1. BUDGET 2014 Financial planning post 27 March 2014

2. 2 CONTENTS SLIDE 4 CAPPED & FLEXIBLE DRAWDOWN SLIDE 12 SMALL PENSION BENEFITS SLIDE 19 FINANCIAL PLANNING IN THE NEW REGIME SLIDE 24 GREATER FREEDOM FOR ISA SAVERS 2

3. 3 Budget 2014 The Budget announced significant changes to the way DC pension scheme members can access their benefits, providing increased flexibility from 27 March 2014 and full flexibility proposed from April 2015. From 27 March 2014  Capped drawdown limit increased to 150% of the equivalent annuity.  The minimum income requirement for flexible drawdown reduced to £12,000.  The trivial commutation limit increased to £30,000.  The ‘small pots’ limit increased to £10,000 and the number of pots to three. From 6 April 2015 At age 55 the government proposes that DC pensions can be taken with complete flexibility meaning:  No restrictions on the amount of income that can be drawn from the fund.  No requirement to purchase an annuity.  Tax free cash of up to 25% of the fund still available.  Apart from tax free cash, funds withdrawn taxed at the individual’s marginal rate of income tax. Other changes announced include the increase to the ISA limits and the ability to transfer between cash and stocks and shares components.

4. CAPPED & FLEXIBLE DRAWDOWN 27 MARCH 2014 – 5 APRIL 2015

5. 5 Capped & flexible drawdown The capped drawdown limit increases from 120% GAD to 150% GAD for pension years starting from 27 March 2014. The flexible drawdown income limit reduces from £20,000 to £12,000 for new arrangements from 27 March 2014. These are interim changes in advance of the sweeping changes planned for April 2015. 5

6. 6 Capped drawdown Income limit increases to 150% GAD. For existing plans, the increase applies from the start of the next pension year starting on or after 27 March 2014. Asking for an ad hoc review doesn’t change this. Transferring a plan doesn’t change this. The new limit applies immediately for new arrangements starting on or after 27 March 2014. This includes additional funds designated into a new arrangement. Overall, most individuals will see little benefit before the wider changes come into effect in April 2015. 6

7. 7 Example – capped drawdown Liz Liz is 61 - She put her personal pension into drawdown (then known as unsecured pension) on 20 March 2011. - 5 year review is not due until 20 March 2016. - Her maximum income is 120% GAD. - This will increase to 150% GAD from 20 March 2015. - Asking for an ad hoc review won’t change this. The earliest date for an ad hoc review is 20 March 2015. 7

8. 8 Example – capped drawdown Richard Richard is 61 - He put his personal pension into drawdown on 15 May 2011. - 3 year review is due 15 May 2014. - His maximum income is 120% GAD. - This will increase to 150% GAD from 15 May 2014. - His maximum income will also be affected by the recalculation of his income entitlement at the triennial review, based on changes resulting from investment performance and gilt rates since 2011. 8

9. 9 Flexible drawdown Income limit reduced to £12,000 a year (from £20,000) for new flexible drawdown arrangements starting from 27 March 2014. Still can’t make any contributions to DC schemes during tax year flexible drawdown starts. Still have to cease active membership of other pension schemes before flexible drawdown starts. Must have secure pension income of at least £12,000 in tax year flexible drawdown starts. No changes to existing rules on what counts as secure pension income. 9

10. 10 Example – £12,000 income requirement Tony Tony incorrectly believes he’ll be able to take advantage of flexible drawdown under the new rules in 2014/2015. - He will start taking a scheme pension of £24,000 a year from 1 December 2014. - However, the pension is payable monthly in arrears. - So he’ll receive secure pension income of £8,000 in 2014/2015. - As this totals less than £12,000, he’s not eligible for flexible drawdown in 2014/2015. 10

11. 11 Example – £12,000 income requirement Cleo Cleo can take advantage of flexible drawdown under the new rules in 2014/2015. - She has an existing scheme pension of £12,000 a year already in payment before the start of the 2014/2015 tax year. - She has a personal pension pot of £60,000 which she could now designate for flexible drawdown. - She has sufficient LTA to take 25% - or £15,000 - as tax free cash. - She could withdraw the balance of £45,000 immediately, but this would all be taxed as income in the 2014/2015 tax year. 11

12. SMALL PENSION BENEFITS 27 MARCH 2014 – 5 APRIL 2015

13. 13 Trivial commutation / small pots From 27 March 2014, the triviality and small pots rules were extended. These new rules will be in place until the new more radical rules are in place, planned from 6 April 2015. In summary, the changes are as follows:  The triviality limit was increased to £30,000  The small lump sum limit was increased to £10,000  The number of small lump sums that can be taken was increased to three. 13

14. 14 Trivial commutation lump sums Trivial commutation still available from age 60. Total benefits – both crystallised and uncrystallised - cannot exceed £30,000. Any amounts already taken as small lump sums not counted for this purpose. Funds post-deduction of adviser charges assessed against the £30,000 limit. Valuation of crystallised benefits as per the normal rules. The ‘nominated date’ and ‘trivial commutation window’ still apply. 14

15. 15 Example – trivial commutation lump sum James Over the years, James has accumulated a number of low value pensions (his only pension benefits). The plan values are as follows: - Stakeholder plan - £3,200. - Group personal pension - £12,400. - Personal pension (2 arrangements): -arrangement 1 - £8,300, -arrangement 2 - £5,700. James selects 28 May 2014 as his nominated date, at which point his total benefits are £29,600. He must start to take benefits no later than 27 August 2014. He takes his first lump sum on 1 June 2014, and so the trivial commutation window runs until 31 May 2015. If this is after the introduction of the new rules, it will no longer be relevant. Personal pension arrangements 1 & 2 must be taken together. 15

16. 16 Small lump sums Small lump sums available from age 60. No reference to total benefits, so small pots can be taken even if there are other significant benefits. Up to three pots of no more than £10,000 in value each can be taken. Funds post-deduction of adviser charges assessed against the £10,000 limit. Plans can be restructured to take maximum advantage of the rules. 16

17. 17 Example – small lump sums Mary & Kevin Mary is a member of her occupational pension scheme and has significant benefits. She also has a personal pension plan consisting of a single arrangement worth £17,400. The plan value is greater than the £10,000 limit so could be split into two plans worth £8,700 each, both of which could be taken as small lump sums. Kevin has a personal pension worth £27,000, made up of 40 identical arrangements worth £675 each. The scheme rules allow the arrangements to be consolidated into 3 arrangements worth £9,000 each, which could then be taken as small lump sums. 17

18. 18 Combining the rules Combining the rules allows benefits of up to £60,000 to be taken as authorised lump sums. The small lump sums must be taken first. This allows three funds of up to £10,000 each to be taken. Remaining funds must not be greater than £30,000. 18 Example – Peter Peter has a number of personal / stakeholder pension plans, valued as follows: Personal pension 1 - £8,000; Personal pension 2 - £27,500; Personal pension 3 - £9,100; Stakeholder pension (arrangement 1) - £3,200; Stakeholder pension (arrangement 2) - £6,400. The stakeholder plans are under the same scheme so can be combined (subject to scheme rules) and taken as a small lump sum. Personal pension 1 and 3 are both under £10,000 so can also be taken under the lump sum rules. Then personal pension 2 can be commuted under the triviality rules. Total benefits taken as lump sums equals £54,200.

19. FINANCIAL PLANNING IN THE NEW REGIME

20. 20 Financial planning in the new regime Proposed rules from April 2015 offer full flexibility for all in defined contribution schemes. Effectively the same flexibility available to those who currently qualify for flexible drawdown. 25% of the fund still available as tax free cash. Remainder subject to income tax at client’s marginal rate.

21. 21 Financial planning in the new regime Whilst increased flexibility is good for clients, without careful planning it can lead to high effective tax rates. E.g. client with £280,000 fund, takes £70,000 as tax-free cash; remaining £210,000 would be taxed as*: £31,785 @ 20% £6,357 £118,215 @ 40% £47,286 £60,000 @ 45% £27,000 Total tax £80,643 So an effective tax rate of just over 38% (£80,643 / £210,000). *Assuming proposed rates and thresholds for 2015/2016 and client has no other income.

22. 22 Financial planning in the new regime If instead the money is taken over five years the tax bill would reduce considerably. £210,000 spread evenly over five years gives £42,000 a year. This is then taxed at*: –£10,500 @ 0% = £0 –£31,500 @ 20% = £6,300 The total tax over 5 years would then be £6,300 X 5 = £31,500. So an effective rate of tax of just 15% and a tax saving of nearly £50,000 with some straightforward planning. *Figures assume proposed tax rates and thresholds for 2015/2016 remain the same throughout

23. 23 Financial planning in the new regime The rules regarding recycling have not yet been confirmed / amended but could make income recycling more attractive as clients will have immediate full access to the funds. The reinvested funds could provide a further 25% tax-free cash and it may also be possible to ultimately withdraw funds when marginal income tax rates are lower. Funding for non-working or low earning spouse will also be more attractive, particularly those aged 55+. Potential to receive basic rate relief and then immediately withdraw the full fund. If client keeps income within personal allowance then no tax to pay. The ability to access pension funds and freezing of the inheritance tax (IHT) nil- rate band could see increased demand for IHT planning.

24. GREATER FREEDOM FOR ISA SAVERS

25. 25 Changes at a glance From 1 July 2014 ISAs reformed into a new simpler product – the New ISA (NISA). At this point overall subscription limit rises to £15,000. Savers can choose to hold subscriptions wholly in cash or stocks & shares or in any proportion. Existing ISAs automatically become NISAs - existing account holders benefit from the new flexibility/limits. The ability for the first time to transfer from a stocks & shares account to a cash account. 25

26. 26 Revised subscription limits – 2014/2015 The revised limits are shown below, the overall limits for 2014/2015 include any subscriptions made between 6/4/2014 and 30/6/2014: 26 Stocks & Shares CashOverall limit ISA: 6/4/2014-30/6/2014 £11,880£5,940£11,880 NISA: 1/7/2014-5/4/2015 £15,000 Junior ISA/Child Trust Fund: 6/4/2014-30/6/2014 £3,840 Junior ISA/Child Trust Fund: 1/7/2014-5/4/2015 £4,000

27. 27 Example – fully utilising 2014/2015 subscription Mandy On 1 May 2014, Mandy invested the maximum permitted, £11,880 into a Stocks & Shares ISA. From 1 July 2014 she could invest a further £3,120 into the same account subject to her provider allowing this. If her provider imposes restrictions she could consider transferring the current year’s subscription in full to a new NISA and contribute a further £3,120 in 2014/2015. 27

28. 28 Planning with New ISAs The increased subscription limits and greater flexibility will be attractive to: higher or additional rate tax payers. individuals prevented from making further pension contributions due to annual/lifetime allowance limits. those with Fixed Protection 2012 or 2014. those without relevant UK earnings. grandparents looking to make capital gifts for grandchildren (16 & 17 year olds have a £15,000 cash NISA allowance). account holders looking to move from equities into cash pre-retirement. 28

29. 29 Further resources An in-depth look at the major changes discussed in this presentation is available on the Budget page of the Scottish Widows Adviser Extranet:Budget page 1) Capped and flexible drawdown: Interim changes from 27 March 2014Capped and flexible drawdown: Interim changes from 27 March 2014 2) Accessing (reasonably) small pensionsAccessing (reasonably) small pensions 3) Financial planning in the new regimeFinancial planning in the new regime 4) Greater freedom for ISA savers – March 2014 Budget changesGreater freedom for ISA savers – March 2014 Budget changes

30. 30 Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HMRC practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. Scottish Widows plc. Registered in Scotland No. 199549. Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: 0131 655 6000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 191517. FP0445