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Pensions in 2013 Adrian Mee Consultant, Mattioli Woods 14.25 – 15.05.

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Presentation on theme: "Pensions in 2013 Adrian Mee Consultant, Mattioli Woods 14.25 – 15.05."— Presentation transcript:

1 Pensions in 2013 Adrian Mee Consultant, Mattioli Woods 14.25 – 15.05

2 PENSION PLANNING FOR INDIVIDUALS AND BUSINESSES Institute of Financial Accountants – Birmingham 17 October 2013

3 Pensions and wealth management group AIM listed – market cap circa £66 million Established 1991 – over 20-year proven and stable track record Assets under advice and administration - £4billion 330 staff; 54 consultants (offices in Leicester, London, Aberdeen and Glasgow) 6,000 small self-administered scheme (SSAS) and self-invested personal pensions (SIPP) clients Strong client retention - 98% “Through personal and proactive delivery of trusted advice, building long-term client relationships remains our core objective.”

4 Contributions —Annual allowance and pension input periods —Tax relief and lifetime allowance Investments —Connected transactions to fund business —Investment strategies for long-term growth —Choice of pension vehicle Drawing benefits & succession planning —Annuities and drawdown —Flexible drawdown and scheme pension —Death benefits Auto-enrolment Agenda

5 Contributions

6 A-day Annual allowance Lifetime allowance 2006/072006/072007/082007/082008/092008/092009/102009/102010/112010/112011/122011/122012/132012/13 AA£215k£225K£235k£245k£255K£50K £50k£40k LTA£1.5m£1.6m£1.65m£1.75m£1.8m £1.5m £1.25m Background 20062007200820092010 201120122013 2014 COALITION ANTI-FORESTALLING

7 Annual allowance - £50,000 gross per individual — personal = reference to earnings —employer = ‘wholly & exclusively’ Carry-forward unused allowance – previous three years (2010/11 onwards) Must utilise current year’s relief first Carry-forward from earliest year Must have been a member of a UK pension scheme in all years to be utilised Defined benefit schemes – 16 x benefit increase (!) Current rules (tax year ending 5 April 2014)

8 Lifetime allowance (LTA) Limit to tax-efficient size of fund £1.5million for tax year ending 5 April 2014 £1.25million from 6 April 2014 Consequences of exceeding LTA No tax-free cash on excess 55% tax (if drawn from the fund) 25% if paid as ‘taxable’ income Lifetime allowance

9 With effect from 6 April 2014 Annual Allowance reduces to £40,000 Will affect pension input periods (PIPs) that end on or after 6 April 2014 SIPP vs SSAS but… No change to carry forward rules (£50,000 limit for previous years unused relief still applies) and… New rules

10 ...LTA reduces to £1.25million Fixed protection 2014 Only protects tax-efficiency of fund to £1.5million Future contributions will revoke fixed protection Anticipated investment growth? Care should be taken with small policies, auto-enrolment and accruals in defined benefit schemes N.B. Lump sum death benefits tested against LTA at time of death rather than point of payment

11 Personal protection factor depending on fund size Ability to continue to contribute To qualify, must have accrued pension fund as at 5 April 2014 of at least £1.25million Maximum protection £1.5 million Proposal for personalised protection (PP)

12 PIPs 6 April 2013 5 April 2014 13/14 14/15 Company year-end 30 April 2013 Pension input period - 20 April 19 April 2014 No further contributions until 20 April 2014 onwards £50k £40k

13 When will spreading apply? Spreading Four stage process —What contribution has to be paid in current chargeable period? —If there has been a change in the length of chargeable periods adjust the periods to the same length —Compare the RELEVANT contributions in the current & previous chargeable periods to work out if there has been an excess and, if so, how much — Is the excess more than £500,000? Certain contributions do not need to be spread These are contributions to pay for: —Cost of living increases to pensions in payment to pensioner members —Benefits for future service for members joining the scheme in the current chargeable period

14 Spreading Over what period will relief be spread? Amount of relevant excess contributions Period of spreading of tax relief £500,000 or more but less than £1m2 years £1m or more but less than £2m3 years £2m or more4 years

15 Employer contributions only ‘Wholly and exclusively’ test applies at point of payment for tax relief purposes Personal contribution rules applicable at point of allocations i.e. 100% of earnings Unallocated contributions to be allocated to members under future PIPs Unallocated contributions

16 Which pension?

17 Market overview Stakeholder Full self-investment SIPP/SSAS Personal pensions Insured/ broker SIPP Managed/pooled funds Individual shares Fixed interest Cash Commercial property Unquoted shares Structured products Connected loans (SSAS only) Unconnected loans

18 Stakeholder £20,000 at 1.5% = £300 p.a. SIPP/SSAS £20,000 at true cost = £2,000 p.a. Stakeholder £150,000 at 1.5% = £2,250 p.a. SIPP/SSAS £150,000 at true cost = £2,000 p.a. Multi-member schemes Regulatory issues & concern Capital adequacy Proposed rules for SIPP providers The future? Market overview

19 Poor compliance with regulatory requirements Poor systems and controls around client money and asset rules Inadequate controls around investments held including non-standard investments Insufficient capital to absorb unexpected liabilities Key thematic review concerns

20 Proposed new capital regime for SIPP operators Two-tier approach – Initial capital requirement based on assets under administration – Additional capital surcharge for non-standard assets Non standard assets includes commercial property Final rules to be published in second half of 2013 with a one year transitional period Capital requirement increased from 6-12 weeks expenditure to typically 1-2 years expenditure In some cases, up to six years Mattioli Woods already meets requirements FCA consultation paper CP12/29

21 Some providers will not have sufficient income to increase capital in time New business risk Potential additional capital required for one new client Standard assets £499 Including non standard assets £1,746.50 This requirement is for each new client Set up fees are below these levels at the moment How can IFAs justify a move to providers? Market issues ‘Size matters…?’

22 Curtis Banks takes on £3bn of Alliance Trust assets Possible increase to capital is £4.9million 2011 turnover = £1.75million What about other providers? PY set up cost = £160 Hornbuckle Mitchell set-up cost = £295 Example ‘Future fees…?’

23 Investments

24 Our approach for self-investment Income-driven Capital stability Connected transactions Other options Investing for growth

25 Sale and leaseback SSAS/SIPP Ltd Company Existing pension policies £250k cash Property Bank borrowing (50% limit) Rent received by scheme gross Rent payments reduce CT Part ownership/syndicate Personal lending In specie contribution

26 Obstacles - flexibility Many providers will not allow: – commercial split with residential – agricultural land – care homes – overseas property Mattioli Woods currently allows all of the above ! Mattioli Woods position on property

27 Overview – employer loans Maximum amount of loan Interest rate Term of loan Equal annual instalments Security Suitability? “ need for consultancy…” Loanbacks

28 SSAS Fund value £500k (Max loan £250k) Ltd Company Term: 5yrs Interest rate: min 1% over base Repayments: at least annual capital & interest Loan of £250kSecurity

29 Overview Unquoted shares in member’s company can be purchased HMRC see scope for abuse – complex rules Cannot be used as ‘shell’ to hold taxable property Dividends/voting rights? Long terms strategy – sale of company Entrepreneur’s relief and/or Business Property Relief “ need for consultancy…” Unquoted shares

30 Investment strategy for balance of fund

31 Investing for growth Structured products – capital stability – above-inflation returns – staggered investment strategy Commercial property syndicates – capital stability – income generation Discretionary portfolio management – Model portfolios (client risk profile ‘balanced’) – Investment into shares/fixed interest – Quarterly rebalancing – Annual risk profile review Diversification



34 Example valuation

35 Investing for income… Property-7% p.a. Loanback-6% p.a. Balanced -3.15 p.a. (portfolio) SPB -8.15% p.a. (portfolio) Portfolio running yield - 6% p.a. Investment yields

36 The compound effect…




40 Self-investment Other investment options Non-standard/unregulated investments – unquoted shares, domain names, intellectual property & goodwill Other providers —Either say NO, or —Too aggressive (valuations) —Tax consequences – if not commercial —Trading Risk Suitability?

41 Drawing benefits & passing it on

42 25% tax-free cash Annuity? Capped drawdown — Rule change —120% of GAD x crystallised fund —3 year reviews —Investment & interest rate risk Taking benefits Benefit structure

43 Flexible drawdown —Income tax liability —Must meet £20,000 minimum income requirement —Gift excess to children/grandchildren But… Possible IHT liability on the gift!! Scheme pension — addresses IHT issue Planning opportunities

44 Scheme pension Adopt new scheme rules Income (subjective vs objective) —Actuarially assessed on a case-by-case basis —Health —Underlying asset allocation —Triennial reviews —Payment may continue after death using a guarantee period Scheme pension - guarantee period

45 Benefits of the guarantee period on death Maximum 10-year guarantee period Paid to any person(s) Payments not part of member’s estate - no IHT Income is taxed at recipient’s marginal rate only Exhaust fund within guarantee period ‘Can ensure fund is paid out subject to income tax, not 55% tax’ Scheme pension – guarantee period

46 Guarantee period – how it works (assuming a 4% return) Scheme pension – distinct approach Age 75 Fund-£1,000,000 Scheme pension-£91,125 p.a. (10-year guarantee) Terrie dies after 2 years Residual fund-£924,619 Income payments-£126,858 p.a. (to exhaust fund over 8 years) Income tax liability Higher - 40%-£405,945 Basic - 20%-£202,972 compared with recovery tax charge (55% tax)-£503,504 Tax saving-£97,559 to £300,532

47 My clients don’t like pensions!

48 Immediate vesting Gross contribution of £50,000 Tax relief at 45% is £22,500 so net cost is £27,500 Lump sum entitlement is £12,500 (25% of £50,000) This reduces net cost of contribution to £15,000 Income of around £2,000 per annum (gross) ‘£2,000 income from £15,000 is 13.33% yield!’ Salary sacrifice will save NI and further improve picture Does not factor in any investment return – long term compound effect ‘Easy wins’

49 Avoid High Income Tax Benefit Charge (HITBC) One earner in household at £60,000 (gross) Currently claim £1,900 per annum Under new rules can be claimed but will be effectively taxed at 100% Pension contribution of £10,000 will get 40% tax relief and avoid HITBC This saves £5,900 in tax – or a net cost of £4,100 ‘Over ten years this could generate £140,000 pension pot at a cost of £41,000’ ‘Easy wins’

50 Avoid 60% tax trap Earners over £100,000 start to lose personal allowance An income of £18,880 removes personal allowance* Pension contribution of £18,880 would achieve 60% tax relief Net cost of contribution is £7,552 Salary sacrifice can improve picture further – save NI ‘Over ten years this could generate £263,000 pension pot – giving £65,750 lump sum and £9,800 income’ *2012/13 tax year ‘Easy wins’

51 Auto-enrolment Where are we now…?

52 49% of UK population saving for retirement 50% who have company pension do not join What about state pensions? Ratio of workers to pensioners 1901 – 10:1 2005 – 5:1 2050 – 2:1 Why now?

53 Know their staging date – How? Decide on the pension arrangement(s) to be used Assess their workforce eligibility Communication Auto-enrol eligible jobholders and keep records Pay minimum contributions Post auto-enrolment (employer duties) Compliance (the Pensions Regulator) What do employers have to do?

54 Who gets auto-enrolled? Worker typeAge bandEarningsEnrolment Duty Employer Contributions Eligible jobholders 22 - SPA£9,440+ Must be automatically enrolled Yes Non-eligible jobholders 16 – 21 or SPA – 74£9,440+ Have a right to opt inYes 16 – 74Above £5,668 but below £9,440 Entitled workers16 - 74Up to £5,668Have a right to joinNo

55 Contributions Dates Total minimum contribution Employer minimum contribution Oct 2012 to Sept 20172%1% Oct 2017 to Sept 20185%2% October 2018 onwards8%3%

56 Contributions Salary, wages, overtime, bonuses, commissions Statutory sick pay Statutory maternity pay, ordinary or additional statutory paternity pay Statutory adoption pay Qualifying earnings include Qualifying earnings are between : £5,668 and £41,450 Different definitions of earnings: Qualifying earnings Tier 1: Basic x 9% Tier 2: 85% x 8% Tier 3: Total x 7%

57 Things we hear Employer attitudesThe reality ‘We are OK as we pay enough into our scheme’ Every scheme needs to be looked at for various reasons ‘We will wait until the last minute as there is no rush’ The process takes a lot longer than most expect ‘We can produce the correct data no problem’Most cannot ‘NEST will do everything for us’NEST will be a receiver of information from the employer ‘We will just auto-enrol everyone so we do not need to worry’ All workers still need to be classified and communicated with in the correct way ‘We will just use the postponement option to delay’ How long? That does not stop the communication timetable ‘Everyone will opt out anyway so it will not end up costing us anything’ The opt-out rates are low, and the employer cost needs to be accounted for

58 The solution Our Auto-enrolment Hub & support services The Kudos Auto-enrolment Hub provides an end-to-end technological solution, with facility options, for all employers covering all aspects of their auto-enrolment journey.

59 Kudos Hub advantages Saves on costs on manual administration Ensures independence and ownership of data Future flexibility and freedom (not tied to a provider) Helps employers manage their business risk Employee communication hub Allows integration immediately of several schemes (merger/acquisition) Aligned with our “TRS” and “Flex” offering on the Kudos Create platform

60 Top 10 Client Tips 1.Be sure of their staging date(s) 2.Prepare early 3.Engage all stakeholders 4.Establish their costs and budget 5.Review the existing scheme(s) 6.Make sure staff data is clean and complete 7.Decide how you will process Auto-enrolment 8.Have a project plan 9.Communicate and engage with employees early 10.Embed it in your client processes Remember: Auto-enrolment does not finish at staging date, that’s when it starts

61 How we can help Tailored service designed to support you and your clients Personalised delivery through one of our experienced consultants Technical support as and when required Solutions which interact with planning already in place Comprehensive service range for your clients High-quality administration with dedicated account managers Effective communication through newsletters, events and exhibitions Next steps Free follow-up meetings with professional contacts and partners Free initial meetings with clients on a no-obligation basis

62 Summary Key points Pension legislation - constant change despite ‘simplification’ in 2006 Proactive consultancy – detailed knowledge to identify opportunity Choice of provider – security, administration and flexibility key Transparent fees – clear and open charging, commercial view Next steps Free follow-up meetings with professional contacts and partners Free initial meetings with clients on a no-obligation basis Seminar series spring/autumn and bespoke presentations in house

63 Any questions?

64 Disclaimer The views provided in this presentation are for general information purposes only and represent the opinion of the authors based on market conditions at the time of writing, which are subject to fluctuations, and interpretation of current and proposed legislation and HMRC practice, which are subject to change. Nothing in this document represents investment advice of any nature whatsoever, and it does not constitute an offer or solicitation to purchase or sell any financial instruments. Accordingly, to the extent permitted by applicable law, Mattioli Woods plc and Kudos Independent Financial Services Limited do not accept any liability or responsibility for the information contained in this presentation or any investment decision or other action that may be taken in reliance upon the information contained in this presentation. Mattioli Woods plc and Kudos Independent Financial Services Limited accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to their assumptions. Mattioli Woods plc. Registered in England No 03140521. MW House, 1 Penman Way, Grove Park, Enderby, Leicester, LE19 1SY. Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.

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