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Pensions – Cracking the Crunch For financial adviser use only.

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Presentation on theme: "Pensions – Cracking the Crunch For financial adviser use only."— Presentation transcript:

1 Pensions – Cracking the Crunch For financial adviser use only

2 Agenda Latest issues Pensions Week Support

3 Agenda Latest issues Pensions Week Support

4 Latest issues FSA thematic review Allowance freezes Protection deadline Safeguarded Rights National Insurance

5 Agenda Latest issues Pensions Week Support

6 Monday – Johnson Associates

7 Johnson Associates Ltd THE CRUNCH Turnover decreased last year and the company are looking to save on payroll costs. The company facilitates a stakeholder plan for staff who are also ‘feeling the pinch’ Can they reduce payroll costs AND save money for employees?

8 Employee direct contribution Net contribution £50 Tax relief added £12.50 Total £62.50 Reduction in net salary Reduction in net salary £50 Tax saving on salary £14.49 NI saving on salary £7.97 Total £72.46 Employer NI saving £9.27 Salary sacrifice allows an additional 16% contribution + employer NI saving. OR 30.8% if all added to plan Example 1: basic rate taxpayer with salary below the UEL If higher rate taxpayer above UEL total additional contribution is 14.7%

9 What next? Business owners Salary exchange / sacrifice

10 Tuesday – Smith Bros. Ltd

11 Smith Bros. Ltd Brian’s take home pay is £35,468 a year, but he pays anything over £32,000 into a pension Charles is an equal shareholder and wants to maximise income

12 Brian’s take home pay is £35,468 a year, but he pays anything over £32,000 into a pension THE CRUNCH Brian’s fund value has fallen and he is looking at topping up but cannot afford a drop in income. Smith Bros. Ltd

13 2008 / 2009 dividend / salary combinations Brian needs net income of £32,000 and can afford to pay £3,468 net into a pension (£5,780 gross) Profit available (each) Salary Employers NIC Pension contribution Net dividend Mainstream CT Income tax on salary HRT on dividend Employee NIC Employee net income Profit extraction 55,704 50,000 5, , ,906 35, %

14 55,704 50,000 5, , ,906 35, % Charles 55,704 29,800 3, ,000 4,785 4,753 2,017 2,680 38, % Brian 55,704 17,674 1,567 13,678 18,000 4,785 2, ,346 32,000 82% Profit available (each) Salary Employers NIC Pension contribution Net dividend Mainstream CT Income tax on salary HRT on dividend Employee NIC Employee net income Profit extraction 2008 / 2009 dividend / salary combinations

15 What next? Business owners Salary exchange / sacrifice Salary / dividend / pension

16 Wednesday – Maxwell Trading Ltd

17 Wednesday – Maxwell Trading Stephen is looking to sell his business. THE CRUNCH Due to the downturn he has decided to defer this for a couple of years He is going to use the sale of the business as his pension Meanwhile, he has sold some of the assets and is holding cash within the company.

18 Entrepreneurial Relief 18% Capital gains tax applies on the sale of a business Any gain under £1m reduced by 4/9ths (effective rate 10%) Only available for ‘qualifying’ companies.

19 Will Stephen qualify? Stephen is the controlling director for Maxwell Trading Ltd. BUT How much is non-trading? Basically, non-trading activities should not make up more than 20% of: Turnover from non-trading activities Company’s asset base Expenses incurred Time spent undertaking company’s activities Historical context of the company

20 Without entrepreneurs’ relief Ignoring annual CGT exemption i.e. = £100K i.e. = £180K Entrepreneurs’ relief - one year GainERCGTProceeds kept £1m£nil£180k£820k Effect of keeping surplus cash within 20% GainERCGTProceeds kept £1m£444k£100k£900k Surplus company cash £400K Surplus company cash £150K

21 Solution Stephen decides to keep cash under 20% of assets Pension contribution of £200,000 to be made. Should he offset this against this years Corporation Tax? Year2007/82008/9 Profit before contribution £50,000 Tax Rate21% Contribution£50,000 Relief£10,500

22 Solution Stephen decides to keep cash under 20% of assets Pension contribution of £200,000 to be made. Should he offset this against this years Corporation Tax? Year2007/82008/9 Profit before contribution £100,000£50,000 Tax Rate20%21% Contribution£100,000 (c/b)£50,000 Relief£20,000£10,500 Corporation tax relief £30,500 = 15.25%

23 Solution Stephen decides to keep cash under 20% of assets Pension contribution of £200,000 to be made. Should he offset this against this years Corporation Tax? Year2006/72007/82008/9 Profit before contribution £400,000£100,000£50,000 Tax Rate32.75%20%21% Contribution£50,000 (c/b)£100,000 (c/b)£50,000 Relief£16,375£20,000£10,500 Corporation tax relief £46,875 = 23.44%

24 What next? Business owners Salary exchange / sacrifice Salary / dividend / pension Review pension funding in time for company year end Offset previous corporation tax Qualify for entrepreneurial relief

25 Thursday – Alan Cooper

26 Alan - USP benefits Alan took cash from USP in May He draws no income and at outset had no Lifetime Allowance issues. THE CRUNCH The pre-budget report announced a freeze on Lifetime Allowance at £1.8m from 2010/11 to 2015/16. Impact on Alan?

27 Second Benefit Crystallisation Event Original fund available May 2006£1.2m 80% SLA After cash (£300,000) Fund left£900,000 Age 75 (2016) SLA is£1.8m Fund is£1.5m Amount of remaining fund already tested(£900,000) Leaves fund for SLA test£600,000 BUT only has 20% SLA left£360,000 Remainder liable for tax charge£240,000

28 Solution Alan’s daughter is expecting a son. 3 rd Party contributions using income from Alan’s USP? Payment of £240pm is £300pm in grandson’s pension After 16 years At grandson’s age 60 For grandson to fund from age 25, cost All figures assume a 7% growth rate, 1% annual charge £95,000 £1.2m £900pm

29 What next? Business owners Salary exchange / sacrifice Salary / dividend / pension Review pension funding in time for company year end Offset previous corporation tax Qualify for entrepreneurial relief Individual clients Revisit existing USP clients – are they in for a surprise? Consider ‘Generational’ financial planning

30 Friday – Robert Seymour

31 Friday - Bob Due to an MVR, he has a transfer value of £80,000 Bob is 45, planning to retire at 65 The current value of Bob's fund is £100,000 THE CRUNCH He has a PPP which is a paid up policy in a closed with-profits fund

32 FSA Reports

33 Cost comparisons Good practice “The firm set out a section in its template suitability report outlining any switch penalties on the ceding scheme and clearly explained the impact of charges of the switch. They did this by comparing the reduction in yield (RIY) figures for the ceding and new scheme (they used a software system to calculate the RIY of the ceding scheme)”. FSA: ‘Quality of Advice on Pension Switching’ December 2008

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36 Example output

37 Product Suitability considerations Important to review whether the features of the current plan still meets the needs of the client. For example: Can the plan still accept new contributions? Fund choice – mix of managers / fund styles? Option to self-invest Drawdown option (including protected rights)? What is asset mix of With Profit funds? Service levels Financial strength of provider

38 Product Suitability considerations But there may be valid reasons why retaining the current plan is in the client’s best interests. For example: Basis of death benefit may change Risk benefits (life cover, waiver of contribution) may not be available on same basis/terms Guaranteed Annuity Rates Tax free cash entitlement

39 FSA Reports

40 Matching the recommendation to the customer’s ATR and personal circumstances Good practice “The firm used a risk profiling tool to make an initial assessment of the customer’s ATR. They then used a stochastic modelling tool to create a series of model portfolios, with the individual funds selected by an independent fund research company. Although systematised, the approach was not used as a ‘black box’ – the tools were used as a basis for discussion and the process was adapted, when merited, for individual customers”. FSA: ‘Quality of Advice on Pension Switching’ December 2008

41 Demonstrating Risk and Reward Portfolio Architect produces a client facing report Shows: Risk profiling Asset allocation Product selection Forecasting Client report is available in Rich Text Format (RTF), therefore allowing the Adviser to add or amend if required

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43 What next? Business owners Salary exchange / sacrifice Salary / dividend / pension Review pension funding in time for company year end Offset previous corporation tax Qualify for entrepreneurial relief Individual clients Revisit existing USP clients – are they in for a surprise? Consider ‘Generational’ financial planning Revisit plan suitability

44 Agenda Latest issues Pensions Week Support

45 How we can help Sales aids Calculators Webcasts Technical bulletins Suitability letters Account Manager support ‘Folklore and Fact’ chapters

46 IMPORTANT NOTES This item is aimed at financial advisers only. If you reproduce any part of this information for use with retail clients, you must ensure it conforms to the Financial Promotion rules. In addition if used to advise retail clients you are subject to the advising and selling rules and you are responsible for any financial advice which you provide to your clients The information is based on our understanding of current legislation and HM Revenue & Customs' practice, which is subject to change. The value of an investment may move up and down and cannot be guaranteed. Full details are available from Clerical Medical. Part of the Lloyds Banking Group. Issued by Clerical Medical Investment Group Limited. Registered Office: 33 Old Broad Street, London EC2N 1HZ. Registered in England and Wales. Registered number Authorised and regulated by the Financial Services Authority. Compliance Ref No: A0122 Item expires: 27/08/2009


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