Financial Planning and Advice (IAD)

Financial Planning and Advice (IAD)
Exam Revision Session Cris Glascow

Agenda for 2 Days Protection Retirement planning
Financial Planning and Advice. 32

Introductions Name, role
Involvement with financial planning and advice Which of the subjects on the previous slide are you most and least comfortable with? 32

The Financial Planning and Advice Exam
Facilities – calculator, exhibits, worksheets etc Questions – multiple choice, multiple response, case studies, asked at random Calculations – tax, compound interest etc Time available Pass mark. 32

Part 1 – Protection Life assurance products Annuities Protection planning

Factors and trends relevant to financial protection
Health and morbidity Longevity and mortality Employment Product design and development Access to advice and insurance Compensation and consumer protection. Ask what each of these mean. Health understanding improvement but lifestyle choices compromise this leading to higher incidence of chronic illnesses and conditions, potentially leading to shortened life. Statistically, mortality is rising virtually each year both with males and females although average female life is slightly longer than men. Employment means potential for protection arrangements to be offered as part of benefits package. Should research the choices thoroughly before making personal recommendations. Whilst it is very cheap and quick generally to set up (subject to underwriting) protection arrangements, individuals can have multiple needs which make their situation complex. Advice would normally be recommended but costs of advice may become prohibitive. Online guidance through portals such as Money Advice Service could be used at least for purpose of gathering further information. Life assurance compensation generally uncapped under FSCS – 100% from product provider insolvency, 90% from intermediaries (sometimes 100%) Products also come under usual complaints legislation.

Protection needs Health – incapacity or accident. Replacing income and requirement of capital sum Debt repayment Death - replacing income and asset protection Quantifying needs accounting for existing assets Business protection. Ask what each of these mean. How you would work out replacement of income? Consider reduced / change in expenditure of family where one person dies or becomes ill. Consider burden / cost of child care. Capital sum requirements on ill health may include cost of refurbishing home to accommodate incapacity. Life policies to repay debt should accurately reflect outstanding debt amount. E.g with repayment mortgages. Where clients have existing assets, these can of course be used if desired, towards covering say, loss of income and should not be ignored. Neither should the effect that State benefits may have no matter how meagre these may be. Business protection includes loan repayment, keyperson assurance and shareholder / partnership share protection..

State and welfare benefits
Benefit Cap Universal Credit and its effects on other previous benefits (Handout 1) - Families and children Unemployed and those on low incomes Disability and Sickness benefits State retirement benefits. (Handout 2) – Summary of state benefits and care costs Stress importance of incorporating these benefits when quantifying any protection cover in the event of illness or death. Cap is £20k from a wide range of benefits (£23k inside London) for couples and single parents and £13,400 for single people with no children (£15,410 inside London). Cap set against a range of benefits including bereavement allowance, child benefit, child tax credit, ESA, housing benefit, incapacity benefits, income support, job seekers allowance, maternity allowance , severe disablement allowance, universal credit and widowed parents allowance. Universal credit – Discuss key benefit changes relating to this benefit and how it is intended to supersede existing benefits. Use printed version of Gov.uk guide – Handout 1 to assist you. Other categories (last four bullet points) discuss rationale of main benefits, whether they are taxable, means tested or based on NIC record. Also use Handout 2 to discuss long term care support. Families and children: Child benefit: Universal application, non taxable (but tax charge if one parent has income over £50k). Current rates £20.70 pw for first child and £13.70 for each other child. Child tax credit: Means tested, non-taxable. Family element £545 plus child element of £2,780 per child (max 2). Amounts are reduced based on total family income. Maternity allowance: NI contribution based. Non taxable. £ pw (max) Statutory Maternity / Paternity Pay: NI contribution based. Taxable. £ pw (max) Unemployed and those on low incomes: Income support: Means tested. Non taxable. £57.90 pw (lowest). £ pw (highest for couples) Jobseeker’s allowance. Contribution based first 6 months and means tested thereafter. Taxable. Contributions based Up to £57.90 pw under 25, £73.10 pw over 25. Statutory redundancy payments: Working eligibility criteria. Non taxable up to £30k. Working tax credit: Means tested. Non taxable. Income depends on circumstances. Up to £2,010pa if single parent or couple. Disability and Sickness benefits: Attendance Allowance: Not means tested. Not based on NIC record. Non taxable. £85.60 pw (higher), £57.30 pw (lower) Carer’s allowance: Means tested. Taxable. £64.60 pw Disability Living Allowance (being replaced by Personal independence payment (PIP): Eligibility criteria based on disability. Non taxable. Care component - £85.60 pw (higher), £57.30 pw (middle). £22.65 pw (lower). Mobility component: £58 pw Employment and support allowance: Contributions based. Taxable as well as a means tested and non taxable element depending on circumstances. Assessment phase: £73.10 pw Statutory sick pay: NI contribution based. Taxable. £92.05 pw State retirement benefits: Single tier new state pension: Contributions based and taxable as per previous versions. £ pw Pension credit. Means tested and non taxable. £163 pw single. Means testing >£6k under SPA you are treated as having £1 income for every £250 capital. Cap is £16k capital = no benefits Means testing >£10k over SPA you are treated as having £1 income for every £500 capital. Cap is £16k capital = no benefits.

Life Assurance Products Key Terminology
Life office / insurer Insurable interest Proposer / assured Sum assured / Terminal illness cover Life assured Own life / life of another Joint life first / second death Loadings Use of trusts. Ask what each of these mean. Life office – Institution that undertakes the risk of insurance Insurable interest – Loss that the proposer / assured suffers as a result of the death of the life assured. Insurable interest is automatic for own life own benefit and life of another on spouse. Proposer / assured – the person making the application for the life assurance and who will own the policy once in force. This may or may not be the same person as the life assured. See also employer sponsored arrangements eg death in service policies and Keyperson assurance. Sum assured – the amount of cover (usually expressed in capital terms) that the life office promises to pay out in the event of a valid claim. Terminal illness cover paid before death (usually if death anticipated within 12 months) Life assured – the person whose life is insured. Own life – policy taken out by individual on his won life. Life of another – policy taken out by individual on someone else’s life. Joint life first death –policy pays out cover in the event of a valid claim on the first of two lives assured. Second death pays out on claim for survivor of two lives assured. Loadings – Lien debt, premium extra, postponement, exclusion, decline. Trusts enable benefits to pass to where they are intended, by-pass probate and avoid sum assured being added to estate for IHT purposes. Existing policies can be assigned to a new beneficiary.

Life Assurance Products Taxation - Basics
Qualifying policies Non-qualifying policies Traded policies – CGT Policy Benefits - Qualifying Policies The tax treatment of policy benefits depends on whether or not the policy is a "Qualifying" policy under the Income & Corporation Taxes Act 1988 (as amended). The main conditions to be satisfied for a new endowment or whole life policy are a) policies must have a premium payment term of at least 10 years. b) the capital sum payable on death must be at least 75% of the total premiums payable over the whole term (to age 75 in the case of whole life). For endowment assurances this 75% is reduced by 2% for each year the life exceeds 55 at entry. c) the premium payable in any period of 12 months cannot exceed twice the premium payable in any other 12 month period. d) the total premiums payable in any year must not exceed one-eighth of the total premiums payable over the whole term. (For whole life policies where premiums are payable throughout life, the first 10 years are used as the term for the purposes of this rule). For term assurances of 10 years or more the premium payment term must be at least 10 years or 75% of the term, whichever is the lower. "Premiums" should ignore loadings for payment more frequent than annual and any health extra due to increased mortality or morbidity risk. All regular premium policies issued by life offices generally (other than Income Protection and Mortgage Protection) tend to be Qualifying policies at the time of issue. The sum payable on death or maturity under a qualifying policy is free of any further tax liability in the hands of the original owner. A tax liability could, however, arise if a) the policy is surrendered either in whole or in part within the first 10 years or three quarters of its term whichever is the earlier or b)on death, surrender or maturity of a policy which has been made paid up within the period referred to in a) above. The gain, being the difference between the surrender value of the policy and the premiums paid, is treated in the same way as a gain under a non-qualifying UK policy. Discuss tax consequences if policy becomes non qualifying (see later slides on bonds) Discuss tax consequences of traded endowments: If an assignment is for money or money's worth, capital gains tax may also come into play. Life policies are normally exempt from CGT: exceptions occur where someone other than the original beneficial owner disposes of the policy and that person has acquired the policy for money or its worth. If an individual buys a second-hand endowment for example, then a CGT liability may arise on its disposal. There could be both a chargeable event for income tax and a gain for CGT. In this event, the former takes precedence and any amount potentially chargeable to income tax, the chargeable gain, is deducted from the disposal proceeds for CGT to avoid double taxation.

UK non-qualifying life assurance policies
Subject to chargeable event legislation. Chargeable events include: Death Maturity Surrender Assignment for money or money’s worth. A non-qualifying life assurance policy is simply one which does not satisfy the qualifying rules. A single premium investment bond is an example of a non-qualifying policy. The tax treatment of the fund is the same as for a qualifying policy, i.e. UK dividends are received with no further liability within the fund. All other income, such as interest and rental income, is subject to corporation tax at 20%. Any gains made within the fund are subject to corporation tax at 20%. 2

Gain ÷ number of complete years held
UK non-qualifying life assurance policies Higher rate tax payers – additional 20% to pay. Basic rate and non tax payers – gain is top sliced. Gain ÷ number of complete years held Slice added to income. Gain (or part gain) subject to additional 20% if top-sliced gain pushes them into higher rate bracket. A 20% notional tax credit is given for corporation tax paid within the fund. Top slicing involves dividing the gain by the number of complete years that the policy has been held, or the number of complete years since the last chargeable part surrender if the gain arises from a partial surrender. The policyholder can take a withdrawal of 5% of the original capital each year (on a cumulative basis) without creating an immediate tax liability. However, the tax is only deferred and withdrawals within the cumulative 5% allowance must be added back into the equation when a chargeable event takes place. 2

Taxation of a non-qualifying policy
Example: Taxation of a non-qualifying policy Edward invested £30,000 into a single premium investment bond in August He took a partial surrender of £3,000 in September 2014 and surrendered the bond in its entirety in October 2018 for £34,000. He is currently a basic rate tax-payer with a taxable income (after deducting his personal allowance) of £34,000. Calculate the additional tax payable by Edward, if any, upon the surrender of the bond. Note: The partial surrender in September 2014 was not a chargeable event because it was within the cumulative 5%. The full surrender is a chargeable event and the chargeable gain is calculated as: Surrender value £34,000 Plus Partial surrender (September 2014) £ 3,000 Total £37,000 Less Original single premium (£30,000) Chargeable gain £7,000 The chargeable gain of £7,000 is top sliced by 7 complete policy years: £7,000/ 7 = £1,000 Add £1,000 to Edward’s taxable income: £34,000 + £1,000 = £35,000 This pushes Edward into the higher rate tax bracket: £35,000 - £34,500 = £500 Therefore, part of the gain is subject to a further 20%, which is 20% of the top sliced gain multiplied by the top slicing factor of 7: £500 x 20% x 7 = £700 higher rate tax liability. 2

Offshore life assurance policies
Gain is liable to income tax as if it were an addition to policyholders income. Non tax payers can offset unused personal allowance. ART – 45% liability on whole gain. HRT – 40% liability on whole gain. BRT – 20% liability on whole gain if top slicing does not take them into the HRT band. Interest and dividends within an offshore bond roll up within the fund tax-free apart from any non-reclaimable withholding tax. Any gains made within the fund are free of corporation tax 2

Offshore life assurance policies
Time apportionment relief ref period of ownership whilst non UK resident Top slicing always uses period back to inception. The policyholder can take a withdrawal of 5% of the original capital each year (on a cumulative basis) without creating an immediate tax liability. However, the tax is only deferred and withdrawals within the cumulative 5% allowance must be added back into the equation when a chargeable event takes place. 2

Example – taxation of offshore policies
John invested £40,000 into an offshore single premium investment bond in January He took a partial surrender of £10,000 in June 2014 and then surrendered the entire bond in November 2018 for £46,000. John is currently a basic rate tax-payer with a taxable income, after taking account of his personal allowance, of £33,500. Calculate, the tax John is liable for upon the surrender of his offshore bond. Option 1 The partial surrender in June 2014 was a chargeable event (it exceeds cumulative 5% allowance): Cumulative 5% allowance between Jan 11 and Jun 14 = 4 x £40,000 x 5% = £8,000. Chargeable gain is therefore £10,000 - £8,000 = £2,000 Therefore, the full surrender of the policy is a chargeable event and the chargeable gain is calculated as: Surrender value £46,000 Plus Partial surrender in June £10,000 Total £56,000 Less Original single premium (£40,000) Less Previous chargeable gain (£ 2,000) Chargeable gain in full surrender £14,000 John is currently a basic rate tax-payer with a taxable income of £33,500 (after deducting personal allowance). Therefore the chargeable gain will be subject to 20% tax of: 20% x £14,000 = £2,800 Top slicing is required to determine any additional higher rate income tax liability. The chargeable gain of £14,000 is top-sliced by the number of complete policy years since inception; i.e. seven complete policy years. £14,000 / 7 = £2,000 £2,000 is added to John’s income to give £33,500 + £2,000 = £35,500. This pushed John into the higher rate band by £35,500 - £34,500 = £1,000. This part of the gain will therefore be liable to an additional 20% tax liability multiplied by the top slice factor of 7 which becomes £1,000 x 20% x 7 = £1,400 Therefore, John’s total tax liability = £2,800 + £1,400 = £4,200 Option 2 Chargeable gain is top-sliced by 7 complete policy years: £14,000/7 = £2,000 Add £2,000 to taxable income: £33,500 + £2,000 = £35,500 This pushes him into higher rate tax bracket: £35, £34,500 = £1,000 Therefore, part of gain is subject to tax at 40%: £1,000 x 40% x 7 = £2,800 Rest is subject to basic rate: £1,000 x 20% x 7 = £1,400 John’s total liability therefore £2,800 + £1,400 = £4,200 2

Life Assurance Products - Product Identification Exercise
From the case study scenarios attached, recommend an appropriate product to meet client needs in each scenario. Justify your recommendations. (Handout 3) Handout 3 and Handout 3 answers. Use material in CISI FP&A Study Text for guidance where necessary. Answers explain how products can meet needs. Opportunity to discuss key features of term assurance and whole of life policy products. Also discuss: Group DIS, KeyPerson, Shareholder protection and business debt protection arrangements.

Life Assurance Products Investment Bonds
Unit-linked bonds Distribution bonds With profit bonds Guaranteed growth bonds Guaranteed income bonds Guaranteed equity bonds. (Handout 4) Common Features and Potential Returns These investments are structured as life policies. They are therefore subject to life assurance policy “qualifying” rules in terms of taxation. As only single premiums are invested, these rules will be broken and the policies will be treated as “non-qualifying”. There is therefore a possibility that on partial or full encashment, an individual may be subject to an income tax liability. In many instances these rules can be used to the advantage of investors when compared to other product types available. They will not suit everyone though! As life assurance policies, any withdrawals made on a regular basis from these investments are not treated as true income but rather withdrawals of capital. Any life assurance cover provided on death, will be small, often linked to a percentage of the value of the investment e.g. with a unit linked investment bond, 101% of the bid value of units These investments therefore are primarily designed to accumulate capital, with the option in certain instances, to make withdrawals to provide “income” Because of the variety of fund types available and the level of guarantees that will be provided with some bonds and not with others, it would be inaccurate to state that investment bonds all provided similar returns. They can therefore be purchased by the risk averse or the highly adventurous investor to satisfy a capital or income need One key attractive feature of these plans, is that any investor can withdraw up to 5% per policy year of the original investment without immediately causing what is known as a “chargeable event”. Where withdrawals are higher than this, a chargeable event will arise and any amount above the cumulative allowance could when added to other income, place the investor into the higher rate tax band and cause an income tax liability. Any 5% allowance already withdrawn, will be taken into account in final encashment and should therefore be referred to as “tax deferred” rather than “tax free”! See Handout 4 for details of different types.

Health Insurance Key features of: Income Protection Insurance
Critical Illness cover Private Medical Insurance MPPI and ASU cover Long-term care cover. (Handout 5) The questions provided in Handout 5 will give you the opportunity to consider the key features, benefits, limitations and tax treatment of the main sources of health protection insurance. CIC can be on stand alone basis or as part of a life policy - Either combined basis or separate basis. Also discuss: Group IPI, CIS and ASU including tax treatment. Also discuss methods of equity release such s Lifetime mortgages or home reversion plans. Outline key ways in which these arrangemenets work and how they differ. Separate regulatory qualification for advising on lifetime mortgages and long term care. Eg CF8 with CII.. Ensure client has necessary authority to deal with you in cases such as those connected to LTC. Are you dealing with the client or their Power of Attorney in which case, do you have the necessary documentation to confer PoA’s authority?

Part 2 – Retirement Planning
Economy Pensions and taxation Defined Benefit Schemes Defined Contribution schemes Pensions Law

Need for Pension Provision
Demographic trends Role of government Employer responsibilities and challenges Financial and economic factors Incentives and disincentives to saving. These are the key areas covered that will enhance the content of the CISI coursebook material.

HMRC Tax Regime Investments for pension funds
Lifetime allowance, annual and money purchase annual allowances Death benefits Transitional reliefs Tax treatment of Qualifying Recognised Overseas Pension Schemes. These are the key areas covered that will enhance the content of the CISI coursebook material.

Pension scheme investment funds
Not exhaustive: Stocks and shares listed on a recognised stock exchange Stocks and shares listed on exchanges not recognised by HMRC - e.g. ISDX Unquoted shares Unit trusts and open ended investment companies Warrants and covered warrants Government stock and fixed interest stock Commercial property Collective property funds. Which investments would be regarded as unauthorised? NB: OFEX became Plus which is now ISDX (ICAP securities and derivatives exchange). From Jan 2013 this exchange was recognised by HMRC. Unauthorised investments would include buy to let rentai property, chattels and collectibles. What are the tax consequences of unauthorised investment? Tax consequences: 40% unauthorised payment charge on the member. If the investment represents more than 25% of the value of the overall fund, the member is subject to a further surcharge of 15%. If the member is subject to the unauthorised payment charges, then the scheme will suffer a scheme sanction charge of 15% of the value of the investment. Possible de-registration charge.

Lifetime Allowance and Charge
£1,030,000 for 2018/19 Any excess over the lifetime allowance taxed at 55% if taken as lump sum and 25% if taken as pension Member and scheme administrator are jointly and severally liable for payment Normally made by deduction from member’s benefits If the charge arises on death, responsibility for paying 55% tax rests with recipients of lump sum death benefit. The lifetime allowance represents the total amount of a member’s pension savings from all sources that can benefit from tax relief before tax penalties apply, LTA has gone down to £1.25m from £1.5m in 2013/14. and from £1.25m to £1m in April 2016 and then up slightly in 2018/19

Annual Allowance Annual Allowance in 2018/19 is £40,000.
Annual Allowance changes in 2015/16 - post July 2015 Budget and impact to PIPs Carry forward remains Tapering of annual allowance from April 2016 Annual allowance charge, as at present, set at the member’s marginal rate of tax. Define what constitutes net threshold and adjusted income from 2016/17

Money Purchase Annual Allowance
Money Purchase Annual Allowance (MPAA) £20,000 to 8 July 2015 Remainder carried over from 9 July 2015 to 5 April 2016 (maximum £10,000) From April 2017, MPAA reduced to £4,000 No carry forward What triggers MPAA and what doesn’t. Annual allowance charge, as at present, set at the member’s marginal rate of tax. The MPAA will be introduced if there is new designation of flexi access drawdown fund, existing flexible drawdown. It also applies if capped drawdown is converted into flexi-access or the capped drawdown limit is exceeded, or a scheme pension is taken from a SSAS. Previously, under flexible drawdown, any contribution was subject to an annual allowance charge. Can now contribute up to £4,000 (before April 2017/18 - £10,000) per tax year. If someone flexibly accesses benefits, they must inform the pension administrators of any contributions subsequently paid When does the MPAA NOT apply? Defined benefit scheme accruals Capped drawdown Normal/Standard Lifetime annuities Dependents income Only TFC/PCLS is accessed Where someone is subject to the tapered annual allowance (see our Tapered Annual Allowance FAQs) and they are also subject to the MPAA, the taper is applied to their alternative annual allowance amount. The alternative annual allowance amount is the full annual allowance less the MPAA. From tax year 2017/18, the alternative annual allowance for a tax year where the maximum taper provisions apply will be £6,000 pa (being the £10,000 tapered annual allowance less a £4,000 MPAA). It will also be possible to use carry forward for any unused defined benefits pension savings from the previous three years.

Money Purchase Annual Allowance
Money Purchase Annual Allowance in practice Interaction with normal annual allowance (AA) Default chargeable amount Alternative chargeable amount Interaction with PIPs Paying the annual allowance charge MPAA Examples Run through examples on flip chart (pre-prepared)

Pension income options
Pension income options – tax consequences Flexi-access drawdown Capped drawdown Uncrystallised funds pension lump sums Lifetime annuities Scheme pensions Trivial commutation / small pots (Handout 6) No changes to scheme pensions with 12 or more members. Anyone aged 55 or over on 6 April 2015 – or retiring through ill health from that date - can take advantage of the new rules.

Death benefit options Dependants, nominees and successors
Lump sum death benefits source Continuing income. Death benefits – tax examples Briefly cover but explain we shall go through again later Need to go through – impact of LTA and taxation of actual benefit including any attaching conditions such as when paid and form of payment (lump sum or income)

Transitional Reliefs Primary protection Enhanced protection
Pension commencement lump sum protection Minimum pension age Fixed protection. Fixed protection had to be claimed before April Fixed protection 2014 needed to be claimed by 5 April For the 2012, change, the basics were that the individual with a lifetime allowance expected to be above £1.5 million at April 2012, could claim the previous LTA of £1.8 million subject to certain conditions - the most notable being that no further accrual (very limited in the case of DB schemes) can continue. A similar regime is in place for the new fixed protection limits in Also individual protection is available, protecting the amount of fund (under £1.5m) and allowing contributions up to this limit.

Qualifying Recognised Overseas Pension Schemes
A transfer of a member’s benefits in a registered pension scheme overseas, must be made to a qualifying recognised overseas pension scheme (QROPS) if it is to be an “authorised payment” Such a transfer is however, a benefit crystallisation event (BCE) and so could give rise to a lifetime allowance charge at the rate of 25% of the value of the transfer.

Qualifying Recognised Overseas Pension Schemes
Any other transfer overseas would be an unauthorised payment and subject to tax penalties For an overseas pension scheme to be recognised as a QROPS, the scheme manager must have provided HMRC with information regarding its recognised overseas status and the name of country the scheme is based Inward transfers from QROPS will not be unauthorised payments - only registered schemes can make unauthorised payments. There is a possibility that you could be asked about these arrangements and an understanding of their existence and who they could be appropriate for may be useful.

State Retirement Benefits
Basic state pension Additional state pensions. We will now discuss the State regime briefly picking up the key points relating to the basic pension regime and additional schemes including guarantee credit. How much is the new State Pension? The full amount you can get under the new State Pension will be £ per week (in 2018/19) but this depends on your National Insurance (NI) record. If you have: 35 years or more of NI contributions, you will get the full amount between 10 and 34 years of contributions, you will receive a proportion of the pension less than 10 years of NI contributions, you aren’t eligible for the new State Pension. You can check your how much State Pension you will get on the .GOV.UK website or, if you are aged 50 or over, you can request a paper statement if you prefer. How is the new single tier pension amount worked out? If you have already built up NI contributions under the pre-2016 system, you’ll be given a ‘starting amount’. This will be whichever of the following that’s higher: Either the amount you would have received under the pre-2016 system including basic and additional pension Or the amount you would get if the new State Pension had been in place at the start of your working life. If the 'starting amount' is more than the full amount of the new State Pension (see above section), any amount over that level will be protected and paid on top of the full amount when you start to claim the new State Pension. If the starting amount is less than the full amount of the new State Pension you may be able to build up a higher level of new State Pension through contributions and credits you make between 6 April 2016 and when you reach State Pension age. State pension is paid gross but taxable. Pension Credit 2018/19 Guarantee Credit: Top up to £163 pw single person (£ pw couples) – Means tested (£10000 ignored –then for every £500 above this, assumed to be receiving £1 pw of notional income). Depending on other income, guarantee credit top up could be reduced. Savings Credit: 2017/18 £13.40 pw single person (£14.99 pw couples) Complex calculation and only available for people who reached age of 65 before 6 April 2016

Defined Benefit Schemes
Personal benefits Survivor benefits Public sector schemes Early retirement Late retirement Hybrids and other variations Topping up Scheme liabilities and deficits Transfers. Important that you have an understanding of these key points.

Defined benefit schemes - personal benefits
Non-joiners Implications of Auto Enrolment Eligibility Inclusion and exclusion of different employees Pension build up rate and pensionable salary Commutation option Rates scheme specific Some argue they lack value for money Calculating maximum PCLS Pension increases GMP and compulsory increases in payment A scheme can include which employees it wishes subject to not contravening discrimination laws. RE NEST: AUTO ENROLMENT STARTED ON 1 OCTOBER 2012 An eligible worker is an employee aged between 22 and state pension age and earning above the income tax personal allowance. Contributions become payable on earnings over the National Insurance primary threshold. TO AVOID AUTO ENROLEMENT: Schemes must meet the Test Scheme Standard. This standard requires an employer to compare the benefits their members will receive with those received from a hypothetical benchmark known as the Test Scheme. The Test Schemeﾊincludes an accrual rate of 1/120th. Pension builds up at an accrual rate e.g. 1/60th of defined pensionable earnings for each year of service. Pensions in payment are subject to statutory increases (CPI / 2.5% for service after April 2005) Pension (unless provided separately to PCLS) can be given up “commuted” in exchange for a lump sum e.g. commutation factor of 12 would mean that for every £12 of PCSL provided, the member gives up £1 per annum pension.

DB Schemes - Survivor Benefits
Lump sums and survivors’ pensions - limits and payment conditions: Death in service Death in retirement

Public Sector Schemes Increases to benefits in payment
Treatment of members retiring early Early leavers transferring to other public service schemes Scheme funding. Benefits usually fully inflation proofed in payment (changing form RPI to CPI). Members retiring early will often be provided with a generous benefit (not reduced) particularly if the early retirement is instigated by the employer. Members transferring between public sector roles, will benefit from the “transfer club” whereby service is taken on in full by the new employer and linked to their new pensionable earnings. Schemes may be unfunded, notionally funded or more conventionally funded but all have the underlying backing of the government to guarantee benefits.

DB Schemes - Retirement Benefits
Scheme (secured) pension only PCLS Could be in addition to pension or in exchange for some pension using commutation factor Max PCLS calculation. There is no option to take an unsecured pension from a DB scheme at retirement. Max PCLS available under HMRC rules. Use following calculation: Pre-commutation pension x Commutation Factor / 1 + (0.15 x Commutation Factor)

DB Schemes - Early Retirement
Voluntary Benefit decreases Ill health Variances No HMRC age restrictions Compulsory retirement Often pension built up so far with no reduction. Under a private sector DB scheme, early retirement will generally involve a reduction to accumulated benefits using a percentage reduction factor for each year the member retires early. For example, a reduction factor of 4% with a member retiring 5 years early, would mean a reduction to accumulated benefits of 20%. Often, schemes will provide more generous benefits if the member retires through ill health e.g. using a potential service period to Normal Pension Age and / or not applying a reduction factor. In the case of compulsory retirement, a scheme will often provide an enhancement to accumulated benefits. None of the above are guaranteed however and in this day and age, a lot will depend on the funding position of the scheme.

DB Schemes - Late Retirement
Draw some or all of the benefits and carry on working Postpone benefits until retirement.

Topping Up In house AVC Added years EPPs and PPs EFRBS.
This slide demonstrates that any registered pension arrangement can be used to top up benefits alongside DB scheme membership (full concurrency).

Scheme Funding, Liabilities and Recovery Plans
Scheme valuations TPR Guidance IAS 19 scheme valuations Insolvency valuation Recovery plan. (Handout 7) – Scheme liabilities and recovery plan summary Note contents of Handout.

Early Leavers, Transfers and Considerations
Refund of contributions and preserved pensions Revaluation (GMP and non GMP) CETV TVAS (prospective changes to TVAS) Assumptions used. Service up to 3 months – refund of contributions only (less tax of 20% up to £20,000, 45% thereafter) Service of between 3 months and 2 years, refund of contributions as above or transfer value Service of more than 2 years, transfer value or deferred benefit (These are statutory minimum rules and the scheme may be more generous). Preserved pensions must be revalued to retirement age whilst being held in the previous employer’s scheme (current rate is 2.5% per annum). If a DB scheme member is considering transfer of his preserved benefits to a DC arrangement and seeks advice, a Transfer Value Analysis should be carried out to calculate whether transfer to such an arrangement is viable. Using allowable assumptions as laid down by the regulator, the calculation will assess the level of “critical yield” that the DC scheme will need to achieve to match the benefits being offered by the DB scheme. Other considerations will be taken into account such as the need for dependants’ pensions, desired earlier retirement etc but the “critical yield” calculation is very important in determining the viability of a transfer. (See latest FCA CP 2017 on transfers)

Defined Contribution Schemes
Cumulation phase – incorporating default funds Decumulation phase - personal benefits Survivor benefits Flexible benefits v secured benefits Auto enrolment requirements. (Handout 8) – Auto Enrolment Important that you have an understanding of these key points. Much of this already discussed with taxation of registered schemes. The cumulation phase gives rise to a great deal of flexibility in allowable investments (see earlier) but some schemes eg occupational arrangements will choose default funds based around the profile of their membership and employer / trustee requirements regarding returns, risk and constraints on areas such as charging and accessibility. The choices members make on withdrawing benefits will very much based on individual circumstances and requirements and their willingness to accept risk particularly if taking drawdown. Many wealthier clients are using flexi access drawdown (or even not crystallising at all) to maximize benefits on death whilst using other capital sources to provide benefits in retirement. Auto enrolment Quick guide: rehttp://

Incentives to saving towards retirement via registered schemes
Tax reliefs on contributions Tax advantaged growth and benefits Structured approach to saving for retirement Shelter for wide variety of investment vehicles Lack of State provision.

Disincentives to Saving Towards Retirement via Registered Schemes
Restricted access Rules are complex Rules have historically changed frequently Restrictions on funding and benefits.

Alternative Solutions for Pension Income
Some suggestions: ISAs Share portfolios Capital from sale of business Capital from downsizing home / equity release Rental income from buy to let property Income or capital from trusts or inheritances State pensions Other State benefits Maturing life assurance plans Cash on deposit! Consider these alternatives and try to write down at least two advantages and two disadvantages when compared to registered pension schemes as a source of retirement funding.

Pensions Law and Regulation
Pensions regulator Other regulatory and advisory bodies Pension protection schemes Trust and contract based pensions Role and duties of trustees and administrators Pensions and divorce Employment law Bankruptcy law on pension assets. We shall now briefly discuss some key areas of legislation.

The Pensions Regulator
(Pensions Act 2004) Objectives: Protect occupational pension scheme benefits and members’ rights Protect benefits under personal pensions with direct payment arrangements Reduce situations arising that may lead to compensation being paid from PPF Promote and improve understanding of good administration of the above types of scheme. Pensions Regulator primarily overseas DB schemes as these provide the greatest risks in being able to meet commitments to members.

The Pensions Regulator:
Can inflict sanctions on trustees including dismissal, fines and criminal prosecution TPR requires anyone involved with a scheme’s administration to report on irregular / dishonest conduct (whistleblow). TPR has teeth but rarely uses them. Tends to be more collaborative with schemes in trying to resolve issues such as scheme funding

Pension Protection Schemes
Financial Assistance Scheme (FAS) Pension Protection Fund (PPF) (Handout 9) – FAS/PPF comparison Handout 9 provides key data on PPF.

Other regulators and advisory bodies
Financial Conduct Authority Pension Ombudsman Service The Pension Advisory Service Pension Wise. FCA regulates private pensions, providers and pensions advice on conduct and prudential (other than PRA authorized firms) basis. Pension Ombudsman Service Personal and occupational pensions Individuals can ask POS to look into complaints about how pension schemes are run. In some situations employers, trustees and pension scheme managers can ask POS to look into a problem. Pension Protection Fund (PPF) Individuals, employers, trustees and scheme managers can ask POS to look at decisions made by the PPF Reconsideration Committee. We can also look at some complaints about how the Pension Protection Fund is run. Financial Assistance Scheme (FAS) Individuals, employers, trustees and scheme managers can appeal a decision made by the Scheme Manager under the Financial Assistance Scheme’s internal review procedure. Pensions Advisory Service TPAS: give free, independent information and guidance on pension matters resolve problems an individual may have with their pension share insight with Government and industry to help develop future pensions policy Pension Wise Specialist pensions guidance to the over 50s

Trust and Contract Based Schemes
Trust based pensions - commonly associated with occupational schemes although individual arrangements can be set up under trust Contract based pensions - commonly established for individual plans which are subject to personal pension scheme rules adopted by the provider e.g. insurance company or collective investment scheme manager.

Trustees Pension scheme trustees must act within the trust provisions
They must hold and invest trust assets for the benefit of the trust’s beneficiaries (scheme members) in order to achieve the best possible returns They must act impartially and maintain the pension scheme in the best interests of its members at all times.

Scheme Trustees’ Responsibilities
Not rely on the advice from someone they have not appointed themselves Obtain audited accounts (or face criminal penalties) Draw up a schedule of contributions - employer and employee contributions and delivery dates Report certain delays in delivery time of contributions of more than 30 days to The Pensions Regulator Draw up a statement of investment principles to provide guidance to their investment managers including ethical and voting policies Instigate a recovery plan if a valuation shows that the scheme does not meet the statutory funding objective. The trustees have the final say over the disposal of a funding surplus.

Scheme Trustees’ Understanding
Trust deed and rules Scheme explanatory booklet Minutes of meetings Scheme accounts Actuarial valuations Statements of investment principles Statements of funding principles. No formal qualifications needed but you can see that the trustee would be responsible for a lot so, appropriate knowledge levels are essential to meet those responsibilities.

Pensions and Divorce Offsetting Earmarking Sharing (splitting).
Effect on lifetime and annual allowance. Offsetting. Taking a greater share of other assets in exchange for no pension. Simplest form of dividing pension benefits on divorce but takes no account of future accrual. Earmarking. Having pension benefits earmarked for non pension owning spouse at the point pension owning spouse retires. Frought with problems e.g. no clean break, benefits taxed as still belonging to member when in payment, member can manipulate scheme assets and not draw on them until much later. However, still relevant where member has good defined benefit scheme pensions. Sharing. Pension owning spouse gives up part of his fund at divorce (Pension Debit) and non pension owning spouse receives a corresponding credit that can be transferred into her own arrangement at the time. Credit will reduce recipient’s available Lifetime Allowance.

Part 3 – Financial Planning
Economy Pensions and taxation Defined Benefit Schemes Defined Contribution schemes Pensions Law

Financial Planning Fundamentals Assumptions
Client-Planner relationship Collecting Client’s information Analyse Client’s circumstances Recommendations and justification Reviews. (Case Studies 1 & 2 and questions)

Close Review, feedback, CPD certification and close. Thank you. 32

Financial Planning and Advice (IAD)

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