July CPD Newsbrief — Pensions and retirement planning
Further uncertainty for SIPP providers
The FCA has once again delayed publication of its capital adequacy requirement rules for self-invested personal pensions (SIPPs).
The final rules were expected to be published in June 2014, but the FCA now says they will not be published until the third quarter of 2014.
The Financial Services Authority first proposed changes to the requirements for SIPP providers in Consultation Paper 12/33 in November 2012. Under those proposals, the minimum a SIPP provider would have to hold to meet the cost of any wind-down of the scheme would be increased from £5,000 to £20,000.
In addition to this updated minimum capital requirement, the total capital requirement would include an initial capital requirement based on ‘standard’ assets under administration. There would also be a capital surcharge for providers holding ‘non-standard assets types’.
‘Non-standard assets’ are defined as assets that are not on a specified list of ‘standard assets’, and so in the regulator’s view would incur additional time and cost if they needed to be transferred to another provider. Examples include unregulated collective investment schemes (UCISs) and commercial property. Although most non-standard assets are significantly more difficult and costly to transfer during a scheme wind-down, the main debate is over whether UK commercial property is really a non-standard asset.
What is not debated is that the current proposals will lead to significant increases in the levels of capital that some operators will need to hold, especially for SIPP providers who hold a high proportion of ‘non-standard’ assets. The consultation recognises the possible impact of this by asking: ‘Would this proposal lead to a significant reduction in the level of competition within the SIPP sector?’
As the FCA considers these issues, this further delay adds to the uncertainty felt by SIPP providers. However, the FCA says it is determined to take its time to ensure it gets the overall rules right.
Pensions Act raises questions over state provision
The newly minted Pensions Act 2014 is already creating ripples.
The Pensions Act 2014 received Royal Assent on 15 May, after more than a year of parliamentary scrutiny. The DWP wasted no time in producing a shower of press releases and information on the contents of the act. Among these was a formal extension to its State Pension Age (SPA) timetable to cover the move from age 66 to 67 in the two years from April 2026.
The new SPA table ends with a birth date of 5/4/1977 because the Pensions Act 2007 currently sets an SPA of 67 or 68 for those born later. In practice, the 2007 act is now irrelevant: the Pensions Act 2014 introduces regular reviews (and thus likely increases) of SPA at least every five years, with the first due for completion by May 2017. Nevertheless the latest DWP SPA website calculator still has an SPA ceiling of 68.
The DWP also issued an updated version of ‘Your State Pension statement explained’ in the wake of the act’s passing. However, this is not accompanied by a calculation system that takes account of the single-tier regime. For men born after 5 April 1961 and women born after 5 April 1953, the pension statement is based on the current (Basic + Additional State Pension) regime and NIC record to the date of calculation.
SteveWebb, the pensions minister, was challenged by the BBC Moneybox programme on the lack of projections for those who reach SPA shortly after April 2016. His response was to say that the DWP was ‘prioritising’ the production of statements for the two-million-plus individuals whose SPA arrives in the first five years of the single-tier pension’s existence. They will be able to request a single-tier based statement ‘later this year’, according to Mr Webb. It will not be produced automatically.
The sooner the DWP gets out the message about single-tier entitlements, the better. Initially, 61 per cent of those reaching SPA will receive less than the full single-tier pension, according to DWP estimates.
PPI tests pensions flexibility
The Pensions Policy Institute (PPI) has examined the impact of pension flexibility overseas.
Flexibility may be the pension topic of the moment in the UK, but from an international perspective, it is old hat. Last month, the PPI published a briefing paper looking at the pension flexibility experience of nine countries, including Switzerland, Singapore and Ireland. It makes some interesting points, which could give some comfort to annuity providers:
- Flexibility does not automatically mean low annuity take-up. For example, in Switzerland an 80 per cent level of annuitisation is recorded, while Chile manages 70 per cemt. However, high annuitisation goes hand in hand with annuity rates that are viewed as a ‘good deal’. In practice, that means the rates are supported in some way by the government. The PPI suggests that greater awareness of enhanced and impaired life annuities could boost UK annuity take-up.
- Annuity take-up of 30 per cent (Ireland) or less (Australia, Canada, US) is associated with a perception that annuities are poor value. These countries also tended to have a wider range of retirement income products and low understanding among consumers of ‘the potential benefits of annuities, needs in retirement and current life expectancy rates’. Sounds familiar…
- Ironically, some countries with low annuitisation are becoming concerned about the potential long-term impact. In Australia, the Cooper review called for more information and regular projections to be given to retirees. As the PPI points out, if the drawdown rate is set to match the annuity rate, then there is a 50-60 per cent chance of funds being exhausted before death. Mortality drag may not be the hot topic it once was, but improved life expectancy has merely pushed the problem up the age scale.
The PPI has done a useful job in looking at international experience. One conclusion it does not draw is that the problem is as much the perception of annuities themselves as what annuities provide.
Auto-enrolment and the older employee
Research carried out by the DWP has highlighted 15 per cent of employees aged 50 or over opted out of automatic enrolment compared with eight per cent of those aged under 30. But are they right to do so?
The Pensions Policy Institute (PPI) published a report in April that investigated whether automatic enrolment was suitable for older workers. It compared the amount saved into a workplace pension with the likely amount received as additional pension income in retirement. The PPI found more than 95 per cent of this group are likely to receive good value from staying automatically enrolled.
But the funds older workers can build up won’t be big, particularly those on lower earnings. The research shows an individual aged 50 in 2011, enrolled in 2012 and at the 10th percentile of earnings builds up a DC pot of £2,870 at state pension age. Whereas, the equivalent median earner builds up a DC pot of £13,250.
Two factors have enhanced the arguments for older workers to save in pensions. One of them is the planned introduction of the single state pension. This should help greatly with the question of whether it’s worthwhile saving, as it reduces the impact of means-tested benefits.
The other game-changer is the proposed pension freedom. Older workers faced with the possibility of a very low income in retirement may have thought saving was a waste of money. In future, the ability to access the cash fund to pay off debt or for other reasons may make pension saving more attractive. The greater flexibility — whether a lump sum or phased drawdown — could also open up opportunities to reduce the interactions with means-tested benefits and tax.
And crucially for everyone, including older workers, to opt out is to turn down their employers’ contributions, and they could significantly boost individuals’ money at retirement.
HMRC now says yes — you can backdate your annuity.
But what happens if there is a delay in the movement of funds between a pension provider and the annuity provider? Can the annuity be backdated to cover the gap?
In the past, HMRC’s stock answer has been a firm no, regardless of whether the funds were the result of an open-market option exercise or of a transfer to an immediately vesting personal pension. HMRC’s position centred on the requirement that the annuity amount cannot decrease once in payment, subject to limited exceptions. Because the entitlement to an annuity cannot begin before the provider receives the payment, HMRC argued that backdating would result in more payments being made in the first year of the annuity’s existence than in subsequent years, and so it would break the ‘no-reduction’ rule.
No such problems arose for scheme pensions, because regulations (SI 2006/614) specifically authorised the payment of pension arrears. When challenged, that ‘pension’ was not defined as ‘scheme pension’ in these regulations, HMRC rebuffed the idea, saying that SI 2006/614 dealt with payments to a member by a registered scheme and was not relevant to annuity providers. However, it would appear that some annuity providers, ignorant of HMRC’s view, had relied on the regulations to backdate annuity payments.
According to Newsletter 62, HMRC has become aware of this practice, forcing it to reconsider its antipathy to backdating. In an interesting piece of interpretative gymnastics, HMRC now says: ‘Where an amount of arrears in respect of a period before the [annuity] contract was set up is paid at the time the annuity starts, we would not consider that the “amount of the annuity” had decreased, if the amount paid in respect of the earlier period was paid at the same rate pro rata as the payments made going forward.’
HMRC’s change of stance is to be welcomed and is a reminder that eight years on from pensions A-Day, there are still points that need clarification.
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