RETIREMENT INCOME PLANNING

MasterClass

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Scottish Widows logo (a hooded woman) - with the caption 'Masterclass, Retirement Income Planning'.

In this recorded MasterClass from 26 September 2017, we’ll share our technical guidance on retirement income planning and provide insight into many aspects of this valuable benefit including:

  • tax efficient income withdrawals
  • the Lifetime Allowance test/second Lifetime Allowance test
  • the LTA and death benefits/estate planning
  • Death Benefits
  • the Money Purchase Annual Allowance.
  • Operator: Good day, and welcome to the Scottish Widows Retirement Income Planning MasterClass. Today’s conference is being recorded. At this time, I would like to turn the call over to Paul Rutkowski. Please go ahead, sir. 

    Paul Rutkowski: Thanks, [inaudible]. Good morning, everybody, and welcome to the latest Scottish Widows TechTalk MasterClass on Retirement Income Planning. For those of you who don’t know me, my name is Paul Rutkowski, and I took over the financial planning team from Sandra Hogg at the start of July. 

    In a couple of minutes, Chris Jones and Tom Coughlan from the financial planning team will be taking us through today’s presentation. But before we kick off, it’s worth briefly recapping on some of the huge change that has taken place over the last couple of years. 

    In April 2015, the government changed the landscape of retirement in an unprecedented way with the introduction of pension freedoms. In this one act, retirees had more choice and flexibility than ever before with how they accessed their defined contribution pension savings. However, as with all choice, there comes the necessity to consider all the options and make a decision on the best course of action for that particular individual. In addition, as with many things with pensions, the answer to the retirement equation is complex, requiring careful analysis of each route that could be taken. 

    The latest STA figures show that in the period from October 2016 to March this year, there was a 9% increase in the overall number of pension pots accessed, compared to the same period last year. In addition, the market for drawdown grew by 4% for the same comparison period. And also the data reveals that more than twice as many pots are moving into drawdown than annuities. So this tells us that your clients are absolutely making the use of the flexibility of pension freedoms, and it’s an important theme to investigate. 

    Further focus is also being brought to the importance of retirement income planning at the current time, as advisors are looking at more structured, governed approaches to investing in retirement. i.e. a centralised retirement proposition, or CRP. It’s clear that using the idea of a normal pension accumulation approach, that is a centralised investment proposition plus a bit of cash on the side for the decumulation phase, just isn’t the answer. To support you in helping your clients, we have dedicated this MasterClass today on planning for retirement income. It will look at tax efficient withdrawals, the Lifetime Allowances tests and the Money Purchase Annual Allowance. It’s worth noting that as well as these being integral aspects of making the most of pension freedoms, we know from our own data that these are important topics for advisors, because they constitute some of the most frequently queries areas to our advisor helpdesk. And, as with other pension areas, the Scottish Widows financial planning team offers a great deal of support on this topic.

    Following the presentation, I will be letting you know where you can find out more information. The presentation is scheduled to last for about 30 minutes, following which time there will be… Following which, there will be time for any questions you might have. And a recording of today’s presentation will also be made available on the Scottish Widows advisor extranet should you wish to review the content again. And also worth noting that CPD certificates will be issued after the MasterClass. 

    So at this time, I will now hand over to Chris to start this morning’s presentation. 

    Chris Jones: Thank you, Paul. Good morning, everyone. Sorry, some slide issues here. Could you just make sure slide 2 is on the screen, please? Where clients have reached minimum pension age, they have full control over how they take benefits from their defined contribution pension plan. However, with greater freedom, there is also greater scope to make poor decisions. There is now greater focus and need to manage defined contribution funds during the decumulation phase. 

    So as an overview, today we’re going to start by looking at the basics of pension taxation and cover the issue of emergency tax. Whilst emergency tax is usually more of an inconvenience than a major issue, it is important that clients don’t withdraw too much of their pension upfront to compensate for the excess tax deducted under the pay as you earn system. 

    We will then cover the tax and technical aspects of flexibly accessing funds via flexi-access drawdown and partial pension encashment. We will also provide a reminder of the small pot rules and take a look at capped drawdown for the many plans that are still in place. 

    Taking all the tax-free cash at once is still a very popular option, but one that may not be the most effective strategy, particularly when it isn’t actually needed, so we will consider the alternatives. With more and more clients moving into drawdown and a low Lifetime Allowance, the second Lifetime Allowance test has become a bigger issue to manage. Combined with flexi-access drawdown, clients do have some control over it, but it still needs some thought. The first increase in the LTA in eight years is planned from next April. Whilst this will be welcome, it may add further complications to the planning decisions. 

    Changes in the taxation of death benefits have opened up new planning options for clients, providing the opportunity to pass funds down through the generations in a tax efficient way and removing one of the major drawbacks of moving funds into drawdown. It can also mean that using other funds, such as OEICs and ISAs before pensions can be more advantageous.

    And finally, after much confusion, I think we may have settled on the MPAA reducing to £4,000 for the current tax year. At such a low level, it is even more important to make sure clients don’t accidentally trigger it, so provide reminders of the triggers. 

    I am now going to pass over to Tom, who is going to start by looking at the tax aspects. 

    Tom Coughlan: Thank you, Chris. Good morning, everyone. So just looking at the tax treatment of pension income. The same rules apply whether it’s drawdown, UFPLS, annuity, scheme pension. They are all subject to income tax, but not subject to National Insurance contributions. 

    75% of your fund will be taxable under the pension income rules, but the remainder will be tax free. And that distinction between lump sum and pension is becoming blurred because more people are using their tax-free cash as a way of drawing income from their fund, which means tax free cash is often taken very gradually now. 

    In terms of the taxable parts of the actual pension income, then the tax treatment is as shown on the slide. So the personal allowance is available. That’s currently £11,500. The basic rate band is then available, which is the 20% band. The 0% band, or what used to be the 10% band, is not available for pension income. So as soon as you go over £11,500, then you start to pay tax at 20%. There is no middle rate, because it’s not earned income. 

    Obviously if you go above the basic rate band, then you will pay higher rate tax or 45% tax, if you go above that threshold. And all of that is dealt with through the PAYE system, which is the system that pension providers have to operate. It’s not the best system for pension income, but it’s what we have to use. 

    So just to go through the example there, this is someone who’s taken their tax-free cash and then receives a taxable lump sum from their pension of £50,000. That could have been a flexi-access drawdown payment. If they have no other income, then the personal allowance grants freedom from tax for the first £11,500, then the full basic rate band is used up. Basic rate band is currently £33,500. So 20% tax is payable on that, which is £6,700. Then, in this case, they’ve gone just above the 40% band. £5,000 of their income sits in the higher rate threshold, in the higher rate band, sorry, so they pay 40% tax on that. So an extra £2,000 added to the £6,700. That gives £8,700 tax in total. That may be the eventual liability, but there may be some emergency tax payable upfront. 

    Operator, could you just move the slides on to number 4, please? So as I was saying, the PAYE system isn’t always a very good system for pensions income, often because emergency tax is payable on those lump sums. So providers will often operate emergency tax on the first payment. That is operated on a month one basis, which just simply means that the individual is treated as though that payment that they’re receiving this month has been received every month before and every month thereafter. So that means your personal allowance and basic rate band, you just get one twelfth of it each time, so you don’t have to receive a huge payment, only around £12,500, and then you’re already into the 45% band, because that £150,000 threshold split over 12 months is £12,500. So often you’re paying 45% tax, which is just the way HMRC ensure that at least the minimum amount of tax has been deducted. 

    That does make targeting certain net amounts very difficult. You can end up over-compensating to get the higher net amount. But if you’re going to reclaim that tax back very quickly, then you needn’t do that. The client should deduct or withdraw the amount that they require and then, when they get the tax reclaim, they will then get their full net amount that they need. 

    Where tax has been overpaid, then it can be reclaimed, either via self-assessment or it can be reclaimed in-year. And, as I say, the repayment is often made fairly quickly. The gov.uk screen-print on the slide there just shows the different options that the clients have. So if they’ve used up their full pension pot and they have no other income in the tax year, then they require form P50Z. Similarly, if they’ve used their full pot, but they do have other taxable income, then it’s form P503Z. But I would imagine the majority of people would require the bottom form, P55, which is for those who take a partial payment from their pot and regular payments for the rest of the year. 

    Just to give you some stats from HMRC, for the second quarter of this year, clients filled out form P55 6,070 times. The other forms, P53Z and P50 were completed around 4,500 times. So people are clearly accessing their funds flexibly and they are also using these forms to reclaim their amounts back. 

    For a more detailed explanation of emergency tax, we have our article, which is called ‘Failure to Compute’, which is on our website, which Paul will direct you to at the end of this session. 

    Okay, then, so the central theme running through this webinar is that over 55s can take their entire fund since 2015, but should they? Or rather should they take it all in one tax year? Many clients are not aware of the details of the tax system, and often aren’t aware that you can pay a much higher rate of tax if you concentrate all of your income into one year. We now end up in the situation where a client can build up their pension with basic rate relief throughout their working life, but then end up paying much higher rates of tax on that because they try and take it all in one go. 

    So someone who was earning just below the higher rate threshold throughout their working life, they would have received basic rate relief on those contributions over a 30-40 year period. They could quite easily have built up a fund of, say, £240,000. They took tax-free cash from that of £60,000 and the remaining £180,000 would be fully taxable. The graphic on the left of the screen shows the tax consequences, assuming they have no other income in the year. So they get no personal allowance, because they’ve gone over £100,000 – or rather they’ve gone over £123,000 for the year. So that’s £6,700 in tax. They’ve used up their full higher rate band, so they pay 40% tax on that, which is £46,600. And then they’ve got £30,000 of income into the 45% band, so they pay a further £13,500. So, in total, they’ve paid £66,800 on that £180,000 taxable payment, which is an effective rate of tax of 37.11%, which for someone who’s potentially built up their fund with basic rate relief is very unrepresentative of their financial position. Even for someone who’s built up their fund with 40% tax relief, they should be hoping for a much lower effective rate of tax in retirement than that. 

    So the sensible suggestion is to spread that payment as much as possible, which is the graphic on the right-hand side of the slide. So just by spreading that payment over five years, it breaks it down into five lots of £36,000, and that is accessible in a shorter period, just three years and two days, because you only need to be actually in the tax year to get the full personal allowance and full basic rate band. Their personal allowance is available, so the first £11,500, assuming the current rate continues, in each year is tax free. And then the £24,500 above that suffers 20% tax. So in total, all of those five years accumulated, they’ve paid £24,500 tax, which cuts the effective rate of tax right down to 13.6%, which is much more representative of their overall financial position. 

    Even spreading the payment over two years makes a huge difference as well. So those who do want it all in one go, they should perhaps consider taking half of it on 5th April one year and then the next day, which is the start of the next tax year, taking the rest. That would cut, in this example, the overall tax down to below £50,000. So it’s still significantly less than the £66,800 figure shown on the left of the slide there. 

    Okay, that’s just a quick overview of the income tax system as it applies to pensions. I’ll now hand back to Chris to look at flexible access. 

    Chris Jones: Thanks, Tom. Could we make sure slide 6 is on, please? Now we’ll look at the ways in which clients can flexibly access their funds. The flagship product in the new pensions reforms was flexi-access drawdown, allowing full control over how income is taken. Tax-free cash is linked to the initial designation and the second LTA test also needs to be considered, which we’ll have a look at later. 

    The second new option introduced was partial pension encashments, or uncrystallised funds, pensions lump sums, aiming to provide a simpler solution with less tax-planning flexibility. As they are usually taken as ad hoc payments, they are often subject to the emergency tax deductions Tom described earlier. 

    When any income is taken from flexi-access drawdown or any partial pension encashment is taken, it will trigger the Money Purchase Annual Allowance. Small pots have been around for far longer, but their usefulness was extended under the pension freedoms by allowing up to three pots per person, increasing that limit to £10,000 each. The key benefits of these are they are not tested against the LTA and do not trigger the Money Purchase Annual Allowance. And don’t forget that capped drawdowns still remain, are still available for top-ups, where this can be done into an existing arrangement and for transfers to other schemes. Maintaining capped drawdown ensures that the MPAA is not triggered. Note that on death though, if drawdown continues for someone who was in capped drawdown, it always becomes flexi-access drawdown, but there will be no disadvantage of having flexi-access drawdown at that point. 

    Okay, if we can move on to slide 7, please, for a more detailed look at flexi-access drawdown. So with flexi-access drawdown, a decision needs to be made about tax-free cash before designating into flexi-access drawdown. You can take all that tax-free cash in one go, but if you do so, you have to move all of your other funds into drawdown at the same time. Or you can take the tax-free cash as an ad hoc sum. But every time you do so, three times that lump sum must also be designated into drawdown. Or you can use the full flexibility, just taking a bit at a time, or any combination. You don’t need any specific product mechanism within the product, it is just subject to product minimums. The product itself has full flexibility. 

    Legislation does allow tax-free cash to be taken post-75, but many products have a restriction on it and require you to make a decision at 75. The disadvantage of not taking it by age 75 is, if you do die after 75 and you haven’t taken your tax-free cash, you do lose that option, so the beneficiaries will be subject to a much higher rate of tax on the payments. 

    Once funds have been designated into drawdown, the product is very straightforward with maximum flexibility from the minimum retirement age of, currently, 55. You can use your fund to take withdrawals in the most tax efficient way possible. For example, just taking up to the personal allowance and not paying any tax at all or just taking up to the very top of the basic rate band each year to avoid going into the higher rate tax. 

    The alternative is partial pension encashment. It has less bullets because it’s very straightforward. It’s intended to be a very simple product, I think originally designed for those that didn’t want to offer or those providers that didn’t offer drawdown within their product, to give a simpler option that hopefully would be available to everyone. It’s a fixed amount, so each time you take any withdrawal, 25% will be tax free and the rest will be subject to income tax. So with partial pension encashment, you can’t take all your tax-free cash up front, like with flexi-access drawdown. Each time you take a withdrawal, it has to be that mix, 25/75. 

    Now back to Tom who’s going to look at small pots. 

    Tom Coughlan: Okay, thank you, Chris. Okay, so small pots were not introduced in freedom and choice, as I’m sure you’re aware, but it’s nonetheless a very important aspect of retirement income planning in the context of the freedom and choice regime, because of the money purchase annual allowance. So for those clients for whom the MPAA is a concern, then small pots will allow them to access three lots of £10,000 without a trigger event occurring. However, it’s very unlikely that a client will just have three pension pots just below £10,000 in value. 

    So to make the maximum use of these rules, benefits will often have to be reshaped to ensure eligibility, and there’s two ways in which this often goes. So a client might have a large number of smaller pension arrangements. So 27 lots of £1,000, as shown on the slide. Under the current rules, without making any changes, the maximum they can get under the small pots rules is £3,000, because once they’ve taken three pots, they’re up to their limit in terms of the number of arrangements that they can take. So they would have to merge some of those plans together. So if they merged those 27 arrangements into three arrangements, each worth £9,000, then they’d be able to access that full £27,000. 

    The other way round, a client has a larger pot, a pot that is above £10,000. Under current rules, without any changes, then obviously they can’t access that at all, because it’s above £10,000, so they would have to split that one arrangement up into three. And again, splitting that into three lots of £9,000 would enable that full amount to be accessed. 

    Caution is required here, because if a client has fixed-protection, for example, then they could lose that because they’ve created two new arrangements. If you create a new arrangement under fixed protection, then you lose that protection. So they just need to take that into account. On the other hand, if, rather than just creating a new arrangement, you’re transferring, so it’s a transfer from scheme to scheme, then that would be okay. In that second example there, the client could potentially make two partial transfers of £9,000 each, but those transfers are not internal transfers. They would have to actually go to another scheme and they could potentially split that one pot up into three lots of £9,000. But obviously it would require the scheme to offer a transfer in that situation with those low values. 

    Capped drawdown is also a very important aspect of these rules as well. So the capped drawdown had to be in place before 6th April 2015. And the actual GAD limit for the contract mustn’t have been exceeded. It can also be transferred to another provider. So you can move it from provider to provider and it will still be a capped drawdown contract. And also you can add new uncrystallised monies to these capped drawdown contracts and that designation then causes a recalculation of withdrawal limits, so you might have a very small amount in a capped drawdown contract and you can then designate large amounts of uncrystallised funds into that and that enables you then to take income without triggering the MPAA. So as long as you stay within the cap for the contract, then the MPAA isn’t triggered. But as soon as you go above the cap, then you do trigger the MPAA and that converts the contract to a flexi-access drawdown. And that is irrevocable once you have done that. 

    Okay, so that’s the pension income options. Now we’ll look at tax-free cash. So the decision around tax-free cash often drives the pension income choice, and that’s because to take tax-free cash you’ve got to make a decision about what you then do with the income. The two are linked together. So, for example, a client then needs their full tax-free lump sum, but no taxable income, then they must take flexi-access drawdown, because it’s the only product that allows for that. 

    This slide has got four scenarios, showing where the tax-free cash decides the pension income product essentially. So the first example in the top left-hand corner, a client needs tax-free payments from their pension until, say, their new state pension kicks in or their DB pension commences, so they require tax-free cash on a partial designation basis. So they take the tax-free cash and the remaining must go into flexi-access drawdown to ensure that there’s no further taxable income received. And then, once they get to new state payment age or their DB pension starts, then their income drops below perhaps the 40% threshold, then they can start to take taxable income within their basic rate bands. It’s just a way of ensuring that they don’t suffer higher rate tax unnecessarily. 

    The second example, in the top right, a client requires access to funds, but without triggering the MPAA or at least deferring the MPAA for as long as possible. So they could use small pots, enabling them to receive up to £30,000. Again, there may be some reshaping of benefits required to do that. And then, once they’ve exhausted that, they could do what the client in 1 does. So then take their tax-free cash and then, when that is exhausted, then they could receive flexi access drawdown, which has deferred the MPAA for as long as possible. Or, at that point, they could buy an annuity with their remaining fund, to ensure the MPAA doesn’t get triggered at all. That might be quite appealing to clients who want to access their pension funds early and still want to receive their ongoing employer contributions. 

    Okay, so we’re on the third scenario. A client who uses tax-free cash to supplement phased retirement. So their income is declining as they near their retirement age. So in year one, they have their full income, which is above the higher rate threshold. But in year two, it declines to around just above the higher rate threshold, so the client then uses some tax-free cash from flexi access drawdown just to top up their income to ensure there’s no further higher rate tax to pay. In year three, again, they do the same thing. They take their tax-free cash to ensure there’s no higher rate liability, but now their income has declined, which frees up some of their basic rate band. So they just now take flexi-access drawdown to fill up what’s left of their basic rate band, ensuring that they only pay 20% income tax on what they’re drawing from their pension. And then as the years go by and their income drops, they just take more and more flexi-access drawdown. And they’re able to do that because each year they take tax-free cash, they’re designating further amounts to their drawdown contract. So each year, more and more becomes available. And obviously you can only achieve that using flexi-access drawdown. It enables you to separate the payments you receive from the tax-free cash and the drawdown. And as Chris was saying earlier, there’s no specific product feature that enables you to do that. It’s just because flexi-access drawdown enables you to take as much or as little as you like whenever you like. 

    Okay, so onto the final scenario on this slide. So this is not so much about retirement income planning, more around IHT, so a client has an IHT issue and they don’t want to receive their tax free cash perhaps, or they’re not sure whether to receive it or not and they just need to consider if they do take it, then it falls within their taxable state, so they’ll pay inheritance tax on that, whereas if they leave it in the fund, it remains within an IHT efficient wrapper, but the beneficiaries don’t get access to the tax-free cash after their death. However, that isn’t perhaps so important now for those that die under 75, because all death benefits are tax free. But it’s certainly a consideration, that you lose the tax-free cash on death, but if you take it, it’s within your inheritance tax estate. 

    All four of those scenarios trigger a lifetime allowance test, but for drawdown, that isn’t the end of the story, because of the second lifetime allowance test, which Chris is going to go through now. 

    Chris Jones: Thanks, Tom. Can we have a look at slide 10, please? So the second Lifetime Allowance test. With more and more clients moving into drawdown and with a lower Lifetime Allowance, the second Lifetime Allowance test is a much more important planning consideration. It takes place at age 75 or earlier annuity purchase. It doesn’t apply on death. 

    What it does, it tests the monetary increase in the drawdown fund against the lifetime allowance. So on the left, we have, in diagram form, you crystallised, say, in this year, 2017, you take your tax-free cash at 25%, 75% moves into drawdown. You roll forward ten years to 2027 and you look at how much of that drawdown fund has increased. 

    So on the right, we have some numbers here. One where the first Lifetime Allowance test used all the LTA. So assuming £1.2 million was crystallised in 2017. We take the maximum tax-free cash at that point, which is 25% of £1 million. There’s an excess of £200,000, so they have to pay a 25% tax charge on that of £50,000, leaving them with £900,000 in drawdown. Roll that forward ten years, assume that that fund is then worth £1.6 million. We take off that initial designation, £900,000, and the amount tested at that point is £700,000. In this case, it doesn’t matter what the Lifetime Allowance is at that point, because they used it all this year. If they hadn’t used it all, you would have whatever percentage is left available against the current Lifetime Allowance at that point. So say you used 90%, you’d have 10% left to check against whatever the Lifetime Allowance is at that point. 

    So with full flexibility, clients can control the amount paid at the second Lifetime Allowance test by taking income. This though will obviously be subject to income tax. If clients will require the funds at some point, then it’s usually better to suffer income tax earlier, rather than an LTA charge and income tax later, but it would depend on the individual circumstances and the marginal tax rates at the point. If income isn’t likely to ever be required, there’s a good argument for taking the 25% Lifetime Allowance charge and leaving the funds invested and outside of the estate. The ultimate beneficiary’s marginal rates of tax need to be considered here. Note that at age 75, there’s no 55% lump sum option. Only the 25% option for income tax on withdrawal is available. 

    If we can move to slide 11, please. Can you just make sure slide 11 is on the screen, please, operator. Thank you.

    As in recent years the Lifetime Allowance has been on a steep downward trend, some clients have looked to crystallise earlier rather than later, to try and avoid – or to try and cap the growth on that fund. With the LTA planned to increase again, with CPI, from April next year, it adds a further complication. 

    So here we have an example of whether to move into drawdown, or to wait. And this is a situation of a wealthy client, aged 65, but they don’t actually need their income at that point, yeah. Two possible options – there are other options in between – but at the extremes: they defer until age 75, when there has to be a crystallisation; or they crystallise immediately now. Now as you see on the left, with this CPI increase, some of that growth – if the growth is in excess of CPI – just that growth in excess will be tested against the lifetime allowance. Whereas if they move into drawdown immediately, there’s no LTA charge at that point. If they don’t need that income, then all of the growth between age 65 and 75 will be subject to that second lifetime allowance test. That’s an extreme example where no income is required. As we said in the previous slide, you can control that to a certain extent by taking that income. But if they if don’t need that income, they just bring it back into their estate, and – potentially subject to income tax and IHT.

    Move to slide 12, please. So on slide 12, we’re going to look at death benefits. Although not directly linked to income withdrawals, it is relevant because it does have an impact on income-withdrawal decisions and whether to take that income or not. And also, it helps with drawdown because previously, moving into drawdown could mean very high rates of tax on death: up to 55% at one point. Now, you can make that decision and move into drawdown without fear of that being your tax charge. 

    The second change was beneficiary’s drawdown, now available to anyone – to nominees, and successive and dependants – previously only available to dependants. And this means that funds can be passed down the generations without incurring an IHT liability. And beneficiaries can use drawdown in much the same way as a member, but they don’t have that minimum age requirement; they can take it from any age. 

    The LTA still applies on death before age 75, but the option – you can still have the option there of 25% if taking the beneficiary’s drawdown, or 55% of the lump sum. The beneficiary’s drawdown will always be better and should be taken when it’s available, because you could just take that 25% income tax charge, or – sorry – the 25% LTA charge, and then take all the income tax-free at that point, because all the benefits after that will be free of income tax. 

    Once you get to death post-75, there’s always already been a test at age 75, so there’s no further tests. Death benefits are then subject to the beneficiary’s marginal rate of income tax. So you have similar tax-paying issues as Tom described, receiving a lump sum that could incur significantly more income tax than taking the drawdown over a number of years to make use of, possibly, personal allowances and the basic rate bands.

    And finally, Tom’s going to take a look at the money purchase annual allowance.

    Tom Coughlan: Yes, so we’ve mentioned the MPAA a number of times throughout this presentation, so this is just really – just a quick recap. Any decision to access your funds under freedom-of-choice should consider the MPAA. The £4,000 limit that applies from the start of this tax year is a relatively low amount, which works out at £333 per month. So those who are continuing to fund, it will be restrictive to those that want to access their funds whilst continuing to pay contributions above the MPAA, and the fact that it is an irrevocable decision needs to be considered. 

    The £4,000 is an absolute limit, so that is all the rules will allow you to pay in terms of employer/employee contributions and third party contributions. There is no Carry Forward option there; assuming you go over that in the tax year then you’ll pay an Annual Allowance tax charge. And the disadvantage there is that if you do have an annual tax charge because of the Money Purchase Annual Allowance, in the vast majority of cases, you won’t be able to use scheme pays. So, the client will have to meet that tax charge themselves direct. If, on the other hand, you have the standard Annual Allowance, then the usual Carry Forward rules apply. But also if you are subject to the MPAA, if the client is funding a DB scheme then they can add Carry Forward to that amount. So, Carry Forward can still be used, but it’s added to the rest of the Annual Allowance that covers DB accrual. 

    Okay, that is all the technical content we have. I’m now going to hand over to Paul to take you through our resources.

    Paul Rutkowski: Thanks, Tom. Just before I move on to the resources, we will have questions through the webcast at the end of the session. So if there is anything that you wanted to ask, start typing your questions in now, and we can pick them up after I’ve had a canter through the collateral that we have available for you.

    Okay, so just a reminder, TechTalk, our flagship, branded publication, we’ve got a protection ‘special’ coming out at the start of October, so look out for that. And you can obviously download old versions from the Extranet. A reminder of the Extranet itself, we’ve got loads of terrific content on there, so some brilliant tools, lots of retirement-planning support material and retirement-planning articles. So please do go on, have a browse around and make use of that material there. And also we have back copies, or back issues of the MasterClass series, so that the same topics – the same series as today. This MasterClass will go on itself in a few days, but you can also access all of the back issues as well there.

    Right, so we will move on to questions now, please, through the webcast. So I’ll hand back to Tom and Chris to start picking up those questions and answering the. Thanks very much.

    Chris Jones: Thanks, Paul. So Mike was first in with his questions. I think you’re talking – about the MPAA: contributions are limited after crystallising, but what is the effect on employer contributions? Yeah, so well, once you trigger the money purchase annual allowance, both member and employer contributions are restricted to £4,000 into DC schemes. The only way to pay more would be into a Defined Benefit scheme. So, if you had a Defined Benefit scheme, that would be no issue. That carries on with the standard Annual Allowance, but all money purchase contributions are limited to £4,000, before an Annual Allowance charge applies, but of course, you can still receive them. 

    One here for Tom on small pots: can small pots be achieved by breaking off segments of a single pension plan, or do you need three separate contracts – straight providers, for example?

    Tom Coughlan: Yeah, the small pots is at arrangement level, so you could do it within one scheme. So if you have one personal pension plan within that scheme, you could potentially break that up into three personal pensions, so three arrangements. And then you can take that as small pots. But if you were going to do that, just make sure the client doesn’t have any LTA protection that they might lose by doing that or alternatively, you can make partial transfers out to new schemes. So it’s either, as long as you have got three arrangements, which is essentially an entity within a scheme, that then you can access the small pots. So it’s either of those, really.

    Chris Jones: Okay, thanks Tom. One here is one of your specialist subjects: what is the interaction with MPAA and auto enrolment? What if the £4,000 limit is below the 8% minimum total contribution required?

    Tom Coughlan: Yeah, this was addressed in a recent consultation, and HMRC decided there was no real issue. If you’re talking about qualifying earnings, then 8% of the qualifying earnings band should be below £4,000. Where it can be issue is if the scheme is certified so using set one, two or three and every penny of pensionable income you have to pay the basic contribution on. So there, you could end up with a minimum contribution on say, set one, which is above £4,000, and there is no real way of dealing with that. The employer might just have to think about, perhaps, having a conversation with the worker and trying to offset that with something else. So, keeping the contribution below £4,000, and then offering something else instead. So it’s cash salary or bonus, for example. But yeah, there is no – there’s no straightforward answer to that question, I’m afraid. 

    Chris Jones: Okay, thanks. Okay, and the next one: what is the charge if contributions exceed that MPAA? 

    Yeah, so it’s the annual allowance charge as normal, where you exceed the MPAA. So any excess above your limit will be added to your other income, and taxed at your marginal rate of tax. So the effect of that is you basically don’t get tax relief on those contributions. 

    Tom Coughlan: Okay yeah, the MPAA is very popular today. Another question here: does the MPAA ignore payments in the tax year before it is triggered? 

    Yes, it does. So it’s only contributions from the day after. So when you trigger the MPAA, it applies from the following day. So any contributions paid in the tax year up until then are tested against what’s left of the standard Annual Allowance after you’ve deducted the MPAA.

    Chris Jones: Okay, so I was asked to clarify the IHT position, post-pension crystallisation, pre- and post-aged 75. So, assuming you mean post-crystallisation but leaving in drawdown. So, the IHT position is the same either way; the funds should remain outside of your estate. As long as the scheme has discretion over who to make to those payments to, it stays outside your estate. The key difference is not the IHT, it’s the tax. Pre-75, all benefits are free of tax to the beneficiaries; post-75, they’re all subject to the beneficiary’s marginal rate of tax. 

    Tom Coughlan: So yeah, any questions relating to the slides, you know, the slides will go on the website afterwards, so we don’t need to answer those. 

    Chris Jones: Any chance we can move back to slide 12? A bit more of a technical question from Stuart, if we just have a look at slide 12 again. So, Stuart’s basically asking: if the client has a pension DC fund at £1 million and no LTA protection aged 75, they don’t need their tax-free cash. From an LTA taxes perspective, should they take tax-free cash up front, or defer to age 75? 

    So if we look at slide 12, that’s where – where I looked at that. And basically, what we’re trying to say here is if you believe the government – and they will carry on increasing with CPI – then there is an argument for deferring that charge if you don’t need any income or tax-free cash from your fund, because part of the growth will be covered by the CPI increases in the LTA over the next ten years. Whereas if you crystallise now, and you’ve used up 100% of your LTA, any excess, will be subject to a Lifetime Allowance charge.

    Tom Coughlan: Okay. Yeah, there’s a question here regarding losing fixed protection on transfer. 

    A client that has fixed protection, they can transfer money purchase to money purchase. That’s fine, as long as the receiving scheme is just there to accept the transfer from the other scheme. So transferring money purchase to money purchase is fine, but what would cause a client to lose fixed protection is if they create new arrangements, so this is the small pots rule. So if they have a large pension pot, and they try and break that up into multiple arrangements – say, one arrangement merged or split up into, say, three or four arrangements – then they would lose fixed protection because they’ve created a new arrangement. But that is within a scheme, whereas if you transfer scheme to scheme, then that will normally be covered under the permitted transfer rules as far as fixed protection goes.

    Chris Jones: Okay, I think that’s it. Now if we have missed any, we’ll get – we’ve got all your email addresses, so we’ll get back to you individually later on. Thank you.

    Paul Rutkowski: Okay, thanks very much everyone and thanks to everyone for all the questions and the interaction; we really welcome it, so that’s great to see people engaged. Thanks to Tom and Chris for answering them. And as Chris said, we will get back to you on any questions that we accidentally missed during the session there. 

    So it’s clear that retirement income planning will continue to be an important topic within pensions, so please do make use of the material available from the financial planning team, which I highlighted earlier. And if you need any help or any additional material, please speak to Scottish Widows contact about how the Scottish Widows proposition can help you with the ideas that Chris and Tom have covered today.

    It would also be good to get your feedback on what topics you’d like to see covered in future MasterClasses. At the end of today’s presentation, you’ll see a popup box on the screen, in which we will ask you a question about future subject matter. If you could take the time to respond to that, we would be really, really grateful; it’s great to get your feedback and input. So as a reminder, a recording of today’s session will be placed on the Scottish Widows Advisor Extranet for future review and indeed, if you also wish to view any of the other recordings from previous MasterClasses, which I highlighted earlier on. As reminder, CPD certificates will be issued. And finally, my thanks again to Chris and Tom for taking us through the slides today. Thank you for joining, and that concludes today’s presentation.

    Operator: Thank you ladies and gentlemen. That concludes today’s conference call. You may now disconnect.

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