.2% 5.8% 66

67 Critical Yield -1.6% -0.7% 67

68 Critical Yield 0.2% -0.2% 68

69 Cash Flow Modelling Full Scheme Pension no TFC UFPLS Phased Drawdown Drawdown TFC & Reduced Scheme Pension UFPLS Phased Drawdown Drawdown 69

70 Full Pension no TFC - UFPLS 70

71 Keith CETV v CY Revaluation RPI 2.9% pre retirement 2.8% post Higher than TVAS 2.5% Pension calculated Scheme 8,507 TVAS 8,418 71

72 Keith Capital cost at NRA Scheme 200,807 TVAS 305,901 Differential very significant Both capital costs calculated Scheme based on TV and discount rate, TVAS based on PP projection and pensions 72

73 Calculation of the Critical Yield Pension Due at DOL 6, Scheme Revaluation 2.9%pa TVAS Revaluation 2.5% pa Scheme Pension at NRA 8,507 TVAS Pension at NRA 8,418 So what was the Critical Yield? So what was the Discount Rate? Annuity Cost conversion Cash Equivalent Transfer Value Critical Yield?? 13.2% Discount?? 5.35% Cost of Pension at NRA 305K Capital Cost of Pension Due at NRA 200K 73

74 Keith s Critical Yields Keith Pension Cash Joint Life 13.2% 11.8% Single Level 4.6% 3.8% PPF 9% 8.2% 74

75 Cost of a wife 75

76 Single 4.8% 5.3% 76

77 Single assumed wife 4.8% 6.4% 6.5% 5.3% 77

78 Wife Similar Age 6.0% 6.2% 78

79 Wife ten years younger 7.4% 7.3% 79

80 Wife ten years older 5.2% 5.6% 80

81 Comparative Critical Yields Julia Christina Critical Yield 8.7% 17.7% Single Level 3.5% -17.3% PPF 0.1% -13.6% 81

82 No Late Retirement 82

83 No Late Retirement 83

84 Scheme Benefits Available NRA

85 No Scheme Benefits at LRA 85

86 What Is In A Critical Yield?

87 Refreshment Break

88 Case Study Three Again, please refer to case study data sheet number three In your groups, please take a few minutes to gather your thoughts on this case Refer to the set of questions we have provided

89 What if it was Severe Ill Health?

90 Severe Ill Health Confirmation less than 12 months to live Medical Documentation to support claim for full commutation Uncrystallised Remaining Lifetime Allowance Tax Free under age 75

91 Further clarification Re: Needs Money to spend now State Benefits Benefits on death for family IHT Position

92 Options 1. Leave as it is - No Benefits Now 2. Take Benefits Now From Scheme Death in scheme in deferment: Lump Sum Spouse s/dependants Pension 3. DB Scheme - Full Commutation Not an option As above 5. Transfer and don t take benefits Entire fund tax free up to LTA to Nom Ben on subsequent death Potential IHT implications Death in scheme in retirement: 5 Year Guarantee Spouse s/dependant s Pension 4. DB Scheme - Full Commutation Full Commutation or Part Commutation Tax Free up to LTA 6. Transfer - Full Commutation Entire fund up to LTA tax free Potential IHT implications

93 IHT Implications IHT is calculated on the reduction in the value of the estate One chair from a set of chairs One vase out of a pair of vases Probate IHT generic IHT pensions Staveley Case HMRC argued TV for IHT planning Upper Tribunal disagreed no IHT due as no intention to avoid

94 Loss to the Estate Loss is difference in the Before Value and After Value Before Value Open Market value of the benefits in DB Scheme HMRC use CETV adjusted for non immediate payment After Value Open Market Value of the pension rights in the Personal Pension HMRC use the cost of a ten-year guaranteed annuity plus the tax free cash

95 Loss to the Estate Before Value CETV - 1,000,000 After Value CETV 1,000,000 (costs and charges paid personally) Open Market Value 900,000 Benefit Value All figures based on HMRC assumptions 10 year Guaranteed Annuity ( 750K at 9%) 67,500pa Annual Annuity net of HRT 40,500pa Capital Value (Income x 8.411) 340, Net of Discount for non assignability (10%) 306,580 Less Purchaser costs of 1, ,580 Value of Annuity & Tax Free Cash ( 250,000) 555,580

96 Loss to the Estate Before Value After Value Loss 900, , ,420 Max Tax liability: 40% of 344,420 = 137,768

97 Transfer is a Gift Before Death Chargeable Lifetime Transfer Spouse Exemption does not apply First call on Nil Rate Band If loss less than Nil Rate Band and remainder to spouse under inter-spousal exemption No IHT

98 Maximum Liability to IHT 40% of Loss to estate Significantly lower than 40% of the Transfer Value

99 Thank You All For Coming Thank you for attending, we hope you have found today informative and enjoyable Please take a moment to complete the feedback form and hand it to a member of the team Tea and Coffee will now be served and the team will be available for questions

100 IMPORTANT This presentation and accompanying notes have been prepared for the benefit of the delegates only and are designed as part of this seminar. They should not be used for giving specific advice to clients. No responsibility can be accepted by Heather Dunne or HDC, for any loss occasioned by a person acting or refraining from acting on the basis of the seminar notes. Any statements made by the presenter relating to client matters are her opinions or suggestions and must not be interpreted as advice. 100