This presentation is directed at Professional Financial Advisers only.It should not be distributed to or relied upon by retail clients.

“Bold, modern, progressive”

SBG

AXA Wealth

Agenda

• Pension changes – headlines.

• How will consumers react to change?

• Some of the unknowns and some of the pension planning opportunities.

• Is higher rate tax relief on pension contributions at risk?

• The value of cash flow modelling

Pension Changes - Headlines 2014/15• New – effective from 27 March 2014

• Capped Drawdown maximum GAD 150%

• Flexible Drawdown Minimum Income Requirement £12,000

• Trivial commutation limit increased to £30,000

• Small pots limit increased to £10,000 per arrangement and a maximum number of payments increased to 3

• The purchase of an annuity can be deferred for longer than 6 months after taking PCLS, to allow individuals to benefit from the proposed new rules

The closing date for responses to the

consultation is Wednesday 11 June

2014.The 10 questions posed in the consultation consider the

application rather than the creation of the legislation, for

example;

•“what more can be done to ensure the guidance is

available at key decision points during retirement?”

•“how can the government design the new system such

that it enables innovation in the retirement income

market?”

Why has the Government proposed to change the way in which

pension benefits can be taken?

George Osborne“The annuities market is currently not working in the best interests of all

consumers. It is neither competitive nor innovative and some consumers are

getting a poor deal. It is time for a bold, modern and progressive reform.”

“This is the most fundamental change to how people can access their

pension in nearly a century.”

Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf

Chancellor v Regulator…..

What retirement planning vehicle would you normally consider for a client

with less than a £100,000 fund?

Falling out of love with annuities?

FCA’s Thematic review of annuities: Findings– 60% of consumers do not switch when they buy an annuity.

– For standard annuities an estimated 79% could get a better deal on the

open market.

– For enhanced annuities an estimated 91% could get a better deal on the

open market.

Source: http://www.fca.org.uk/static/documents/thematic-reviews/tr14-02.pdf

Standard Enhanced

Average fund size used for annuity purchase £17,000 £26,800

Average annual income achieved from existing pension provider £1,000 £1,630

Average amount of annual increase in income £67 £135

Average proportion annual income could be increased by 6.7% 8.3%

Estimated annual income gains by consumers from purchasing an annuity on the open market

Saving less for retirement

• Government concerned that a lack of choice at the point of retirement will

undermine confidence in longer term saving.Source for table: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/

freedom_and_choice_in_pensions_web_210314.pdf

and living longer*…..

1948 65 male 12 year life expectancy

2012 65 male 21 year life expectancy

1948 65 female 15 year life expectancy

2012 65 female 24 year life expectancy

• Government concerned that annuities might not be the correct product for

everyone - rates have reduced as life expectancy has increased.

*Source:: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/

freedom_and_choice_in_pensions_web_210314.pdf

Current tax system for accessing DC at retirement

Pension potTax free lump

sum

Full withdrawal (at marginal rate)

AnnuityFull

withdrawal

Capped drawdown

Flexible drawdown

£30,000

(previously £18,000)£310,000*

*This is a stylised assumption based on an individual with a full basic state pension of £5,744 per year, who takes the

max. PCLS from their DC plan and purchases a single life, level, no guarantee annuity worth £14,256 p.a. (an annuity rate

of 6.1%) at age 65.

Future tax system for accessing DC at retirement

Pension potTax free lump

sum

Full withdrawal (at marginal rate)

AnnuityDrawdown

/ other products

Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293759/37630_Budget_2014_Web_Accessible.pdf

The projected impact on tax revenues of the measures to introduce greater flexibility and choice to defined contribution pensions.

How many retirees will use their pension pot to buy an annuity, according to research?

• Poll of 1,000 scheme members conducted by Hymans Robertson

Source: http://www.hymans.co.uk/news-events/newsroom/the-budget-pension-reforms-only-25-of-retirees-will-use-pension-pot-to-buy-an-annuity,-according-to-research.aspx

Options Percentage

Use “most or all” of their pension pot to buy an annuity when they retire

25%

Take most of their pension pot as cash to spend in other ways and some to buy an annuity

32%

Not buy an annuity and take their whole pension pot as cash to spend in other ways

12%

Not buy an annuity, keep control of their money and draw an income from the pot each year

31%

Other survey “highlights”• Defined contribution scheme members closer to retirement take a more negative

view of the value of annuity.

• 34% of scheme members aged over 51 felt that annuities “are not flexible enough

for (my) retirement plans compared to 20% of people under 51.

• 38% of scheme members aged over 51 felt that annuities were “poor value for (my)

savings” compared to 21% of people under 51.

• 61% of DC scheme members agree that they are confident about self-managing

the money built up in pension pots throughout their retirement compared to 19%

who aren’t.

Still early days and when the moment of truth comes what price will

individuals place on the value of a guarantee?

Source: http://www.hymans.co.uk/news-events/newsroom/the-budget-pension-reforms-only-25-of-retirees-will-use-pension-pot-to-buy-an-annuity,-according-to-research.aspx

Question

What proportion of your current pension clients will look for ongoing advice when taking income from their pension fund? 

A.Above 75%

B.50-75%

C.25-50%

D.Below 25%

Some of the unknowns…• What will the pension death benefit tax charge be?

• Can you crystalise some funds and continue to contribute to pension?

• Can over 75’s contribute if they have already crystallised funds at an earlier

date?

• What will pensioners bonds look like?

• What will guidance look like for a consumer?

• Will the minimum age to access private pensions increase?

High tax rate on exit

Access pre age 55*

Death during investment period**

Death after taking cash from pension

NISA Pension

High tax rate on entry

NISA v pensions – a high level summary

*Date that pension can be accessed could increase in the future.** Is the NISA invested in BPR qualifying AIM stock / estate below the NRB / beneficiary a spouse or civil partner?

Does the power of tax relief swing the pendulum in favour of the pension wrapper?

?

Funding for Flexible pensions….

 

Basic Rate Taxpayer£80

Higher Rate Taxpayer £60

Additional Rate Taxpayer £55

ARTPCLS £25Pension £41.25TOTAL £66.25

HRTPCLS £25Pension £45TOTAL £70

BRTPCLS £25Pension £60TOTAL £85

Gross£100

Effective net contribution Net benefit

Bonus Vs Dividend Vs Pension cont. • Assuming £200,000 profit to extract, £100,000 each for two directors who are currently

higher rate tax payers.

• *Consider also the potential loss of personal allowance and increased income tax liability by £4,000 (£10,000 X 40%)

• ** Assumes sufficient carry forward of annual allowance is available

Bonus Dividend Pension**

Profit £100,000 £100,000 £100,000

Corporation tax £0 £20,000 £0

Employer’s NIC £12,127 £0 £0

Net profit for distribution

£87,873 £80,000 £100,000

Employee’s NIC £1,757 £0 £0

Employee’s I.T. £35,149 £20,000 £0

Net benefit £50,967* £60,000* £100,000

Bonus Vs Dividend Vs Pension cont: The net benefit Bonus Dividend Pension

Profit £100,000 £100,000 £100,000

Total tax and deductions

£49,033 £40,000 £0

Net Benefit £50,967 £60,000 £100,000

Flexible Drawdown BRT £25,000 PCLS + £60,000£85,000*

HRT £25,000 PCLS + £45,000£70,000

ART £25,000 PCLS + £41,250£66,250

*If withdrawn as one lump sum some will be taxed at 40%

Higher rate taxpayers are on the increase….

• Over the last 30 years the number of 40p taxpayers has risen by 400% with 4.4m paying higher rate in 2014, up from 930,000 in 1984.

• More than a million people have been pulled into the 40p tax band since 2010.

• A further 313,000 pay the top rate of 45p.

• Whilst only 16% of taxpayers pay the higher or additional rates of tax, the top 10% of taxpayers now account for 59 per cent of total income tax contributions!

Our simple tax relief system for 2014/15!

20%relief

40%relief

60%relief

40%relief

£41,

865

£100

,000

£120

,000

Over £

150,

000

45% relief

Or even a combination of these rates

£0

Question

What proportion of your current higher rate tax paying clients will be effected by the new Lifetime allowance of £1.25mill?

A.None

B.Less than 5%

C.5 -20%

D.Over 20%

Cashflow Modeling

• Cashflow

• Assets

• Expenses

Cashflow

25

Assets

26

Expenses

27

Summary

• Now more than ever clients need advice.

• Professional connections also need help and advice – are they up to speed with all the changes in pension legislation?

• This is an advice rich area for advisers

Thanks for listening

Important informationInformation about tax is based on AXA Wealth’s interpretation of current legislation and HM Revenue & Customs' practice. Tax treatment can change and depends on your client’s personal circumstances.

The information contained in this presentation does not constitute advice. It is designed for financial adviser use only and is not intended for use with individual investors. Any sample screen shots displayed are correct at date of issue but may be subject to change.

AXA Wealth, Winterthur Way, Basingstoke RG21 6SZ. Telephone number: 01256 470707. As part of our commitment to quality service and security, telephone calls may be recorded.

AXA Wealth includes the following companies: Architas Multi-Manager Limited (No. 06458717), AXA Portfolio Services Limited (No. 01128611), AXA Wealth Services Limited (No. 02238458) and AXA Wealth Limited (No. 01225468). All of these companies are registered in England and limited by shares. Their registered office is 5 Old Broad Street, London EC2N 1AD.

Architas Multi-Manager Limited, AXA Portfolio Services Limited and AXA Wealth Services Limited are authorised and regulated by the Financial Conduct Authority. AXA Wealth Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Each company promotes and distributes its own products. AXA Wealth Services Limited also promotes and distributes the products of AXA Isle of Man Limited and certain AXA Life Europe Limited products in the United Kingdom. Details of the companies offering specific products are shown in the product literature

AXA Wealth is a marketing brand used by AXA Portfolio Services Limited.