pension decumulation claire trott pensions technical manager, suffolk life

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Pension decumulation

Claire TrottPensions Technical Manager, Suffolk Life

HAPPY PENGUINS?

Agenda

• Background

• Capped Drawdown

• Flexible Drawdown

• Investing for Drawdown

Why are we here?

Drawdown changes 2011-2012

Changes to age 75 rules

Rise of flexible drawdown

What do we want to achieve?

Reaffirm knowledge of implications of capped drawdown changes – Tax issues

Be confident in complexities of flexible drawdown

Review issues of investment for drawdown in these difficult times

Capped Drawdown

Scenario

• Female, aged 62

• FV = £500,000

• Wants max Pension Commencement Lump Sum

Questions

1. What is her Max GAD today

2. What would it be if the gilt yields remained the same but she chose to wait until Jan to crystallise?

3. List the circumstances that would cause the Max GAD to be recalculated/reduced

4. List some reason why Capped DD is still suitable even at reduced GAD rates

Model answers 1

• Max gad is £17,250

• Fund value used = £375,000

• Gad Rate, based on age, gender and FV = £46 per £1000

Model answers 2

• The interim gender neutral tables shouldbe used

• This means males table

• Max gad is £18,375

• Fund value used = £375,000

• Gad Rate, based on age, gender and FV = £46 per £1000

Model Answers 3

• Buy a lifetime annuity with part of the fund

• Buy a scheme pension with part of the fund

• Pension sharing order placed on the drawdown

• Crystallise further funds into the same drawdown arrangement

Model answers 3 - bonus points

• Transfer from one RPS to another if you are crystallised before April 2011

• Will also mean a move to 100% GAD from 120% and move to triennial reviews

• At their request, although this will only be at the anniversary of the pension year.

Model answer 4

• Retained control• Investment control

• Future retirement options

• Not locked into current rates

• Ability to take advantages of future improvements

• Improved death benefit options• Lumps sums

• Flexibility for spouse

Flexible drawdown

Scenario - Martin• Male aged 70

• Partially crystallised in Drawdown in February 2005

• Review of limits in June 2011

• Max GAD now £20,000

• He has:

• state pension benefits of £7,000

• Final salary pension currently £15,000pa increasing annually by 5%, in payment since age 60

• £500,000 uncrystallised funds

Questions

• Give an overview of the basic conditions for Martin to enter flexible drawdown

• List reasons for entering Flexible other than to strip the fund

• Martin meets the conditions and enters flexible taking an income of £100,000 from his fund, when he crystallises his remaining fund in October 2012, how much lifetime allowance is remaining following this crystallisation

Model answer

Model answer 1

1. No contributions (personal or third party) or accrual in a DB scheme have occurred in the tax year in which declaration is made

2. One payment of each income used for MIR has been received

3. The whole MIR (£20,000) will be received in the tax year of the declaration

Model answer 2

• Protection of death benefits

• Crystallise less to receive same income

• Leaves more uncrystallised for death lump sum pre 75

• Reduction in fees for triennial reviews

• Maximising income in tax rate band

• Possible gifts from income - IHT

Model answer 3

First crystallisation since A-day, need to test preA-day benefits

25 x £20,000 = £500,000

25 x £15,000 = £375,000

Lifetime allowance reduced by £875,000 = 58.33%

BCE 1 = £375,000 = 25.00%

BCE 6 = £125,000 = 8.33%

Remaining LTA = 100 - (25+8.33+58.33) = 8.34

Monitor increases in pre A-day benefits!

Investment in drawdown

Scenario

• Male, Age 62,

• Not looking to annuitise for at least 10 years

• Fund value = £500,000

• Going to take maximum PCLS

• Max Gad of £18,750 but only looking to take income of £10,000pa.

• He is a medium risk profile.

Model answer

Thanks to Brooks Macdonald Asset Management

GAD rates . . . built on Gilt Yields

24

Source: Bloomberg, September 2012

25

Source: Brooks Macdonald, 2012

Income segregation

Asset allocation

UK,Fixed Interest, 11%

International & Thematic, 12%

Property, 4%

Cash, 10%

Alternatives, 4%

Internation, Fixed Interest, 12%

European Equity, 3%UK Equity, 19%

North American Equity, 10%

Structured returns, 10%

Japan, Far East and Emerging Markets, 5%

Fixed InterestAlliance Trust Monthly Income Bond FundAXA Framlington US Short Duration HY Bond FundUK EquityLindsell Train UK Equity FundMontanaro UK Smaller Companies TrustNorth AmericaThreadneedle American FundEuropeHenderson European Special Sits FundJapan, Far East & Emerging MarketsNewton Asian Income FundInternational & ThematicJohn Laing Infrastructure FundM&G Global Dividend FundPropertyBraemar Ground Rents FundStructured ReturnIFSL Brooks Macdonald Defensive Growth FundSource: Brooks Macdonald Asset Management

Dividends matter – Global returns from January 1970 to December 2011

27

Source: MCSI, 2012

Risk warningInvestors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a guide to the future. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse affect on the value, price or income of an investment.

Investors should be aware of the additional risks associated with funds investing in emerging or developing markets.

The information in this document does not constitute advice or a recommendation and investment decisions should not be made on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others.

Brooks Macdonald disclaimerBrooks Macdonald Group, its subsidiaries and/or their officers, directors and employees may also own and trade in the underlying assets. Tax treatment depends on individual circumstances and may be subject to change in the future.

This documentation may contain confidential or legally privileged information that is intended for the addressee only. Any views or opinions presented are solely those of the author and do not necessarily represent those of Brooks Macdonald Asset Management. If you are not the intended recipient you are hereby notified that any disclosure, copying, distribution or reliance upon the contents of this documentation is strictly prohibited. If you have received this documentation in error, please notify the sender immediately, so that arrangements may be made for its proper delivery.