Pensions update: Budget 2016 and DB Transfers

1. Pensions update:Budget 2016 and DB Transfers Ian Naismith

2. Agenda Budget 2016 Pension changes announced Lifetime ISA Annual and lifetime allowance changes DB transfers Issues highlighted by FCA Key points from CP15/30

3. Budget 2015 – pension changes Pensions Dashboard To be developed by the industry by 2019. Serious Ill Health Payments possible from crystallised funds. Taxed at marginal rate post-75. Dependant’s Drawdown Child can continue dependant’s drawdown beyond age 23. Financial Advice Employer-funded tax-free allowance up from £150 to £500 from April 2017. Consultation to allow up to £500 from fund for advice before age 55. Charity lump sums Available from crystallised and uncrystallised funds pre-75. 2 year limit does not apply. Trivial Commutation Available from money purchase scheme pension.

4. Lifetime ISA basics Bonus until age Paid after end of tax year Start by age 40 50 Government 25% bonus OR First home worth up to £450,000 Lose bonus + 5% charge Individual’s contributions – up to £4,000pa

5. Benefits of pension (basic rate taxpayer) Figures ignore investment growth, charges and possible annuitisation

6. Pension v. lifetime ISA – overall gain Figures ignore investment growth, charges and possible annuitisation

7. Pension v. lifetime ISA – overall gain Figures ignore investment growth, charges and possible annuitisation

8. Lifetime ISA benefits First-time buyers Savers for retirement • Likely to form a large majority for Lifetime ISA • Many would save without the bonus • Take care with qualifying criteria • LISA bonus equivalent to basic rate relief, but no tax on benefits • LISA gives greater gain for personal contributions, unless tax rate reduces in retirement • Not as attractive as pension with employer contributions • Pension exempt from IHT

9. Tapered annual allowance Annual Allowance Adjusted income

10. Definitions Threshold income Taxable income MINUS relief at source contributions PLUS new salary sacrifice Adjusted income Taxable income PLUS employer contributions PLUS net pay arrangement contributions For defined benefit schemes, employer contributions = benefit accrual (16:1 factor) minus required employee contribution.

11. Tapered annual allowance Pension £50,000 Pension £80,000 Adjusted net income = £180,000 Annual allowance = £40,000 – (£180,000 - £150,000)/2 = £25,000

12. Tapered annual allowance Pension £50,000 Pension £80,000 No tapered annual allowance because income < £110,000.... ....but has exceeded the normal annual allowance

13. ISSUES AND MITIGATIONS • Income may not be known until end of tax year – defer pension contributions? • Relief at source contributions can take threshold income below £110,000. • Carry forward may be available from previous years, based on the annual allowance then. • Consider other tax-beneficial savings – e.g. employer share schemes – and non-pension vehicles.

14. Lifetime Allowance

15. The new protections

16. Applying for protection Deadlines for all other protections have passed

17. Interim process Online application not available until Finance Act receives Royal Assent in July. Write letter to HMRC using standard template See HMRC Pension Schemes Newsletter 76 for process and 77 for updated letter template. 77 also has explanations for consumers. HMRC provides reference number valid until 31/7/16 Apply online when that becomes available

18. Lifetime allowance actions Assuming no existing protections: Value @ 5 April 2014 > £1.25 million Apply for IP14. Value @ 5 April 2016 > £1 million Apply for IP16. Consider FP16. Value @ 5 April 2016 < £1 million Consider FP16 if it may grow above £1 million If value > £1.25 million, FP16 could be beneficial if IP14 or IP16 is reduced by a subsequent pension sharing order.

19. pension transfers: key points • Advice independent of the scheme required for transfers of safeguarded rights to access retirement freedoms if value is over £30,000 • Advice on transfer from DB to PP must be given or checked by a pension transfer specialist. Firm must also have a permission for such advice. • Advice on transfer from DB to PP must be accompanied by transfer value analysis, except at scheme NRA or for immediate benefit crystallisation

20. pension transfers: fca concerns “Firms are not providing sufficient evidence for recommending a transfer, or the reasons given were not specific to the client. We have seen examples where clients with different attitudes to risks are being advised to invest in the same fund with little or no justification. Firms need to ensure their risk profiling procedures are in-line with the good practice we published.” http://www.fca.org.uk/firms/financial-services-products/investments/pension-transfers

21. pension transfers: fca concerns “Firms are not providing sufficient evidence for recommending a transfer, or the reasons given were not specific to the client. We have seen examples where clients with different attitudes to risks are being advised to invest in the same fund with little or no justification. Firms need to ensure their risk profiling procedures are in-line with the good practice we published.” http://www.fca.org.uk/firms/financial-services-products/investments/pension-transfers Personalisation

22. fca concerns “Firms are not providing sufficient evidence for recommending a transfer, or the reasons given were not specific to the client. We have seen examples where clients with different attitudes to risks are being advised to invest in the same fund with little or no justification. Firms need to ensure their risk profiling procedures are in-line with the good practice we published.” http://www.fca.org.uk/firms/financial-services-products/investments/pension-transfers Documentation

23. latest consultation – CP15/30 • Starting-point is that DB to DC transfer is unsuitable • Should this be reviewed for those over age 55? • Advisers won’t transact for insistent clients (PI insurance / Ombudsman) and providers won’t take direct instructions • Is there a case for amending regulation? • TVA assumes annuity purchase • Is this appropriate if drawdown/UFPLS intended? • TVA outputs too long and complicated • How can they be made more meaningful? • Focused advice for enhanced TV exercises too narrow • What advice options should FCA consider? FCA CP15/30, Chapter 8

24. Insistent clients – fca guidance 1. You must provide advice that is suitable for the individual client, and this advice must be clear to the client. This is the normal advice process. 2. It should be clear to the client that their actions are against your advice. 3. You should be clear with the client what the risks of the alternative course of action are. • Good Practice • Gather bespoke information • Resolve inconsistencies • Explore the real need • Make advice unambiguous • Document reasons & risks • Give robust warnings • Retain contemporaneous records • Use the client’s own words FCA factsheet 35 - Pension reforms and insistent clients

25. TVA - COBS 19.1.2R summary • A firm must: • (1) Compare the benefits of the DB scheme and the new personal/stakeholder pension • (2) Provide enough information to enable an informed decision; • (3) Provide a copy of the comparison, highlighting factors that do and do not support the advice, in good time; and • Take reasonable steps to ensure that the client understands the firm’s comparison and its advice.

26. KEY TVA ISSUES • How meaningful is a TVA close to retirement? • May be unrealistic to assume an annuity will be bought • May be looking at variable withdrawals or cashing in • BUT this is the major quantitative tool available • 2. How much information is enough, but not too much? • TVA report typically 20-40 pages, on top of suitability letter • Lots of comparisons, including if scheme enters PPF • How can we shorten without increasing risk? • Remember: TVA is only a tool informing your recommendation

27. transfer conclusions • Keys to good advice are taking individual circumstances fully into account, making sure the client understands and documenting thoroughly. • The FCA expects us to keep customer documentation as short as possible – important judgement call on what can be left out for individual customers. • Advisers are under no obligation to transact business against their recommendation, but possible perception problem if ‘the industry’ is seen to be blocking transfers.

28. Questions?

29. Important Notes This material is for use by UK Financial Professionals only. It is not intended for onward transmission to private customers and should not be relied upon by any other person. Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. Scottish Widows plc. Registered in Scotland No. 199549. Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: 0131 655 6000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 191517.