pension allowance cuts 2014 - protect and serve · 2013. 12. 11. · 11/12/2013 6 the ‘real’...

11/12/2013

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This presentation is intended for financial services professionals only and must not be relied on by anyone else. © 2013 Standard Life

Pension allowance cuts 2014- protect and serve

Bob Gordon

Technical ManagerTechnical Manager

Technical Solutions

Today’s agenda

What’s going on?

Who’s affected?

Pension protection 2014

Pension allowance cuts 2014 – protect and serve

The advice challenge

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What’s going on?

Pension tax relief in perspective Government expenditure - 2011/12*

£74Bn

£43Bn£35Bn

£27Bn

Pension allowance cuts 2014 – protect and serve *source HMRC

State benefits

Armed Forces

Pension tax relief

Tax credits

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• Pension tax breaks cost £35Bn a year (2011/12)*

The rising cost of pension tax breaks And a new policy focus

Pension tax breaks cost £35Bn a year (2011/12)– net cost £23.7Bn (after tax on pension income)*

• Costs are up 19% in 2 years*

• Perception is tax incentives aren’t meeting policy objectives

• Refocus on using tax breaks to reduce reliance on StateRefocus on using tax breaks to reduce reliance on State– 75% of tax breaks currently go to higher/additional rate taxpayers*

– but 50% of contributions relate to basic rate taxpayers*

– and the savings gap is primarily amongst basic rate taxpayers


*Source: Pensions Policy Institute report ‘Tax relief for pension saving in the UK’ (July 2013)

• State pension reform from 2016 to cap costs– single-tier £144 a week from age 68?

The Government’s response

• Auto-enrolment to tackle savings gap at lower end– expected to bring 8M new people into pension saving

• More pension allowance cuts from 2014/15– AA cut to £40k (from £50k) - hits 140,000 clients*

– LTA cut to £1.25M (from £1.5M) – hits 360,000 clients*

– £1.125Bn combined yearly saving to exchequer by 2017/18*

• Threats of further tinkering with private pensions– LibDems propose further LTA cut to £1M to fund 1% tax cut

– PPI report is influencing thinking on tax-relief & TFLS

Pension allowance cuts 2014 – protect and serve *Source HMRC

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Who’s affected?

Lifetime allowance changes 2014 How many clients are affected?

2014 2030?

30,000*

360,000*


*Source: HMRC**Standard Life estimate

£250Bn+**

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Lifetime allowance Which way is the wind blowing?

Lifetime allowance


It’s a game changer for retirement planning

• Lifetime allowance cut to £1.25M from April 2014£62 500 DB i f ll d d LTA (£1 25M/20)

Lifetime allowance changes 2014 A game changer for retirement planning

– £62,500 pa DB pension fully uses reduced LTA (£1.25M/20)

• It’s not going up again soon

• ‘Real’ lifetime allowance could be much lower– £700k fund breaks £1.25M @ 6% growth for 10 years

– £45k DB pension hits £1.25M @ 3.3% revaluation for 10 years

Risk of £62 5k (25%)/ £137 5k (55%) ‘windfall tax’• Risk of £62.5k (25%)/ £137.5k (55%) windfall tax’

• New protection options to lock-into a higher allowance


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The ‘real’ lifetime allowance Current fund to exceed allowance

£1.25M £1.5M

Years to go 4% 8% 4% 8%

3 £1.112M £993k £1.334M £1.191M

5 £1 028M £851k £1 232M £1 021M


And this assumes pension saving stops now

5 £1.028M £851k £1.232M £1.021M

10 £845k £579k £1.013M £695k

Segmenting your clients Get a handle on their LTA position

Existing protection? Review situation? No action needed?

Type of pension?

Defined benefit

Defined contribution

Deferred Active

Legacy Contributing

LTA value? NowAt retirement

(no more savings)At retirement

(ongoing savings)

Employer contribution?


Years to retirement?

(no more savings) (ongoing savings)

< 5 5 to 10 > 10

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Segmenting your clients Prioritising action

Already over £1.25MMust act before Aprilp

Projected over £1.25M even if pension saving stopsMust review soon – action likely before April

Projected over £1.25M if pension saving continuesSet-up reviews – target older clients before April

P j t d b t £1M d £1 25M


Projected between £1M and £1.25MReview regularly - monitor progress

Projected under £1MNo immediate action needed

Pension protection 2014

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• The lifetime allowance cut potentially exposes up to an extra £250 000 of pension savings to LTA tax

Lifetime allowance cut 2014 The tax implications

extra £250,000 of pension savings to LTA tax

• 55% LTA tax on excess savings taken as lump sums– up to £137,500 LTA tax

• 25% LTA tax (+ income tax) on excess savings used to provide income

up to £62 500 LTA tax (+ income tax)– up to £62,500 LTA tax (+ income tax)

• HMRC view these charges as broadly tax neutral– aim is to cancel out tax-relief on contributions and tax-free growth


• Even within the LTA most benefits are taxed

– 75% of retirement benefits are subject to income tax

Lifetime allowance cut 2014 The ‘real’ tax rate

– only the TFLS/ uncrystallised lump sum death benefit is tax-free

Effective TOTAL tax rate on retirement benefitsBasic rate

taxpayerHigher rate

taxpayerAdditional

rate taxpayer

Benefits within LTA(with 25% TFLS) 15% 30% 33.75%


(with 25% TFLS)

Excess above LTA(taken as income) 40% 55% 58.75%

Excess above LTA(taken as lump sum) 55% 55% 55%

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Lifetime allowance cut 2014 The ‘extra’ tax rate above LTA

EXTRA tax rate on excess retirement benefits

Basic rate Higher rate Additional rateBasic rate taxpayer

Higher rate taxpayer

Additional rate taxpayer

Income 25% 25% 25%

Lump sums 40% 25% 21.25%

• But lump sums paid from excess funds on death beforetaking benefits (and age 75) face the full 55% extra tax hit– these lump sums are paid tax-free within the LTA


• There are 2 new options to lock-into a higher LTA

Pension protection 2014 Mitigating the tax hit

p gbeyond 5 April 2014– ‘individual protection’ gives a personal LTA of £1.25-£1.5M

– ‘fixed protection’ gives a personal LTA of £1.5M

• Simplification?’ll h 6 diff t li it i !– we’ll now have 6 different limit regimes!

– standard + enhanced + primary + fixed 2012 + the 2 new options

– not to mention protected lump sums and low pension ages


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• Individual protection gives LTA of £1.25–£1.5M– LTA based on fund value at April 2014 (up to £1.5M)

Individual protection 2014 A higher LTA with no trade-off

– no need to stop funding (or lose employer funding/DB accrual)

– TFLS also calculated based on personal LTA

• Only available if pensions are > £1.25M on 5/4/14– not available to clients with primary protection

– can use as ‘safety net’ with fixed protection 2012/14 (+ enhanced?)

• Must apply for protection by 5 April 2017• Must apply for protection by 5 April 2017– forms not available until Autumn 2014 (Finance Act 2014)


If you’re eligible for individual protection, do it

• Fixed protection 2014 gives a personal LTA of £1.5M– TFLS also calculated based on personal LTA of £1.5M

Fixed protection 2014 A £1.5M LTA – with a trade-off

TFLS also calculated based on personal LTA of £1.5M

• Trade-off is no ‘benefit accrual’ allowed after 5/4/14– DC = no more contributions

– DB = increases after 5/4/14 stay within ‘relevant %’ each tax year

• Not available to clients with any earlier protections– can use alongside ‘dormant’ individual protection (if eligible for IP)

– individual protection better deal for clients > £1.5M at 5/4/14

• Must apply for protection by 5 April 2014 (APSS228)


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• To keep fixed protection, the DB value at 5/4/14 can’t increase by > the ‘relevant %’ in any tax year

DB fixed protection and the ‘relevant %’

– DB benefit value is calculated as (20 x pension) + separate TFLS

• The ‘relevant %’ is:– any rate of benefit increase specified in scheme rules at 11/12/12,

– otherwise, it is CPI (for the Sept before the start of the tax year)

• Scheme rules are only likely to specify a rate for:b fit (i th l ti % f P S l)– career average benefits (i.e., the annual uprating % for Pens Sal)

– late retirements (LRFs)

– deferred benefits (PUPs)


Pension allowance cutThe advice challenge

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The advice issues

Take benefits before

Advice options

before April

Individual protection (can continue contributions)

Final pension top-up

Review investment

strategy

Fixed protection

(stop contributions)


Other saving

vehicles

Bring pensions together

Advice issues Protect or not? – considerations

Individual – do it if eligible (higher LTA with no downside)

Fixed – only way to lock into higher LTA if below £1.25M @ 5/4/14Individual, fixed,

None – more exposure to LTA tax, but might give best client outcome

What is the trade-off for protection? (value of future pension provision)

Will employer compensate for lost pension funding? (does it stack-up?)

Will employer pay a final pension top-up before 6 April 2014?

Both – IP gives safety net if fixed is lost (if above £1.25M @ 5/4/14)

Individual, fixed, both or none?

Employer contributions?


Should client pay a final pension top-up before 6 April 2014?

May be best advised to stop (esp voluntary/ AVCs) and save elsewhere?

Must personal contributions continue to get employer contribution?

Personal contributions?

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Advice issues Getting pensions in shape - considerations

5/4/14 payment deadline for fixed protection cases

Get it while you can – carry forward, flex PIP rules, get tax reliefPension top-up

Project benefits against LTA with and without top-up

Can improve terms (LFDs) and widen investment choice

Opens-up more tax-efficient decumulation & wealth transfer options

Watch out for guarantees – but don’t let the tail wag the dog

p p

Consolidate

Easier to monitor progress towards LTA


g g g

De-risk investments to target LTA to reflect reduced reward for risk-taking

Changes risk/ reward equation – 100% of downside v 45% of upside

2006 LTA covenant broken – LTA frozen or reducing

Review investments

• Clients giving-up on pension saving need to find alternative

i hi l d t

Advice issues Alternative saving strategies – the options

saving vehicles and tax wrappers

– even clients staying in employer schemes should consider redirecting personal/ voluntary pension saving to other vehicles

i fl ibl d l ti

ISA

Bonds

Spouse’s pension

Trusts

– gives flexible decumulationoptions and potential safety net if plans don’t work out


VCTEIS

Mutual funds

Shares

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Advice issues Alternative saving strategies - considerations

Using both pension allowances reduces risk of LTA tax

Spouse gets tax relief on client payments up to £3,600 or 100% of incomeFund spouse’s

pensionOpens-up more tax-efficient decumulation options

ISA – use allowance – tax-efficient growth – easy access

Bonds – investment choice – tax-efficient – tax planning/ assignment

Mutual funds – investment choice - flexibility

pension

ISA Bonds

Mutual funds


Asset protection on death, divorce, bankruptcy

Retain control over who gets what – and when

Separate assets from personal wealth/ estate

Trusts

Key advice considerationsThe advice challenge

Already over £1.25M

Projected > £1.25M (no more saving)

Projected > £1.25M (with new saving)

Projected£1M to £1.25M

Protect or not?(fixed or individual)

Must act before April

Protect or not? – fixed only

Must review – action likely before April

Review soon – older clients before April

Monitor progress –review regularly

Top up pension before 6 April 2014?

Take benefits before 6 April 2014?


Consolidate pensions? – easier tracking, investment choice, benefit flexibility - but watch guarantees

Consider alternative saving vehicles and tax wrappers?

Review pension investments? – potentially de-risk

Top-up pension before 6 April 2014?

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Any questions?

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 presentation Tax and legislation are

The legal stuff

in the UK as at the date of 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 customer’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.


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Investment risk

Past performance is not a guide to future performance. As with any investment, the value of your client's fund can go down as well as up and may be worth less than they invested.y y

Where we mention FTSE we are referring to FTSE®

*"FTSE" is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited ("FTSE") under licence. Standard Life Wealth is licensed by FTSE to redistribute the FTSE All Share and FTSE 100. All rights in and to the FTSE All Share and FTSE 100 vest in FTSE and/or its licensors AllFTSE All Share and FTSE 100 vest in FTSE and/or its licensors. All information is provided for reference only. Neither FTSE nor its licensors shall be responsible for any error or omission in the FTSE All Share and FTSE 100.


pension allowance cuts 2014 - protect and serve · 2013. 12. 11. · 11/12/2013 6 the ‘real’...

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