1. Rules and Ramifications
For financial advisers only – not for retail clients
Retirement
Rules and Ramifications

2. Learning objectives for the day
By attending this session, delegates will be able to:
Share the detail around new-style drawdown
Understand the implications of new ways of taking lump sums
Explain the changes to annual allowances proposed from 2015
Explain the proposed new annuity options
Identify the tax planning issues around each option

3. Freedom and Choice
These reforms create more choices for individuals, and we want people to be equipped and ready to make informed decisions.
Treasury, March 2014

4. Then Now Pensions make-over Trivial Commutation Trivial Commutation
Small Pots
Small Pots
Capped drawdown
Uncrystallised Funds Pension Lump Sum
Flexible drawdown
Flexi-Access Drawdown
Annuity
Annuity – significant changes
Death benefits taxable
Death benefits - tax free pre 75
Annual Allowance
Annual Allowance(s)!

5. Flexi-Access Drawdown (FAD)
“Flexi-Access Drawdown” applies to all new drawdown crystallisations
Existing flexible drawdown has converted to FAD
The pension can be income withdrawal or a short term annuity
No limit on the amount drawn from the fund each year
Amounts over 25% subject to marginal rate of tax
Revised Annual Allowance £10,000 if income taken
Unlimited withdrawals from a crystallised fund
Like traditional drawdown, funds are designated as drawdown money (i.e. crystallised) when a Pension Commencement Lump Sum is paid. This designation often occurs within the accumulation scheme so that an amount of 3 times the PCLS is crystallised. PCLS is restricted to 25% of the fund so the residual would always be 3 times the PCLS but partial crystallisation can occur and there is some added flexibility to accommodate adviser charges.
Customers will be permitted to make unlimited withdrawals from their crystallised fund subject to income tax at marginal rate. Withdrawals could be uniform or ad-hoc and it is expected that customer will opt for both although it is not known in what proportion.
Withdrawals may be taken to sustain a planned income strategy or used to withdrawal all funds as a lump sum, perhaps in 2 or 3 payments to avoid moving into a higher tax band.
£10,000 allowance covers 98% of pension savers over 55

6. Avoiding the trip-wires

7. Taxation – the basics Existing income £60,000
Case study 1 – Les is considering buying his car pre-retirement, but can access PCLS at 55
Existing income £60,000
Less personal allowance £10,600
Total Taxable income £49,400
Taxable 20% (0-£31,785) £6,357
Taxable 40% (£31,785 - £49,400) £7,046
Tax £13,403
Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc.
As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes)
Les decides to buy a car for £22,000 with PCLS and take the ‘income’ that goes with it.
Tax may be subject to change in the future and depends on individual circumstances.

8. £88,000 withdrawal in 2015/6 Additional tax £30,640 or
Existing income £60,000
PCLS £22,000 non-taxable
Pensions Income £66,000
Total ‘income’ £126,000
Less personal allowance £10,600
Total Taxable income £126,000
Taxable 20% (0-£31,785) £6,357
Taxable 40% (£31,785 - £126,000) £37,686
Tax £44,043
Additional tax £30,640 or
46.4% of £66,000 pension!
Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc.
As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes)
Tax may be subject to change in the future and depends on individual circumstances.

9. What if ‘post-retirement’ and pre-state pension?
Existing income £0
PCLS £22,000 non-taxable
Pensions Income £66,000
Total ‘income’ £66,000
Less personal allowance £10,600
Total Taxable income £55,400
Taxable 20% (0-£31,785) £6,357
Taxable 40% (£31,785 - £55,400) £9,446
Tax £15,803
Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc.
As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes)
Tax may be subject to change in the future and depends on individual circumstances.

10. HMRC newsletter - February 2015
If a member has a P45 from a previous source/employment dated on or after 6 April in the current year and there is no existing pension source, the scheme administrator should:
- operate the code on the P45 on a Month 1 basis

11. The not-so-neat version! Just on the pension…
Pensions Income £66,000
Less MONTHLY personal allowance £883
Total Taxable income for MONTH (pension only) £65,117
Taxable monthly 20% band (0-£2,649) £530
Taxable monthly 40% band (£2,649 - £12,500) £3,940
Taxable monthly 45% band (£12,500 – 65,117) £23,678
Tax in MONTH £28,148
PLUS normal tax on earned income
Let’s take an example and show how the tax works if someone takes their ‘pot’ out in one go as some are suggesting. Read through tax calc.
As a comparison, they could have had a net annuity of £5,291 pa (calc on next page of notes)
Tax may be subject to change in the future and depends on individual circumstances.

12. HMRC newsletter - February 2015
If the scheme administrator already has a tax code for the member and is making payments, they can operate the tax code held against flexibly accessed payments provided:
- the payroll software is sophisticated enough to cumulate the payments and take account of tax allowances already used, deducting the correct value of tax at the appropriate basic or higher rates, and
- the scheme administrator can separately identify, and quantify the flexibly accessed element of any payment, when reporting the payment through RTI using data item 168, on or before the date the payment is made

13. Annual Allowance(s) Trigger points for reduced Annual Allowance:
Receiving income from Flexi- Access Drawdown (FAD) account
Receiving an Uncrystallised Funds Pension Lump Sum (UFPLS)
Exceeding the ‘capped’ rate of drawdown on an existing capped drawdown arrangement
Scheme pension where the arrangement is providing scheme pension to less than 12 members, including dependants, at the time the first payment is made.
Stand alone lump sum with primary protection and greater than £375k protected tax free lump sum
No material change to contribution rate
for 98% of retirees

14. Annual Allowance(s) - there’s more..
Current allowance of £40,000 remains for existing capped drawdown
And designating new tranches for income within limits
Annuity only clients not impacted (assuming no decreases)
Defined Benefits
Retain £40,000 (or £30,000 + £10,000 for DC)
No material change to contribution rate
for 98% of retirees

15. X MPAA – An example £10k max £30k £10k April 2016* April 2015 Jan 2016DC
£10k max
£30k
£10k X
FAD income
April 2016*
April 2015
Jan 2016
Overall still needs to be below £40k in the pension input period or AA charge will apply.
AA charge is marginal rate (for info) so in effect tax neutral as tax relief given (as long as conts below your Net Relevant Earnings)
*Pension Input Period ends on 5 April 2016

16. Defined Benefits and Money PurchaseDC
£12k
FAD income
April 2016*
April 2015
Jan 2016
DB accrual ending 31 March £28,000
*Money Purchase Pension Input Period ends on 5 April 2016

17. Money Purchase Annual Allowance – The checks
The chargeable amount is the higher of:
The alternative chargeable amount*
Total of DB > £30k + excess DC > £10k
DB is £28k = £0
DC is £12k = £2k over
£2k is the alternative chargeable amount
The default chargeable amount
DB plus DC > £40k
£28k + £12k = £40k
Charge is nil under this test
*This additional check is only required if contributions exceed £10,000 into a money purchase arrangement
EG £32k in DB, £8k in DC is okay, as second test does not apply!

18. When is a lump sum not a lump sum?
Question
As part of their objectives, Jeff and Ann want to clear their interest-only mortgage with a lump sum of £10,000. What is the most efficient way of accessing the ‘lump sum’?
When is a lump sum not a lump sum?
When it’s an income!

19. Uncrystallised Funds Pension Lump Sum (UFPLS)
Payable from age 55
or upon meeting ill-health conditions
25% available tax free, remainder taxable as pension income
Reduced annual allowance
Unless taken under ‘small pots’ allowance
Not available to those with primary and/or enhanced protection and lump sum rights > £375,000
Not available for DB pensions
Trivial commutation previously available from age 60
• • Part tax-free; part taxable
This option could be extrapolated from FAD but has special rules to prevent the recycling of tax relief. This is a variation on phased retirement could be a major new option for providing retirement income.
Primary/Enhanced protection and PCLS over £375k rules:
When can a protected PCLS sum be paid?
A protected PCLS sum of in excess of 25% of the capital
value of the member’s pension benefits can only be paid
on the first occasion that an individual vests benefits on
or after 6 April 2006, and provided that all benefits are
drawn from the scheme at that date.

20. Avoiding the trip-wires

21. UFPLS FAD ‘Income’ available PCLS available Lump sum or ‘income’?
£2,500
tax-free
£10,000
tax-free
£7,500
taxable
Annual Allowance
£10,000
Annual Allowance
£40,000

22. UFPLS Net income required £10,000 25% @ 100% = 25% 75% @ 80% = 60%
100% = 25%
80% = 60%
= overall ‘rate’ = 85%
£10,000/ 85% = £11,765

23. UFPLS Client needs approximately £10,000 pa £11,765 crystallised PCLS
£2,941 .
£7,059
income
£10,000
‘income’ shown net of 20% tax

24. Lifetime Annuities
The annual rate of income will be allowed to go down as well as up
Retains £40,000 annual allowance if annuity only
Assuming no decreases
Allow lump sums to be taken
Must be specified at point of purchase
There is no limit on the maximum guarantee period that can be offered
Commutation of guaranteed payments on death under £30,000
• A lifetime annuity can go down as well as up and need not increase uniformly.
Previously a lifetime annuity could only reduce in very limited circumstances. For example, an index linked annuity could reduce if the movement in the index was negative, an investment linked annuity could reduce if the attached investment returns did not support the income, and an ill-health pension could reduce if health was restored.
Now a pension can go up and down as required.
Possible options for Partnership’s lifetime annuity include a pension that starts at a higher level reducing in later life when old age restricts activity.
There appears no obvious reason why a pension cannot be reduced to a trivial amount, say £1 a year allowing individuals to draw all their income in early years but this option could be closed if used to avoid Annual Allowance restrictions (see below).
Whereas an increasing annuity had to increase annually, the new rules could allow a step up at a future date, or a future event, e.g. going into residential care.
• Restriction on guarantee period removed.
Currently an annuity could be guaranteed for fixed term of up to 10 year so that the income continues to be paid to next of kin for that term if the annuitant dies. The 10 year limit is being removed so that any period could be selected.
Extended guarantees restrict Partnership’s IP. Where standard life expectancy might be 20 years and Partnership predict 15 years due to medical conditions, the longevity become almost irrelevant if the income is guaranteed for 25 years. Extended guarantees competitive dynamics will be dependent on investment returns, expenses and margins rather than longevity.
An extended guarantee period might be of interest to customers where the priority is providing a legacy for family or charity.
• Scheme Pensions
There is uncertainty about how the new definition of Lifetime Annuity distinguished from Scheme Pensions through annuities. Further clarification is required .
• Bulk Annuities
There is uncertainty about how the new definition of Lifetime Annuity distinguished from Bulk Annuities that are assigned to scheme members. Further clarification is required .

25. Taxation of death benefits
New System
Die before 75
Die after 75
Lump Sums
(“uncrystallised funds”)
Tax free
45% in 2015/16
Marginal income tax thereafter*
(“crystallised funds”)
Benefits as flexible drawdown income
Marginal income tax
Annuity Guarantee periods
Tax Free
The treatment applies to a specific nominated beneficiary. We do not know if the position will change if there is no nominated beneficiary or the nominated beneficiary predeceases the pension fund holder.

26. Death benefits - Jeff and Ann
Jeff and Ann have children aged 21 and 22
Can they leave pensions income for them?
What about when they pass the age of 23?

27. Death Benefits – The Terminology
Dependant: Spouse, civil partner, child under age 23, older child dependant due to
physical or mental Impairment, someone financially dependant on member
or someone in a financial relationship of mutual dependence with member.
Nominee: Anyone nominated by the member to receive an income on the member’s
death.
The scheme administrator cannot normally appoint a nominee or change
the nominee. (discretion still applies)
Successor: Anyone nominated by dependant, nominee or successor to receive
any remaining benefits on their death

28. Dependents and Nominees
Pension Fund
Trustee discretion
Options for Financial Dependants
Options for non-Financial Dependants
Lump Sum
(outside pension)
Pension Income
Lump Sum
(outside pension)
Pension Income

29. Dependents and Nominees
Options for non-Financial Dependants
Lump Sum
(outside pension)
Pension Income
Scheme administrator / Trustee discretion to pay to anyone (within class of beneficiary)
Should be nominated by the member
Scheme administrator / Trustee cannot make a nomination if living dependant or nomination made by member
But could pay to a financial dependant

30. Reconsidering bypass trusts
Benefits via trust
Benefits from pension fund
Benefits pass to trust
Tax = 0%, 45%, trustee rate depending on date of death
Trust monies outside of estate
Loans to spouse create debt against estate (if not repaid)
Original member establishes future beneficiaries
Spouse takes only what is needed
Tax = 0%, marginal depending on date of death
Remainder stays outside of estate
Spouse nominates cascading benefits
Bypass trusts become more about control than taxation

31. Impact on Defined Benefits?

32. Defined Benefits – Safeguards
Individual must take advice before a transfer can be accepted
Pension Transfer Specialist
Independent from the defined benefit scheme
Guidance given to trustees on the use of existing powers
Delays
Scheme funding levels
Unless £30,000 or under
FCA handbook:
With defined benefit transfers a firm ‘should start by assuming that a transfer or opt-out will not be suitable’.*
*FCA: COBS

33. Notes from the guidance
“It is not the trustee’s role to second-guess the member’s individual circumstances… Nor is it their role to prevent a member from making decisions which the trustees might consider to be inappropriate to the member’s circumstances”.   “We expect trustees to conduct proper due diligence on the receiving scheme to ensure that it is a legitimate arrangement”.
Lexology.com 16/2/15

34. The relevance of underwriting
DB scheme population often weighted towards retirees
‘Freedom and Choice’ confirms individual retirees cannot transfer out of Defined Benefit Schemes
BUT schemes can de-risk the benefit by annuitising
DB de-risking is a huge opportunity
..read points.
The principle of ‘target benefits’ can be used on a group basis by trustees. An annuity geared towards the promised benefit can be an asset of the scheme, but de-risk the payments due.

35. Learning objectives for the day
By attending this session, delegates will be able to:
Share the detail around new-style drawdown
Understand the implications of new ways of taking lump sums
Explain the changes to annual allowances proposed from 2015
Explain the proposed new annuity options
Identify the tax planning issues around each option

36. Still some areas of crystallised ball-gazing!

37. Thank You
Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No ), and Partnership Home Loans Limited (registered in England and Wales No ).
Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Partnership Home Loans Limited is authorised and regulated by the Financial Conduct Authority. The registered office for both companies is 5th Floor, 110 Bishopsgate, London EC2M 4AY