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1

DB to DC

“However, following on from its 2017 consultation, from 1 October 2018 there is a requirement to undertake an appropriate pension transfer analysis (APTA) of the client’s options; and a prescribed transfer value comparator (TVC), indicating the value of the benefits being given up and the cost of purchasing the same income in a defined contribution environment. Further details of this can be found in Appropriate transfer value analysis (APTA).

Having carried out the comparison, the adviser’s role is to advise their client as to whether staying in the existing defined benefit scheme will provide the best means of them achieving their retirement planning objectives and meeting their retirement needs, or whether transferring fully or partially (if the option is available) into a defined contribution scheme that provides flexible benefits is the most suitable course of action to achieve the same ends.”

2

Safeguarded Benefit to DC

“Safeguarded benefits are defined as benefits that are not money purchase or cash balance benefits. They include defined benefits, defined contribution schemes with guaranteed annuity rates (GARs) and guaranteed pensions at retirement.”

“Guaranteed annuity rates: It is important to understand the exact nature of the guaranteed benefits provided by the contract in order to provide appropriate advice, therefore it is essential to obtain information about the terms and conditions of the guaranteed annuity rates as well as the rates themselves:
Is the guarantee applicable at a specific point in time, such as normal retirement age, or is it generally applicable whenever benefits are taken?
Generally, rates will be expressed as single life, paid annually in arrears with no indexation or guarantee period, as this is the most basic benefit available and therefore the highest starting point. It is important to establish whether the contract can offer benefits on any other basis, and to obtain details of these rates.
What are the options in relation to taking benefits early or late and details of any penalties or enhancements that may apply?
“Guaranteed pension at retirement: This is different from a guaranteed annuity rate plan in that the contract offers a basic guaranteed pension which is increased by the addition of bonuses over time rather than a guaranteed rate. Generally, these will be with-profits type plans so in addition to the details about the pension itself the following additional information would be required:
The previous history of reversionary and terminal bonuses for the provider.
Whether a market value adjustment factor can be applied and on what basis. Understand the circumstances when an MVA would not apply.”

“The most likely reason for a member to consider transferring away from a scheme with a guaranteed annuity rate is where it is only payable as at a certain date which doesn’t fit in with their retirement plans, and/or it is only available on a single life basis and the member is concerned that their partner is inadequately provided for, and would prefer a lower rate but on a joint life basis. Other reasons may be poor health, shortened life-expectancy or simply just not having the need for the secure income.

The most likely reason for a member to consider transferring away from a scheme which provides a guaranteed basic pension at retirement is that the annual bonuses being added are negligible and the overall likely pension at retirement is therefore unattractive to the member, and they do not see future bonus patterns changing. Again, other reasons may be poor health, shortened life-expectancy or simply just not having the need for the secure income.”


“When considering transferring away from a defined benefit scheme or a scheme providing any other form of safeguarded benefits, and into a defined contribution scheme, a comparison should be made at the scheme’s NPA and any other ages that are appropriate to the member’s requirements of the benefits likely to be paid under the existing scheme, with the benefits that would be available on transfer to a defined contribution scheme that provides flexible benefits. When doing so, reasonable assumptions should be used, with the FCA stipulating the assumptions that should be used specifically for defined benefits.

It is essential that in doing this comparison the firm clearly informs the client about the benefits they will be giving up and the implications of the loss of these benefits. Specifically, this should include the extent to which any replacement benefits may fall short of replicating those in the defined benefit pension scheme or other scheme with safeguarded benefits.”

3

Reconciling Client Objectives and Needs:

“It is not however simply a case of prioritising and compromising between diametrically opposed requirements, there are also other factors that need to be taken into account when establishing how best to proceed. These other factors include:

when the client intends to stop working and whether this will be a gradual reduction of working hours over time;
determining how best to access the pension benefits;
timing of taking an income from the State Pension;
alternative ways of achieving the client objectives other than by transferring;
features of the receiving scheme; and
suitability of the recommended investment strategy.”

4

DB Scheme Pensions:

“Defined benefit scheme pensions – benefits and drawbacks

Benefits

Drawbacks

Income paid to the member

Secure income for life of member.
Will usually increase in line with inflation (subject to scheme and DWP rules).
Liability for payment remains with the trustees and sponsoring employer.
Will not trigger the MPAA under most circumstances.
Once in payment income cannot usually be varied.
If the scheme member dies earlier than expected, the income ceases (unless a survivor’s pension guarantee period or annuity protection is included).
Continued payment is subject to the continued financial solvency of the scheme and the sponsoring employer.
Death benefits following death of the member

Will usually provide a spouse pension (spouse includes civil partners and same sex marriage) provided any conditions in the scheme rules are met.


“Benefits will generally increase roughly in line with inflation as per scheme rules and HMRC legislation.
May provide a guaranteed period of 5–10 years. Balance of payments can be commuted for a lump sum.
May provide for a dependant pension other than spouse, and possibly children’s pensions.
There is a huge variation in the definition of spouse and dependant, and often payment of benefits is at the discretion of the trustees.
Spouse and other pension benefits will be taxable as the recipient’s pension income under PAYE.
Payment of spouse benefits can be reviewed, reduced or withdrawn all together based on the scheme rules.
Can only be paid to a beneficiary who is a dependant as defined by the DWP/the scheme rules if more restrictive.
A survivor’s pension must cease when the survivor dies (i.e. the benefit cannot pass on through later generations).
No lump-sum death benefits unless annuity protection is selected. Any lump sum paid will form part of the survivor’s estate unless paid to a suitable trust.
General

Easy to understand – no need for ongoing reviews.
Provide certainty of income throughout life for member as long as the scheme remains able to honour its pension promises.

“Less costly than a drawdown pension.
May be suitable for clients who have a low capacity for loss.”

5

Lifetime Annuities:

“Life offices use external life tables and their own experience to work out life expectancy. This is especially true for individually written impaired life business and, to some extent, for enhanced terms smoker and ‘lifestyle’ business. Insurers also factor in improvement assumptions that allow for further increases in life expectancy among their annuitants in payment. Traditionally, a life office pools the risk so that underwriting gains from those who die early will be (to some extent) redistributed to help meet payments to those who live longer than expected.

The pension flexibility reforms have reduced the amount of new individual annuity business. This further reduces the scope for annuity cross subsidy, with continuing downward pressure on mainstream rates for younger lives relative to where they might otherwise have been. This is because many of those who choose to buy lifetime annuities will do so because they are in good health (and so are less likely to die earlier than expected) and so want to eliminate the risk of outliving their income.”

6

Lifetime Annuities Benefits and Drawbacks:

“Benefits

Drawbacks

Income paid to the member

Secure income for life.
Indexation can be included.
More flexible options now available including the amount of the income.
Payment from a conventional lifetime annuity will not trigger the MPAA.
Once purchased, the level of income cannot be varied unless a flexible lifetime annuity is selected.
If the annuitant dies earlier than expected the income ceases (unless a survivor’s pension is included).
Payment from a flexible lifetime annuity will trigger the MPAA.

“Death benefits following the death of the member

Can be set up to provide a guaranteed income for a beneficiary.
Beneficiary does not have to be a spouse, civil partner or dependant
May include annuity capital protection.
May include any length of guarantee period (subject to the provider’s rules).
Benefits are paid to survivors free of income tax if the member dies before the age of 75.
May be possible for the survivor’s pension and/or guarantee payments to be commuted for a lump sum if the triviality conditions are met.
Decisions relating to the inclusion of a survivor’s pension must be made at outset and cannot be changed.
A survivor’s annuity must cease when the survivor dies (i.e. the benefit cannot be passed on through later generations).
No lump-sum death benefits unless annuity protection is selected.
Once an annuity protection lump sum is paid out it is within the beneficiary’s estate for IHT unless paid into a suitable trust (and depending on the rules of the pension scheme).”

“General

Easy to understand – no need for ongoing reviews if a conventional (non-investment linked) annuity is chosen.
No investment risk for conventional annuity.
Less costly than a drawdown pension in terms of the need for ongoing advice.
May be suitable for clients who have a low capacity for loss.
Reviews are required if an investment linked or flexible lifetime annuity is selected.
Generally inflexible (other than where a flexible lifetime annuity is selected).
No ability to pass the pension through the generations.”

7

Flexible Income Options. UFPLS Benefits and Drawbacks

“UFPLS – benefits and drawbacks

Benefits

Drawbacks

Income paid to the member

Client has full flexibility to choose the amount of the lump-sum payment they take (i.e. can take the whole fund or a series of payments).
25% of each payment is tax free.
Can be used for tax planning to utilise the client’s personal allowance and/or basic rate tax band.
As withdrawals are in the form of a lump sum, the client can take funds for any purpose.
Payment of an UFPLS triggers the MPAA.
All in excess of the 25% tax-free element is taxable as the client’s pension income via PAYE.
Any fund not taken as an UFPLS remains subject to investment risk.
Possibility that entire fund could be depleted and leave the client with insufficient funds to live on in retirement.”

“Death benefits paid following the death of the member

Any uncrystallised fund not taken as an UFPLS remains available for client’s beneficiaries (tax free on member’s death before the age of 75).
Uncrystallised funds can be used by the survivor to provide a lump sum, annuity income or be designated to drawdown.
If designated to drawdown the funds can be passed onto future generations within the pensions tax wrapper, thereby outside the survivor’s estate for IHT.
Any UFPLS taken and not spent is within the client’s estate for IHT.
Any uncrystallised funds taken as a lump sum forms part of the beneficiary’s estate for IHT for seven years.”

“General

Relatively simple to understand.
Full flexibility in terms of amount and frequency of UFPLS taken.
Can be used to phase retirement by taking a series of UFPLS withdrawals over time.
Any uncrystallised funds can be passed onto future generations.
Reviews still needed in respect of any uncrystallised fund, which may be costly.
Need to reclaim overpaid PAYE after each payment while the emergency tax code is applied.”

8

Capped DD Benefits and Drawbacks

“Capped drawdown pensions – benefits and drawbacks

Benefits

Drawbacks

Income paid to the member

Income taken does not trigger the MPAA rules (unless maximum permitted income is exceeded).
It may be possible to designate additional funds into an existing capped drawdown arrangement.
Access to a PCLS at outset in respect of newly designated funds.
Can be used for tax-planning to utilise the client’s personal allowance and/or basic rate tax band.
All payments made in excess of the PCLS are taxable as the member’s pension income via PAYE.
Unused funds remain invested and therefore subject to investment risk.
Possibility that entire fund could be depleted and leave the client with insufficient funds to live on in retirement.
Scheme administration charges may be higher due to the requirement to monitor income levels and undertake triennial or annual reviews.
Not all providers permit the designation of additional funds into existing capped drawdown arrangements.”

“Death benefits

Balance of the crystallised fund remains available for client’s beneficiaries.
No restriction on who funds can be passed to.
Beneficiaries can choose to continue with flexi-access drawdown, purchase a survivor’s annuity or take the funds as a lump sum.
Income or lump sum received by a beneficiary will be tax-free where the member’s death occurs before the age of 75.
Income and lump-sum death benefits taxable as the recipient’s pension income via PAYE on member’s (or subsequent beneficiary’s) death where death occurs on or after their 75th birthday.
Any lump sum paid forms part of the beneficiary’s estate for IHT unless it is paid into a suitable trust.
If the beneficiary wishes to designate the funds to drawdown pension, then it will be a flexi-access”

“as it is not possible for a beneficiary to continue in capped drawdown.
General

Significant flexibility in terms of amount and frequency of income taken.
Can be used to phase retirement by taking flexible income withdrawals and/or utilising the PCLS in stages over time.
Beneficiaries who continue with drawdown can nominate someone to receive the funds following their death, allowing funds to pass ‘through the generations’ whilst remaining within the pensions ‘tax wrapper’ and thereby outside the survivor’s estate for IHT.
Complex option.
Needs ongoing reviews, which may be costly.”

9

Flexi access Dd Benefits and Drawbacks:

“Benefits

Drawbacks

Income

Full flexibility in the amount and frequency of income taken.
Access to a PCLS at outset.
Can be used for tax-planning to utilise the client’s personal allowance and/or basic rate tax band.
If PCLS only is taken (i.e. no income), the MPAA is not triggered.
The client can take funds for any purpose.
Income withdrawals from a flexi-access drawdown pension trigger the MPAA.
All of the payments made in excess of the PCLS are taxable as the member’s pension income via PAYE.
Unused funds remain invested and therefore subject to investment risk.
Possibility that entire fund could be depleted and leave the client with insufficient funds to live on in retirement.”

“Death benefits

Balance of the crystallised fund remains available for client’s beneficiaries.
No restriction on who funds can be passed to.
Beneficiaries can elect to continue with drawdown, purchase a survivor’s annuity or take the funds as a lump sum.
Income or lump sum received by a beneficiary is tax-free on the death of the member where the death occurs before
age 75.
Income and lump-sum death benefits taxable as the recipient’s pension income via PAYE on member’s (or subsequent beneficiary’s) death where death occurs on or after their 75th birthday.
Any lump sum paid will form part of the beneficiary’s estate for IHT unless it is paid into a suitable trust.”

“General

Full flexibility in terms of amount and frequency of income taken.
Can be used to phase retirement by taking flexible income withdrawals and/or utilising the PCLS in stages over time.
Beneficiaries who continue with drawdown can nominate someone to receive the funds following their death, allowing funds to pass ‘through the generations’ whilst remaining within the pensions ‘tax wrapper’ and thereby outside the survivor’s estate for IHT.
Complex option.
Needs ongoing reviews, which may be costly.”

10

State Pension:

“Basic State Pension
Individuals who attained State pension age (SPA) before 6 April 2016 with at least 30 years of National Insurance contributions (NICs) will be in receipt of a Basic State Pension of £125.95 p.w., or £6,549.40 p.a in 2018/19. This income increases each year by the ‘triple lock’ guarantee (the greater of the Consumer Prices Index (CPI), average earnings or 2.5% and provides spouse’s benefits on death (as long as the spouse has not built up a full entitlement in their own right).
New State Pension
Anyone reaching their SPA on or after 6 April 2016 will qualify for the new State Pension. As long as they have at least 35 years of NICs, they will be eligible for a Pension of £164.35 per week, or £8,546.20 p.a. for 2018/19. This income also increases in line with the ‘triple lock’ guarantee; however, it does not provide spouse’s benefits on death.”

“Conversely, an individual may receive a higher amount of starting pension where they were contracted into the State additional scheme in its various guises. Given this variation in entitlement based on NICs, contracting-out status and qualifying years, and the changes to the State Pension from April 2016, it is essential for individuals to obtain a State Pension forecast. In the previous example, the State Pension payable is significantly less than the flat rate. Failure to address this issue could mean that the individual could face a significant shortfall in the future, which may be a surprise especially where assumptions have been based on entitlement to the full amount solely on the basis of qualifying years.”

11

Death Benefits alternative:

“A major consideration for many clients is provision of benefits on death. They have concerns that their spouse will have a reduced income, or they do not have financial dependants who would qualify in the event of their death. They may wish to ensure that some benefits are available to their children in the event of their death.

When comparing the death benefits under a DB scheme with those available from a money purchase scheme, it is important to not just compare the DB lump sum death benefit with the return of fund available under the proposed money purchase arrangement, but to also factor in the capitalised value of the DB scheme’s dependant’s pension(s). When doing so, it is important to bear in mind that any dependant’s pensions will be subject to PAYE in the hands of the recipient while any money purchase scheme death benefits (assuming a comparison based on death prior to age 75 and that the death benefits do not exceed the individual’s lifetime allowance) will, potentially, be paid tax-free.

“It may be possible to replace the lump-sum death benefits with a whole of life plan with a sum assured equal to the value of the death benefits they wish to provide . This should be written under trust for the intended beneficiaries. This would facilitate the payment of a lump sum on death and enable the member to retain their guaranteed pension benefits. The suitability of this option will depend on the state of health of the individual and the availability of cover at an acceptable cost. The ongoing cost of maintaining the premiums should be taken into account when considering the suitability of this option.”

12

Receiving Scheme features; death Benefits

“Nominee drawdown – This is any individual nominated by the member (other than a dependant), who is nominated to receive the benefits from the pension plan upon the member’s death. If there is no nomination made before death (either to an individual or a charity) and there are no dependants, the scheme administrator can make the nomination on behalf”


“of the scheme member.anyone who is not a financial dependant.
Successor drawdown – This is any individual nominated by a dependant or a nominee to continue to receive the dependant’s/nominee’s flexi-access drawdown upon the dependant’s/nominee’s death. It can also be anyone nominated to continue to receive the income from a previous successor’s flexi-access drawdown. If a nominee or successor fails to nominate someone to continue to receive the income from their flexi-access drawdown, then the scheme administrator can do so on their behalf. However, in some cases, the nomination made by the original member (e.g. in an expression of wishes) can still stop a scheme administrator from making a nomination.
Consideration should also be given to whether the plan is written under an individual or master trust as this will dictate who will make the ultimate decision of the recipients of death benefits.”

“Other considerations
The client may have specific requirements which a personal pension plan (PPP) or SIPP are unable to satisfy, for example, a small self-administered scheme (SSAS) is generally used by small business owners as it provides additional investment flexibility and enables them to use the pension benefits to help them grow and develop their business.”



13

What is Lifestyling?

“To deal with this situation some pension providers offer a lifestyling option, whereby the investment mix of the pension fund is automatically moved away from equities and into fixed interest investments and cash as retirement approaches. The assumption is that the member will use their fund to purchase an annuity after taking their full PCLS. Thus, the investment mix at the member’s selected retirement age is typically 75% in gilts and 25% in cash.”


“This happens as follows:

the switching begins between five and ten years before the individual’s selected retirement age;
this locks in the gains made and reduces the risk of the fund falling in value as retirement approaches;
including gilts within the fund also provides a hedge against falling annuity rates, since annuity rates are based on gilt yields; and
as the switching is automatic the individual does not have to remember to switch their funds as retirement approaches.”


“Lifestyling is a valuable option, but it does have some disadvantages:

It works on the basis that the individual will crystallise their benefits at their selected retirement date, they will take their full PCLS and purchase an annuity with the balance.
If the individual retires earlier than anticipated the fund may have a high exposure to equities at the point at which the annuity is purchased. If equity values are falling the fund will be reduced and hence so will the annuity. If a partial crystallisation takes place (e.g. to take a UFPLS) then a greater number of units will be crystallised to provide the sum required, affecting the future growth prospects for the remaining funds.
If the individual retires later than originally planned or they commence flexi-access drawdown, too much of the fund will be in more secure investments: the fund will have been switched into safer funds earlier than required and growth opportunities will have been lost.
The individual’s attitude to risk may alter over the time of the investment or the automatic switching of the fund may mean that it no longer matches their attitude to risk.

“Switching occurs automatically at pre-set times and does not allow for market conditions; consequently, switching may occur when equity values are depressed.”



14

What are Target Date Funds?

“Target date funds are used by the National Employment Savings Trust (NEST) as the default fund for its members (NEST calls them retirement date funds).”


“The member selects a fund that aligns with their intended retirement date. So, for example, someone who intends to retire in 2035 will select the 2035 target date fund. The fund invests in riskier growth assets initially, with the investments being moved into less volatile assets as the target retirement year approaches. Unlike a lifestyle fund, the fund is actively managed and so can take account of market movements”


“The fund’s investment is driven by the target retirement year and not by the member’s age. If the member decides to retire at an earlier or later date they can switch into a target date fund aligned with their revised retirement date.”

15

What does self-investment involve?

“At the upper end of the market, SIPPs may also be used as:

a wrapper in which to manage a directly invested portfolio of shares and bonds;
a means of investing in commercial (not residential) property;
a structure through which to operate drawdown pension; or
as a way to finance the member’s business, e.g. through the purchase of private company shares.
All registered pension schemes are subject to the same permitted investments, though the investments offered will depend on the rules of each scheme. SIPPs are likely to offer most, if not all, of the currently permitted investments.

There are few restrictions on the type of assets that a scheme can invest in, although there will be tax charges in relation to certain types of investments. In particular, the Government wishes to ensure that self-directed schemes (i.e. SIPPS) do not receive any tax advantages from investing in residential property and certain other assets, such as wines, classic cars, art and antiques.”

16

What are the limits on investment in sponsoring companies?

“The total value of shareholdings in the sponsoring employer that an occupational scheme (i.e. a SSAS) can hold are limited to:
under 5% of scheme assets in any one sponsoring employer; and
under 20% of scheme assets, where the shareholdings relate to more than one sponsoring employer.
The shares in any one sponsoring employer of the scheme must still be less than 5%. The percentage of value is calculated at the time the scheme pays for the shares and is not re-tested later, unless new shares in the sponsoring employer are acquired. There are no restrictions on the percentage of shares that can be held in one company (e.g. a registered pension scheme could potentially own 100% of the share capital of a company) providing that the sums invested are less than 5% of the scheme’s assets.”


“The 5% and 20% shareholding limits only apply to registered schemes classed as ‘occupational pension schemes’ as defined in the Finance Act 2004. Therefore, a SIPP could be wholly invested in shares of the member’s employer, provided that the employer did not establish a trust for the SIPP, because this means the SIPP would be classed as an occupational scheme. However, the complex rules on indirect holdings of taxable property could prevent a SIPP from holding any shares in a member’s employer.”

17

What are the rules for loans to sponsoring employers?

“The rules allow loans to sponsoring employers from occupational schemes (i.e. an SSAS), subject to certain conditions. They do not permit loans to an employer from a contract-based SIPP (which is the most usual form a SIPP takes).
Loans from an occupational scheme to the sponsoring employer must meet the following conditions:

They must not exceed 50% of the net value of the scheme’s assets at the date the loan is granted.


“They must be secured, as a first charge, on assets that initially have a value at least equal to the loan plus the interest. Subsequent falls in the value of the security are permitted, provided they are not the result of actions taken by the employer or any connected persons.
They must carry a minimum interest rate of 1% over the average base rate of the six main clearing banks. This rate is rounded up to the higher 0.25% if the resulting figure is not a multiple of 0.25%. (Note: this does not mean that the interest rate charged must be 1% over the average base rate of the six main clearing banks – it means it must be at least this rate or higher).
They must be repaid by equal annual instalments of capital and interest.
They must not last for longer than five years. However, at the end of the original term it is possible to roll over loans for one further period of no more than five years (without replacing the existing security) if the employer is having difficulties in meeting payments due.”

“If any one of these conditions is not satisfied, an unauthorised payment arises, which could result in the scheme being de-registered. The same criteria and sanctions apply if a scheme provides a guarantee for a third-party loan made to a sponsoring employer”

18

What are the rules around Scheme borrowing?

“Both SIPPs (contract-based and trust-based) and SSASs can borrow funds to use for investment purposes. The total loan to a pension scheme for any purpose is limited to 50% of the net assets of the scheme before the loan, e.g. a fund with net assets of £200,000 may have maximum borrowings of £100,000.”

“Where a scheme has existing borrowing, the maximum loan remains at 50% of net assets. This 50% must include the existing borrowing (i.e. the total of all borrowing is limited to 50% of the scheme’s assets).”

“Example 6.5
Let us use our example of Costas again. This time his SIPP already has £30,000 of existing borrowing.
The maximum borrowing possible to help with the purchase of the property would now be:

(£200,000 – £30,000) × 50% = £85,000 – £30,000 = £55,000

When added to the fund value this gives us assets of £255,000, which is less than the amount needed to fund the property purchase.”

19

Taxable Property:

“The list of ‘taxable property’ covers residential property (with minor exceptions, e.g. a caretaker’s flat) and this is defined in great detail, e.g. beach huts are residential property, but student halls of accommodation are not. The list also covers tangible moveable property, which basically means personal chattels (e.g. antiques, art and cars) but excludes certain business assets valued at not more than £6,000.

If a self-invested pension scheme, directly or indirectly, purchases a prohibited asset the scheme and/or the member is subject to one or more of the unauthorised payments tax charges.”

20

What are the Small pots and Trivial Commutation rules?

“A client may have several smaller pension pots and, subject to certain conditions, they may have the option of taking some of these using the small pots or triviality rules. Small pots payments and trivial commutation payments do not trigger the MPAA rules. Neither are they assessed against the member’s LTA. Where the member has pension benefits close to or in excess of the LTA, small pots payments can help them avoid (or reduce) a lifetime allowance tax charge.

For non-occupational money purchase benefits, a single pension pot can be split into small pots to take advantage of the small pots rules. The maximum number of small pots payments in respect of non-occupational schemes is three, so the maximum that can be commuted on this basis is £30,000.”

“Commuting uncrystallised funds provides the member with 25% of each payment tax-free, but the balance is taxed as pension income via PAYE.”

“Nonetheless, it is important to be aware that taking lump sums from their pension in this way could push the member into a higher income tax bracket thereby causing unintended consequences with regard to their income tax position.”

21

Annuity Income?

“A client may want to make use of ‘flexible’ annuities but avoid the imposition of the MPAA. If they do then there is an option available to them.

‘Flexible’ annuities were available prior to 2015 and included investment-linked annuities, which allow income to be varied between lower and upper limits. They are reviewed every three years in a way similar to capped drawdown. These types of annuities can still be sold by providers and offer some flexibility of payment and the potential for investment growth. However, they do not trigger the MPAA because they comply with the pre-2015 rules, and are not a ‘flexible annuity’ as set out in the Taxation of Pensions Act 2014.”

22

Income Tax and Capital Gains tax planning:

“So, while it may seem an attractive proposition to a client to be able to access large amounts of their pension fund whenever they wish to, they do need to be aware that the payment may lead to them paying more tax than they anticipated. For example, by:

pushing income above £50,000 and therefore having to pay a High Income Child Benefit Tax Charge;
reducing or wiping out the amount of their savings that benefit from the 0% (2017/18) starting rate for savings income;
pushing income into the higher rate tax band, which also reduces the Personal Savings Allowance from £1,000 to £500;
reducing or wiping out their personal allowance;”

“pushing income into the additional rate tax band, meaning they lose their Personal Savings Allowance entirely; or
using up some or all of the basic rate tax band so that capital gains in excess of the annual exemption and available losses are taxed at 20% rather than 10%.”

23

Recycling Excess Pension Income

“Also, where someone is receiving a fixed income (e.g. from an annuity) recycling excess income into a pension not only provides a further source of PCLS, it may also improve the death benefit options available following the member’s death. For example, if the annuity includes a 50% spouse’s benefit and the spouse predeceases the member, then upon the member’s death no benefits may be payable from the annuity. If excess funds are recycled into a personal pension, then the uncrystallised fund can be left to whoever the member chooses.

Typically, there is no tax cost in recycling, as the tax paid on the pension income received is matched by the tax relief on the pension contribution. However, for higher rate and additional rate taxpayers, there may be a cash flow disadvantage as higher rate and additional rate tax on the pension is taken via PAYE, but full relief on the contribution normally has to wait until a self-assessment claim is made.”

“Recycling excess income as further pension contributions is not the only option: other investment opportunities (e.g. individual savings accounts (ISAs)) should also be considered.”

24

IHT Planning:

“Funds in drawdown can pass to beneficiaries (either as an income or as a lump sum) free of tax if the member (or subsequent beneficiary) dies before the age of 75. Though if the member transfers knowing they were in serious ill health at the time of the transfer and then dies within two years of having made the transfer, any unspent drawdown funds can be included in their estate for IHT purposes.”


“This means that families can use their money purchase pension savings as vehicles for passing wealth down through the generations in a tax-efficient manner. The beneficiaries have the options of keeping the money inside the pension arrangement and of taking an income as they wish. Any pension funds remaining on the beneficiary’s death can be passed on again to future generations.

These rules may make clients more likely to think about funding a pension. It may also make clients more likely to use other sources of income and capital in retirement so as to leave a pension plan intact for future generations.”

25

IHT Planning examples

“Sarah, who is single, is retiring and needs to draw an income. She has a money purchase pension fund valued at £500,000 plus ISAs valued at £200,000 and a share portfolio valued at £100,000. Her house, which is mortgage free, is valued at £500,000. This gives Sarah an estate for IHT of £800,000.
Sarah has no children and plans to leave her estate to her niece and nephew. Her main objectives are to minimise both the tax she pays on the income she receives in retirement and the IHT paid following her death.

To achieve this Sarah, decides to take her income by selling enough shares each year to use her annual capital gains tax exemption. This means that the proceeds are effectively tax free. If she requires additional income, then Sarah plans to take this from her ISAs as this will also be tax free.

By doing this Sarah is also reducing the value of her estate for IHT. Once her shares and ISAs have been used Sarah will have the choice of taking an income either from the pension fund or by releasing equity from her home.

“If she chooses to take income from her pension fund, she could enter into phased flexi-access drawdown crystallising sufficient of the pension fund each year so that the tax-free PCLS covers her income needs and leaving the related taxable element still in drawdown. This approach would provide her with further tax-free income and would reduce her pension fund which is outside of her estate for IHT.

If she chooses to release the equity from her house, then this will further reduce her estate for IHT whilst preserving the value of the pension fund and provide her with a tax-free income. The downside of equity release, however, is that the interest chargeable (if it is a lifetime mortgage) on the equity released will either have to be paid as she goes along or rolled-up with the debt, with the latter potentially impacting significantly on the estate she leaves behind. The pension funds can be nominated to her niece and nephew and will not be included in her estate when calculating whether any IHT is payable following Sarah’s death.”



“Example 6.8
Dmitri has a personal pension scheme valued at £400,000. He wishes to release enough funds to provide his son with £30,000 for a deposit on a flat.
Dmitri has total taxable earnings of £50,000 in the 2017/18 tax year and so is a higher rate taxpayer. In order to calculate the amount of funds he must crystallise to provide his son with £30,000 we perform the following calculation:

Each £100 crystallised provides £25 tax free plus £75 × 0.6 = £45 net of higher rate tax.

This means each £100 crystallised provides a net amount of £70.

Dmitri therefore needs to crystallise £30,000/ 0.7 = £42,858 in order that, once the tax he owes has been paid, he can provide his son with the £30,000 required.

The £30,000 that Dmitri gives to his son is a potentially exempt transfer for IHT purposes. If Dmitri dies during the next seven years, this gift will be included in the calculation of any IHT due on Dmitri’s estate.”

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LTA Implications:

“If the member accepts this transfer value and transfers into a DC scheme there will be no test against the LTA; however, when they start taking benefits there is a strong likelihood that the standard LTA would be exceeded and a resulting lifetime allowance excess charge incurred.”

“In reality, such a tax charge, while unfortunate, is unlikely in itself to persuade the member not to transfer. It may also be possible to phase retirement and so hope that the future planned CPI increases to the LTA exceed the annual increase in the value of the member’s pension rights with the result that the excess over the LTA is less than would otherwise be the case. The downside of this of course is that the pension benefits would only be growing at a slow pace for this to occur, so it may not in fact be a desirable outcome.

It is also worth noting that where a DB scheme member has either enhanced or fixed protection, there are certain circumstances where the act of transferring to a DC scheme could result in the loss of these transitional protections. Further details can be found in Transitional protections.”