At a recent family reunion in my ancestral home in Ireland, I had the chance to meet some relatives I had not met for many years and some I had never met at all.
As things do, once the pleasantries dried up, the conversation drifted to “so what do you do?” One publican, a construction company owner and an accountant later, it was my turn. “I try to make pensions exciting” was my reply.
Despite the incredulous looks, I do believe pensions and, in particular, the individual pension market can be very exciting. Even with Pickering, the Inland Revenue and the threat of Sandler on the horizon, I believe that not only is the future exciting but also full of opportunities for IFAs.
So many opportunities that I would like to spend the next articles looking at 10 individual pension sales opportunities that every IFA can use to help build their business.
These opportunities can help you take your fair share of the £2.4bn regular-premium and £9bn single-premium UK pension market. Opportunities such as:
Income drawdown in payment transfers
The spouse is back and this time it's for real
Pensions for children
Pensions for pensioners
Targeting protected rights and the impact of S2P
Where do we start? I had intended to begin by explaining how the introduction of S2P can provide IFAs with business opportunities but my plans have been overtaken by events.
That event is the National Insurance rises announced in the recent Budget. The 2002 Budget, while good news for the NHS, delivered what many felt was unwelcome medicine for the UK pension industry.
Some commentators believe the NI rises will have a detrimental effect on pensions. But, being a glass half-full kind of guy, I see opportunities for IFAs to advise on salary sacrifice and directors' remuneration. I would like to start my series by discussing these two potentially lucrative opportunities.
The new rates and thresholds proposed in the pre-Budget report were confirmed for the 2002/03 tax year. But it is from April 6, 2003 that the greatest impact of the measures will be felt. The earnings' threshold will be frozen and NIC rates will be 1 per cent higher for employers, employees and the self-employed on all earnings above the earnings threshold of £89 a week (£4,615.00 a year) includes earnings above the upper earnings limit, which will be £30,940 from April 6, 2003. Table A explains the key details.
From 2003/04, the removal of a ceiling for the additional 1 per cent contribution means that the greater the earnings, the greater the impact.
I believe the changes in NI contributions will have a very positive effect for pensions. The Brown NHS Budget should encourage employers to make bigger contributions to employees' pension schemes using salary sacrifice.
Under a salary-sacrifice scheme, the employer and the employee agree the employee will be paid less or forgo bonuses and, in return, the employer will pay more into a pension scheme. This is considered as a pension contribution and is therefore not subject to NI contributions.
If employers combine their pension provision with a focused staff remuneration strategy, they can strike a healthy balance and limit the costs.
For example, salary sacrifice can be combined with the payments of other employee benefits such as childcare vouchers, which are not subject to National Insurance. Employers may also consider issuing shares in the company through a Revenue-approved scheme and not only save on NI but also income tax.
One other strategy would be to pay employees dividends rather than salary as dividends are not subject to NI.
However, by giving an employee a greater salary in the way of a bonus this year, employers and employees with a GPP or stakeholder scheme can begin planning ahead for 2003.
This is because, under the personal pension and stakeholder regime, contributions based on high net relevant earnings for one year, can be continued at the same level for the next five tax years.
Employers need your help. As the average company with 100 employees is now facing paying an extra £23,607 annually as their NI contributions have increased, now is the time to start discussing the alternatives with your business clients.
It is also worth discussing salary sacrifice with all your group scheme members. Do not forget your self-employed clients as they have even more reason to pay into a pension and so save on NI.
Directors' remuneration – the high-net-worth market
The new NI contribution limits have reopened the debate on the best type of remuneration strategy for controlling directors – salary, dividends or pensions?
A low-salary/high-dividend strategy could reduce liability for NICs but restrict the scope for pension planning. One of the strong arguments in favour of salary is that it is pensionable while dividends are not. However, dividends do not attract NIC.
There is also the need to consider pensions and the appropriate vehicle – PPP or EPP. Typically, EPPs have been the preferred route in many cases due to the potential for higher contributions. However, as we have seen under the DC regime, an individual may base their contributions to a personal pension/ stakeholder arrangement for six years on the earnings of just one tax year.
For example, a controlling director of a company who is able to adjust how their remuneration is paid, may choose in tax year 2002/03 to take a large salary. Over the next five years, they could decide to take remuneration largely in the form of dividends. They would then have a modest salary of around the level of the threshold for paying tax (that is £4,615 in 2002/03) and NICs. See Table B.
This means that for a further five years the controlling director can benefit from taking dividends, minimising liability to tax and NI without adversely affecting their pension planning. Also, do not forget that this strategy could then be repeated every six years.
This is the ideal time to review the remuneration strategy for director clients. You can combine this with discussions on salary sacrifice for staff.
Next time I will look at how S2P, targeting protected rights and protection benefits on pensions can help you build your business.