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CPD: Pensions

The latest edition of Newsbrief counts as 1 hour of structured CPD and covers the regulatory and marketplace changes that took place during October 2014. Visit the Money Marketing CPD Centre to answer 10 multiple choice questions and complete this CPD activity. Just click into your CPD Plan and you’ll find each month’s marketplace changes round-up in your activity list.

December CPD Newsbrief — Pensions

Financial services regulation and ethics

Unscrambling annuities for greater flexibility

John Housden

The pensions minister Steve Webb has suggested that pensioners should be able tounscramble their existing annuities to take advantage of the new flexible drawdownregime.

The minister’s latest idea − not government policy − is that it should be possible to unscrambleannuities that are already in force and receive a taxable lump sum, echoing the 100% of fundwithdrawal option soon to arrive with flexi-access drawdown. Annuity escape is Mr Osborne’sbig idea, but is such a proposal realistic once an annuity has been set up? There are severalhurdles to overcome:

  • Selection against the office Insurance companies would want medical evidence beforemaking any payment, otherwise there would be an obvious incentive for those at death’sdoor to cash in. The practice for non-pension annuities is that the annuitant pays for thatevidence, which could put many people off the idea.
  • Surrender value This would almost always be below the original purchase price becauseof the payments the insurer has already made, the expenses it has incurred and its lostfuture profits. Looking ahead, if long-term interest rates start to rise, then this would alsoreduce trade-in values.
  • Tax As with the buy-a-Lamborghini principle of full fund withdrawal, there would be a riskthat annuitants would incur tax liabilities that they might not expect, mainly because of thepossibility of crossing tax band thresholds.
  • Logic “If sold well, annuities have the potential to be a good product”, said Mr Osbornein the Budget Day pension consultation document. In many cases annuities will have beenthe right choice because of annuitants’ need for maximum secure income and the modestyof their available funds. Until very recently, median annuity purchase prices have hoveredaround £20,000, making other options largely impractical.
  • Advice If a guidance guarantee is required for converting funds to income, then it would behard to argue that the same facility is not also needed for reversing the process.

It would be very surprising if the idea of being able to surrender pension annuitiessurvives for long. David Gauke, the Conservative financial secretary to the Treasury,has dismissed the idea as taking the new freedoms too far.

www.abi.org.uk/…/2014/pensions/abi statistics q2 2014 the uk retirement income market post budget.pdf

Statistics show increased pension take-up

Ian Naismith

According to the latest edition of the ‘Pension Trends’ series from the Office forNational Statistics (ONS), pension coverage has been increasing since the introductionof automatic enrolment.

Among the raft of retirement surveys, this remains the most authoritative, because it bringstogether data from all government sources to give a composite picture of UK pension provision.The new edition of chapter 7, detailing membership of private pensions schemes, confirmsincreasing coverage of pensions following the introduction of auto-enrolment.

Employer dominated provision

The ONS estimates that in 2013 around 13.4 million people aged 16 to 64, a third of the totalin this age group, were actively participating in private pension schemes. The total numbers formembership were higher because many people are in more than one scheme. Occupationalschemes and personal/stakeholder pensions both had just over eight million active members.

Employer-arranged pensions dominate, covering 28% of both men and women. This represents50% of employees, up from 47% the previous year:

  • 29% were in defined benefit (DB) schemes, down from 46% in 1997;
  • 12% were in group personal or stakeholder pensions; and
  • The remaining 9% were in defined contribution (DC) occupational schemes.

We can expect the last of these to increase in future years as NEST and the other master trustschemes grow.

Men are twice as likely as women to have individual personal pensions, largely because theyare more likely to be self-employed. Some 8% of men were contributing to individual personalpensions, compared with 4% of women. Overall, though, the gender gap has been closingquickly, from 20 percentage points in 1997 to three percentage points in 2013.

Pension provision is very heavily dependent on workplace schemes, with membership ratesin the public sector over twice those in the private sector. Over 90% of those in publicadministration, defence and social security were members of workplace schemes, comparedwith under 15% in hospitality. Reducing this gap is a key goal of automatic enrolment. However,it will not directly affect perhaps the most shocking statistic − that contributors to personalpensions fell from 62% of self-employed men in 1997 to 22% in 2013. In part, that may reflectthe popularity of ISAs for retirement savings.

DB schemes down

The continuing decline in DB provision is confirmed by another official publication, The PurpleBook, which is published jointly by the Pension Protection Fund and the Pensions Regulator.DECEMBER 2014© Taxbriefs Limited and MoneyMarketing 2014. 8This records a fall in the number of DB schemes in the year to March 2014 from 6,225 to6,070, with 11 million total members but under two million active members. Only 13% of DBschemes are open to new members (down 1% over the year) and 32% are closed to futureaccrual (up 2%). The total funding deficit of DB schemes was £39 billion, representing about3% of liabilities, compared with 14% in March 2013.

Statistics are snapshots and are out-of-date before they are even published, but the trendsthey reveal are important. Many years of decline in pensions coverage are being reversed, butthe fall in DB provision will mean that there will be fewer people with adequate provision.

Increasingly, the role of those advising individual clients may be to help eliminateretirement shortfalls, as well as ensuring that the self-employed are making provisionfor their later years.

www.ons.gov.uk/ons/dcp171766_382136.pdf

www.pensionprotectionfund.org.uk/documentlibrary/documents/purple_book_2014.pdf

More detail from the Pensions Tax Bill

Ian Naismith

According to the latest edition of the ‘Pension Trends’ series from the Office forNational Statistics (ONS), pension coverage has been increasing since the introductionof automatic enrolment.

Reporting requirements

The new reporting requirements have attracted attention because they originally carried therisk of substantial fines for consumers. The reporting enables enforcement of the £10,000money purchase annual allowance (MPAA), which applies when a scheme member accessespension flexibly. This will generally be done by drawing income from flexi-access drawdown,converting from capped or flexible drawdown, or taking an uncrystallised funds pensionlump sum (UFPLS) from a pre-retirement pension arrangement. Simply paying a pensioncommencement lump sum (tax-free cash) does not trigger the MPAA and is not part of thereporting requirements. The MPAA applies across all money purchase pension arrangementsthe member holds.

The process initially announced was that the scheme administrator must tell the member thatthe MPAA applies within 31 days of the pension first being accessed flexibly. Within 31 daysof receiving the notification, the member must tell the administrators of all their other pensionschemes, and subsequently inform any new schemes they start paying into. If they transfertheir pension, the administrator of the ceding scheme is responsible for the information.Schemes must then provide a statement for any input periods in which the member exceedsthe MPAA.

Following industry criticism, in late November the Chancellor announced concessions to thisregime and backed away from the requirement for blanket reporting. Members will now onlyneed to inform schemes to which they are currently making contributions, or plan to becontributing to, that they have accessed their pension. The 31 day window has also beenincreased to 91 days to complete the reporting before incurring fines.

These penalties still remain at up to an initial £300 plus £60 per subsequent day if informationis not provided as required. But these concessions make the whole process more likely toattract users and answers much of the criticism originally levied.

Death benefits

The other major changes are to death benefits. Two new types of pension will sit alongsidemember’s pension and dependant’s pension.

  • Nominee’s pension is for someone chosen by the member who is not a dependant.
  • Successor’s pension allows a cascade of drawdown when the dependant, nominee oran earlier successor dies. For successor’s pension, the tax payable depends on the age ofthe person who has just died.
    1. If the deceased was under 75, the drawdown or lump sum is tax free.
    2. If the deceased was over 75 the benefit is taxable, regardless of the age at death of the original member.

The Bill does not change IHT rules, so in situations where pension benefits currently fall into themember’s estate − such as Section 32 buy-outs where there is no trust to receive the deathbenefits − there is presumably a potential IHT liability. There should be guidance at some pointto explain exactly what the IHT position is in different circumstances, but it appears there willstill be a place for trusts in retirement planning. However, some things currently done throughtrusts, such as spousal bypass trusts, should in future be achievable by retaining the funds indrawdown.The new regime has many complications and is still being developed. However, itis clear that the role of professional advisers will remain vital where an individual’sneeds are not straightforward.

The new regime has many complications and is still being developed. However, itis clear that the role of professional advisers will remain vital where an individual’sneeds are not straightforward.

www.publications.parliament.uk/pa/bills/cbill/2014-2015/0097/en/15097en.pdf

www.publications.parliament.uk/pa/bills/cbill/2014-2015/0097/amend/pbc0971110m.45-51.html

Money Advice Service out of guidance

Neil Dickey

On 18 October 2014 the government unveiled the providers of the guidance guaranteeservice from April next year.

The face-to-face guidance is to be provided by the Citizen’s Advice Bureau (CAB), withtelephone guidance provided by the Pensions Advisory Service (TPAS). It had been widelyexpected that the Money Advisory Service (MAS) would deliver the online and telephoneguidance alongside TPAS. But in an unexpected move, the government has chosen to notinclude MAS in its list of providers.

TPAS certainly has the knowledge and experience to provide the guidance, but not thenecessary resources. CAB is better placed resource-wise but its main focus is debt advice,not pension guidance, and it currently lacks the necessary expertise.

The government has also omitted the MAS from providing an online service, although itsexperts have been seconded to HM Treasury to help build it. The MAS has tried putting itsown spin on this by stating that it is developing more extensive help for people aged 55 andover, to supplement the support they will get from the new guidance service.

However, the reality is that the government’s choice was made after Treasury Select CommitteeChair Andrew Tyrie wrote to Chancellor George Osborne earlier this year expressing seriousconcerns about MAS’s ability to perform its functions, and whether it should be involved inproviding the guidance guarantee service.

As a result, an independent review of the MAS was launched in May 2014 and its upcomingpublication is unlikely to make pleasant reading. Anticipation of the findings would seem to bethe likely reason for its exclusion.

It seems unlikely that MAS will receive any guarantees regarding its own future, andit will soon be receiving guidance from the government about how it can perform itsown functions more effectively.

www.gov.uk/government/news/pensions-guidance-providers-unveiled

Pension consultations focus on standards

Ian Naismith

From April 2015, minimum governance standards for schemes used for automaticenrolment will be implemented. The government has published ‘Better workplacepensions: Putting savers’ interests first’, building on previous consultations on governanceand charges in workplace pension schemes.

Contract-based schemes (personal pensions) must establish independent governance committees(IGCs) to look after members’ interests.

For trust-based schemes, regulations will require trustees to design default investmentssuitable for members and review them regularly. They must also ensure that core financialtransactions are processed promptly and accurately, monitor costs and charges, and certifyyearly that governance standards have been met. In addition, master trust schemes mustappoint a majority of independent trustees, and those establishing the scheme cannot mandatea particular service provider.

The government is also consulting on the details of the 0.75% a year charge caps for defaultfunds in qualifying pension schemes. This includes defining the costs to be included in thecap. In addition, from April 2015, trustees and IGCs will be required to report on costs andcharges, with further consultation planned on disclosure of transaction costs.

Another consultation considers the thresholds applying to automatic enrolment in tax year2015/16. Up to now, these have used tax and national insurance thresholds. But with theincome tax personal allowance continuing to rise more quickly than inflation − to £10,500from April 2015 − many feel the automatic enrolment earnings threshold should be frozen at£10,000 to prevent more people slipping through the net. Qualifying earnings could continueto be linked to national insurance thresholds or the band could be widened to increasecontribution amounts.

The focus on improving standards demonstrates the government’s determinationto continue the success of automatic enrolment. The new measures should giveemployers and their advisers confidence that automatic enrolment schemes will bestrongly focused on the interests of members.

www.gov.uk/…/364567/better-workplace-pensions-putting-savers-interests-first.pdf

December Newsbrief

The latest edition of Newsbrief counts as 1 hour of structured CPD and covers the regulatory and marketplace changes that took place during November 2014. Visit the Money Marketing CPD Centre to answer 10 multiple choice questions and complete this CPD activity.

Just click into your CPD Plan and you’ll find each month’s marketplace changes round-up in your activity list.

Not yet registered? Join for free today at www.ifacpd.com and access more than 35 hours of independent, accredited CPD learning content. Learning objectives (full list of ApEx standards covered below)

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