Operator: Good day and welcome to the retirement income planning conference call. There will be an opportunity to ask questions over the web. Simply type your question into the ask a question box and click send. Today's conference is being recorded and at this time I would like to turn the conference over to Mr Simon Harris. Please go ahead, sir.
Simon Harris: Thank you very much and good morning everybody and welcome to the Scottish Widows Tech Talk masterclass on retirement income planning. Today I'm joined by Bernadette Lewis and Tom Coughlan from the Scottish Widows financial planning team who'll shortly be taking us through the presentation. At the conclusion of the presentation, you will hear where you can access and find further information covered in today's slides.
As the objective of these presentations is to provide valuable insight into topical areas of pensions planning, it's fair to say income planning in retirement falls squarely into this category. Planning for retirement, with its many advice and risk facets, including product selection, taxation, investment solutions and sustainability make it important for clients to take suitable advice, so a comprehensive understanding of the rules is important and naturally, with flexi access drawdown playing such a dominant role, today's presentation will primarily focus in on this area but we'll also include and draw comparison with other options as appropriate.
To highlight the role played by drawdown in retirement planning, the latest set of FCA data published this month tells us that new drawdown plans continue to exceed annuity sales at a rate of two to one. In the market there are now nearly 860,000 drawdown plans, with assets in the region of £110 billion used to purchase these, a significant and growing area. As we will see, how you deploy drawdown to create income for your client is important, especially from a taxation standpoint.
Tom and Bernadette will also consider some of the more complex areas of planning, such as consolidation of existing drawdown plans, as well as death benefits. Today's presentation will last for about 40 minutes, following which there will be time to answer any of the questions that you have raised. Full details of how you can ask questions will again be given out at the end but, as was said in the introduction, you can ask online as you go along. The presentation will be recorded and available for subsequent review via the Scottish Widows extranet and CPD certificates will also be issued. I'd like to now hand the call over to Tom to continue.
Tom Coughlan: Thank you Simon. Good morning everyone. We're now 3.5 years on from the freedom and choice reforms which have given pension savers unrestricted access to their defined contribution pots, usually from age 55. We're all well aware of the changes this has made in the DB market but it's also had massive implications for tax planning during retirement which we're going to look at today.
So we'll look at drawdown, the flexi access drawdown option, we'll look at ways in which this can be used to provide tax efficient income during retirement. We will also compare this with the alternative of UFPLS, which is a cut down drawdown option and in addition to those, we'll look at ways of using tax free cash to generate tax efficient retirement income as well and we'll look at the other issues that arise when you withdraw benefits, so the lifetime allowance and death benefits. And as mentioned, please submit your questions as we go through, which we'll deal with at the end.
The objectives, for CPD purposes, are to enable you to explain the tax consequences of receiving lump sums from flexi access drawdown, how to control the effective rate of tax on pension withdrawals using tax free cash and the lifetime allowance events that occur each time a DC pension is accessed.
So, starting with flexi access drawdown, so there have been a lot of changes to drawdown since A day. We've gone from unsecured pension, alternatively secured pension, capped drawdown, flexible drawdown and now flexi access drawdown. But despite all of these changes, the designation process remains largely unchanged, so if a client wants their tax free cash from the fund, they have to make that decision then and the tax free cash will be paid out. If they decide not to take tax free cash then that is lost in relation to that portion of their funds.
At least three times the cash has to be designated across to drawdown. It can be more but it has to be at least three times. So a client with a £200,000 DC fund, if they want their cash, they will take £50,000 tax free cash and then three times that amount, £150,000, will be designated across to flexi access drawdown. It usually is, currently, to flexi access drawdown but, however, those clients that had an existing capped drawdown contract on 5th April 2015 and haven't exceeded the cap since then can still designate their funds across to an existing capped drawdown contract.
If they do that, the maximum withdrawal limit is recalculated. That's based on the most recent three yearly review but there will be an in year adjustment to that based on the extra uncrystallised funds that have been designated across and it's currently based on 150% of the equivalent annuity. But if, as most clients do, there was no capped drawdown contract in place, then flexi access drawdown is the only option. And as you know, the key change is that the full fund can be withdraw on the flexi access drawdown but that shouldn't be done without considering the tax consequences first.
So what happens when a client takes their entire fund under flexi access drawdown ? A client with a fund of £250,000 and no other taxable income takes their full fund using flexi access draw down, or they could have used the UFPLS route, then the tax consequences are as follows: so £62,500 will be paid out tax free and the remaining £187,500 will be taxed as income in the year of receipt. So that is their taxable income for the year, £187,500 and that means, because they're well above £123,700, they have no personal allowance for the tax year and the income tax, at 20%, 40% and 45% works out at just under £70,000. So that leaves them with a net payment of £117,500 and that is an effective rate of tax of 37.32%, which is likely to be disproportionate to the overall rate of tax relief they got if that is the extent of their retirement fund - £250,000. That issue arises because the bulk of that payment is taxed at 40% and a portion at 45%.
So there is a better outcome simply by spreading that payment. So even by spreading that payment over two years, the tax drops significantly, so the taxable payment in each year is £93,750. That gives them their personal allowance in each of those years, so exempting around about £24,000 from income tax altogether, their total tax over those two years drops to £51,720, so the overall net payment has gone up by about £18,000, so the effective rate of tax has dropped by about 10% just by splitting that payment over two years. And the more years you can split that payment over, the better. So just by splitting that payment over three years, the effective rate of tax drops down to 21.38%, to five years it drops to 13.68%, over ten years down to 7.36% and 15 years it drops down to a pretty negligible 1.04%. So from a tax perspective, the more years that income can be spread over the better. However, income needs do need to be met in each year, which creates pressure in the other direction, so a compromise between those two needs to be found but just spreading as much as possible generates an effective tax outcome. And as always, spreading payments around April time can allow two lots of personal allowance and tax bands to be utilised in quick succession, so without having to wait a full 12 months to get your hands on the next payment.
Okay, so that's flexi access drawdown. UFPLS is always available as an alternative for those who perhaps don't have access to drawdown. Just to compare the two, so on the flexi access drawdown, maximum tax free cash is available, you can take that in one go without taking any income at all, whereas under UFPLS, the tax free element is always 25% of the total payment. Flexi access drawdown gives us a much greater ability to control the taxable amount, so in addition to tax free cash, you could take any amount of drawdown income that you wish, whereas UFPLS is much more inflexible but it's a much simpler option as well.
If a client just takes tax free cash from their flexi access drawdown, that doesn't trigger money purchase annual allowance, whereas under UFPLS because there is always that 75% taxable payment, that always triggers the money purchase annual allowance, which is now £4,000, so it effects those who wish to continue contributing, or perhaps receiving contributions from their employer.
Under drawdown, greater than 25% tax free cash is available. So if the client has that from A day then they want to use flexi access draw down rather than UFPLS because, as I said, the tax free payment under UFPLS is always 25%, which therefore precludes the option of scheme specific tax free cash. Flexi access drawdown allows you to take funds above the lifetime allowance as well, so the lifetime allowance charge is dealt with when the designation takes place and then drawdown income can be taken after that. Whereas, on the UFPLS, that option is only available up to the level of the lifetime allowance.
Clients considering flexi access drawdown and UFPLS shall also - should also consider small pots. So small pots also do not trigger the money purchasing allowance as the tax free cash only option doesn't, so they should consider that before flexi access drawdown, or UFPLS, where they want to continue contributing or perhaps receiving contributions from their employer. So, just as a reminder, that allows up to three small pots, no more than £10,000 to be fully crystallised, enabling clients to get up to £30,000 of their fund before they begin to trigger that restrictive annual allowance. The tax is familiar, so 75% of the payment is subject to income tax, or 100% of it if that small pot comes from already crystallised amounts and the provider will deduct the basic rate tax.
Those are the traditional income options and many clients will want to consider using tax free cash as an alternative approach to keeping the effective rate of tax as low as possible. That's the freedom of choice, by allowing full access to your DC fund, that's lessened the appeal, to some extent, of tax free cash as you can get the entire fund as a lump sum at any time, so many clients may consider using tax free cash as an income option but as always there is a trade off and that is losing the tax free lump sum, including future growth on that lump sum, so that won't be available, or at least at the same level, in the future.
There are many ways a client can use tax free cash in retirement, so level monthly or annual lump sums, or increasing monthly or annual lump sums. Or they can supplement income with tax free cash and some kind of phasing options and those that want to – ultimately may want to use an option like dripfeed drawdown.
So, just an example of a client who uses tax free cash to supplement their income during retirement, so someone with a salary of £53,350, that's £7,000 above the higher rate threshold and that has a DC pension fund of £400,000. And their plan is to retire gradually over ten years and use their DC pot to maintain their income level during that period and they want to keep the tax rate on what they draw from their pension as low as they can.
So, in the first year, shown on the graph at the bottom, their income is up at the level of £53,350, so they don't have any need for tax free cash or drawdown. In year two their income has dropped £6,000 and that drop is all within the higher rate band, so they decide to use tax free cash to top up their income back to that same level. Taking £6,000 tax free cash would require three times that, £18,000, to be designated across to drawdown. However, there's no withdrawal but that just sits in the retirement income fund. In year three their income has dropped further, so this time they take £7,000 tax free cash and that is just to cover the bit between their target income and the higher rate threshold. Again, they have to designate three times that amount across to flexi access drawdown, so £21,000, and now they have a small amount of their basic rate band, £3,000, available, so they take a £3,000 withdrawal to plug that gap. So they've taken around about £40,000 across into drawdown but they've only taken a small withdrawal, so the cumulative column on the right hand side just shows that drawdown fund building up. And then they do the same in years four and five, so they take £7,000 tax free cash just to prevent any higher rate liability on their income. Each time that requires £21,000 to be designated across to drawdown. And as you can see, as their income drops more and more of their basic rate band becomes available, so they fill that with flexi access drawdown income, which is the orange column. And as you can see, the cumulative fund on the right hand side continues to build up because they're designating more funds across to drawdown but they're only taking small levels of withdrawals so far. And then in later years, as their income drops further, they have to take more and more from the drawdown, so you see the cumulative fund starts to drop.
A client could do something along those lines using dripfeed drawdown. That allows different combinations of flexi access drawdown and tax free cash to be combined so that they can generate the optimal mix of taxable and non-taxable income and utilise their basic rate band and personal allowance as effectively as possible. Dripfeed drawdown is all around the tax free cash, including that tax free payment in the total payment, allowing the client to control the effective rate of tax that they pay on those withdrawals that they make. So that might be suitable for a client who can defer the higher proportion of their taxable income after their earnings cease, perhaps when their personal allowance will be available and even a flexi access drawdown payment perhaps generates no tax liability.
Just a very quick summary of the options on dripfeed drawdown, so the tax free cash can range from 25% to 100% of the payments, so just three examples just to illustrate that. So the first option: the client requires £1,000 crystallised and £1,000 paid out. So £250 of that payment is tax free cash; £750 is paid out as drawdown income and it's all paid in one payment. That minimises the amount of tax free cash used but consequently has a higher proportion of taxable income. So option two in the middle, a client who wishes to receive 100% tax free payment, £1,000 is going to be paid out. That requires a £4,000 crystallisation, so £4,000 is crystallised, £3,000 is moved across to drawdown, £1,000 is paid out. So that uses a maximum amount of tax free cash but it keeps the tax liability to nil. So that might be suitable for a client who wishes to perhaps avoid the effective 60% rate of tax on the withdrawals but obviously just keeping an eye on the fact that that reduces the tax free cash to the – by the largest extent. And then option three is just another example, somewhere in the middle, so taking some tax free cash, 50% in this case and some drawdown income. So by requiring £500 tax free cash, that requires them to crystallise £2,000 in total. And they can choose any option, any ratio they like, 60%, 40%, 70%, 30%, whatever is suitable for those circumstances but always using the lowest amount of tax free cash required to generate the tax outcome that they need.
So that's just a very quick summary of dripfeed drawdown. Whenever funds are taken by drawdown, whether it's dripfeed draw or flexi access – just under flexi access drawdown or UFPLS, there are other considerations, such as the lifetime allowance and Bernadette is going to take you through those now.
Bernadette Lewis: Thanks Tom for that introduction. When people are moving into retirement income, the lifetime allowance test comes into play as we know and it comes into play via a series of benefit crystallisation events. If you move into flexi access drawdown, BCE1 applies. If you take an uncrystallised funds pension lump sum, BCE6 applies. And if you do the old fashioned thing and buy an annuity, BCE4 applies. There is one difference if you move into flexi access drawdown. With all of the other options the only time the lifetime allowance test applies is at the point that you crystallise those funds - and then the amount that you actually use up in total is tested against the lifetime allowance. With drawdown, you also face a second lifetime allowance test, which for most people would be when they reach age 75. But also if they use their drawdown funds to switch across to annuity purchase at an earlier age, the second lifetime allowance test also applies. What it's looking at is just the growth on the amount that went in to drawdown and it doesn't make any adjustments for any income that's actually withdrawn from that drawdown pot.
And you can see one of the aims of the second lifetime allowance test is to stop people crystallising their pension fund into drawdown, taking no income at all, in the hope that this would then limit the future growth on that fund. This would then have to be tested against the lifetime allowance at some point.
We’ll actually look at some examples of how the second lifetime allowance test deals with monetary increases in the drawdown fund. Look at the example of David and we can see from the graph that his drawdown fund is growing over time. And we're going to start from the point that he crystallised his £800,000 pot last tax year when the lifetime allowance was £1 million because it gives us some nice, easy figures to work with. Out of his £800,000 pot,he designates £600,000 for draw down, which is BCE1 and takes £200,000 tax free cash, which is BCE6 and overall he uses up 80% of the lifetime allowance. In ten years' time, when he gets to age 75, he's going to face the second lifetime allowance test and we're going to assume that his fund has grown to £1 million at this point where he's going to face BCE5A, the second lifetime allowance test. What we deduct from his current age 75 drawdown pot value is the £600,000 that he crystallised via BCE1, in other words the amount that went into drawdown in the first place. That gives his growth, which is now tested, of £400,000 and we know that at age 75, he's got 20% of the lifetime allowance left. We've made some assumptions about what the lifetime allowance might be at that time, allowing for CPI inflation and 20% of that proposed lifetime allowance would come to £268,880. That means that his fund growth that has been tested exceeds that by £131,120. And if you have an age 75 lifetime allowance test, the tax charge is always on a 25% deducted from your fund basis. So the provider will deduct from his £1 million pot the lifetime allowance charge of £33,780.
There are ways that you can manage that possible lifetime allowance charge and the obvious one is to use regular withdrawals to reduce the value of your drawdown funds by the time you get to age 75. If we look at George, we can now see on the graph that he is taking regular withdrawals between crystallising and reaching age 75, with the result that his drawdown pot is going down in value over time. So, our starting point is going to be the same, last tax year, at age 65, he crystallises a total of £800,000, designating £600,000 for drawdown, and when he gets to his age 75 lifetime allowance test, his drawdown pot is now worth £300,000.
If we deduct the amount that he originally designated for drawdown you can see that there is no growth. You don’t end up in a negative, you just end up with a no growth figure, and therefore he is not going to face a lifetime allowance test when he reaches age 75. Well, he does face the test but he doesn’t face a charge when he reaches age 75. However, the payoff for this is that he will have almost certainly have paid income tax on those withdrawals. So it’s possible that if he hasn’t managed things very well, the amount of income tax that he’s paid would just equate to the amount of lifetime allowance charge that he has avoided.
The optimal position would be the example of somebody like Danny, who is managing their withdrawals over time to just take out the growth element that they are earning on their drawdown pot, so that the value of their funds, when they reached age 75, hasn’t grown at all. Once again Danny is crystallising £800,000 at age 65, £600,000 going into drawdown, When he gets to age 75, his fund value has stayed at £600,000 so once again there is no growth. When he faces the lifetime allowance test, the result is there is no growth, therefore there is no lifetime allowance charge. And hopefully he has managed his withdrawals at a level where he has paid as little income tax as possible, plus not actually had to pay a lifetime allowance charge at age 75.
For example, our wealthier clients, who might be looking at a lifetime allowance charge, will probably have substantial funds in ISAs as well. It might be worth looking at using their drawdown pots for income, managing that to a level where they’re not going to face a lifetime allowance charge at age 75. Pay as little income tax as possible and balance that out with taking some tax-free withdrawals from ISA accounts.
Another issue that obviously comes up as people move into retirement is that they want to look at consolidating pots from different providers with one provider. So I will have a look at some of the issues relating to drawdown to drawdown transfers. There are a number of different things people can do; if they have got an existing pre-2015 capped drawdown plan, it is possible to transfer that as a capped drawdown plan to another provider. You can also move around any flexi access drawdown plans as flexi access drawdown to flexi access drawdown transfers, and it’s possible to take an existing capped drawdown plan, move it to a different provider and convert it to flexi access drawdown as well.
There’s another thing people can do if they’ve got uncrystallised funds with one provider, and they’ve got a capped drawdown or flexi access drawdown plan with a different provider. They can move their uncrystallised funds to that other provider and then immediately invest them with that other provider, either in an existing plan or in a new flexi-access drawdown plan.
There are some slightly odd rules for drawdown transfers; whatever type of drawdown transfer you’re doing, it has got to go into a new empty arrangement. This dates back to when we only had capped drawdown, where when you designated funds for drawdown, that triggered the review dates, and you had to keep track of the funds and the review dates, for each time you set up a capped drawdown arrangement. For whatever reason, the legislation remains in place for flexi-access drawdown to flexi-access drawdown transfers, even though it might look a bit silly, but that’s what HMRC’s manuals say you have to do.
If you’ve got uncrystallised funds, you can still designate them to an existing pre-2015 capped drawdown plan, just so long as it’s not a pre-2006 drawdown plan; there are extra special rules for those types of funds. You can do a capped drawdown to capped drawdown transfer, if you want to – if you’ve got a client where it’s important that they don’t trigger the money purchase annual allowance. Their withdrawals from their new capped drawdown plan have obviously got to stay within the GAD limits for that contract. If you do a transfer from a capped drawdown plan, as part of converting it to flexi-access drawdown, then as soon as they take the first income payment after that conversion, you are going to trigger the money purchase annual allowance. That might not matter for some clients because they might have done something else that’s already triggered the money purchase annual allowance, but if it is important, they’ve got to make sure that they don’t do that. And usually it will be the member who actually asks for their capped drawdown to be converted to flexi-access drawdown on transfer, and that might be because they actually prefer the flexible options that are now available.
One other issue that people in retirement age are going to be particularly concerned about, is the death benefits that will be available from their pension funds. This is certainly one of the reasons why a lot of people regarded annuities as problematic, because of the limited kinds of death benefits that they offered. And the other thing that pension freedoms has brought in, is that you can now have a much wider range of beneficiaries who can receive ongoing drawdown following the original member’s death. The industry tends to lump them all together and refers to them as beneficiary drawdown. This covers the three different categories in the legislation, dependant’s drawdown with the traditional definition of a dependant, nominee’s drawdown, usually somebody that the member has nominated, but in some circumstances, that can be somebody that the provider nominates. And then the really new category of successor’s drawdown, which is where the original beneficiary drawdown recipient dies and they can nominate a successor who can carry on receiving their drawdown pot. The successor can also nominate a successor, now allowing drawdown to flow down the generations, providing income tax efficient and inheritance tax efficient options.
Someone can now use their pension fund to provide benefits for the member, the retiree themselves, for their spouse as would have been traditional, for a child and we’re now talking not just minor children and dependent children, but adult children as well. And also anybody else that the member might want to choose, so that makes it really easy to provide for cohabitees but also for people who maybe haven’t got a surviving spouse or cohabitee, they can provide for grandchildren, for siblings, for nieces and nephews or even for a good friend, if they want to.
So, you’ve now got a lot of options. There is an overall rule that if it’s the member or the recipient beneficiary who dies and they are under age 75, the next person in line can withdraw funds from that beneficiary drawdown pot on a tax free basis. If the member or the beneficiary in receipt dies over age 75, the next in line has to pay income tax at their own marginal rate. They’re highly beneficial or not unreasonable tax charges and it does mean that a lot of people are now looking at their money purchase pension pots as an extremely efficient inheritance tax planning vehicle. The reason that works is that almost all providers will have discretionary powers over who they pay their death benefits too, normally taking into account, of course, any nomination of beneficiary, and that keeps the pension death benefit outside of the member’s or the beneficiaries’ inheritance tax estates.
One of the things that the freedom and choice reforms did was remove a consideration that people had to think about when crystallising funds. Previously if there was a death benefit left over from crystallised funds, there was a tax charge of 55% between 2011 and 2015 (it had previously been 35%), if the amount left over was paid out as a lump sum. Or if you were setting up a dependant’s annuity or dependant’s drawdown, the dependant always had to pay their marginal rate of tax on income. So, it is now a much better situation from a tax point of view.
That improved situation does mean that we now have the death benefits lifetime allowance test if you die before age 75. If the death benefits are paid out of a lump sum, you would pay a 55% tax charge. But if you can designate them for beneficiary drawdown if a member dies before 75, there’s a 25% lifetime allowance charge, and the recipient of that drawdown pot can withdraw the funds tax free, so clearly that’s the optimal solution where that’s available.
We’ll have a quick look at a case study, looking at some death benefits. Steve is aged 65 and he’s hasn’t crystallised his pension fund yet. He dies under age 75 and his widow Lynn, who is currently aged 60, inherits his fund and uses it to set up beneficiary flexi-access drawdown. Because he died under age 75, she has now got access to income tax free withdrawals from that beneficiary flexi-access drawdown. The family is a bit unfortunate and Lynn also dies under age 75. The remaining funds that originated in Steve’s pot are now available to their children, Amy and James, again via beneficiary flexi-access drawdown. In this case it will be successor beneficiary access drawdown, and because she died under age 75, they actually get access to that money on a tax free basis.
If we change it up just a little, we’ll now assume that Steve is the survivor in the couple and that he dies over age 75. In this case he now nominates his children to receive beneficiary flexi-access drawdown directly, but because he died over 75, they now have to pay income tax when they draw money out of that beneficiary flexi-access drawdown pot. But, it’s still an inheritance tax free transfer from him to his children, provided that the scheme has discretionary powers over the death benefits, which they almost certainly will.
I’ll just offer you a reminder of some of the other excellent material that we have available from the financial planning team. Our most recent edition of Tech Talk was issued in July, and did include an article on estate planning with pension death benefits, which obviously ties in very closely to the presentations made today. Our next edition, which we’re currently working on, is due out in October and that will include an article on pension income options, again tying into today’s presentation. If you want to look at the material we’ve got on the Tech Talk page, you can find a link through our index of articles, which gets updated roughly every time we issue a new edition of Tech Talk.
We have also got a lot of other financial planning material available to you. Tools including essential calculators to sort things out, like carry forward and the tapered annual allowance. There is also further retirement planning support material that the team have created including technical guidance which we are gradually converting into accredited CPD guides, so you still get the technical material but with added objectives and questions so that you can use it towards your CPD requirements. And there are also further retirement planning articles covering both the retirement planning stage, where people are accumulating funds, and the retirement income stage, the decumulation stage, looking both at technical aspects and the planning opportunities. And all of this is available on the Scottish Widows Extranet.
And in addition, we also make all of our master class series available following a link on the Scottish Widows Extranet, particularly from the Tech Talk page, so that you can review the material from today, look at linked material or look at other subjects that you might be interested in. Now, I’m going to hand back to Simon Harris.
Thomas Coughlan: Just have a look at the questions, see if we’ve got anything come in and then we’ll hand over to Simon.
Bernadette Lewis: Okay.
Thomas Coughlan: Okay, so we’ve got a couple of questions that have come in, so the first question, could you take a monthly spread out UFPLS ? I’ll take that one. Yes, that’s absolutely fine, and UFPLS doesn’t have to be the full fund, it can be just a part of the fund, so yes, they can take that monthly, quarterly, annually, ad hoc as they choose, and every time you will have the consequences we’ve discussed, so the income tax consequences. Although they’re likely to be low if it’s a very small payment, and the lifetime allowance test as well, and you could also automate that using drip feed drawdown as well.
Quite a few questions about copies of the slide, a recording of the session will go on the internet, on the Scottish Widow adviser site, in the next few days or so, so that will answer anyone who’s asked that question, yeah, we’ll let you know when they are available. Quite a few questions here, so perhaps won’t be able to get through all of them, so any that we don’t, we will respond to you directly. Another question that we can answer, on the small pots, would it always be 20% that the provider deducts before paying out a residual? Yeah, I understand that is the case, so yes, on 75% of the payment the provider will deduct the basic rate tax, and then the client has to pay any additional tax that they have to pay, via self-assessment. A question for Bernadette perhaps, when would a BCE for lifetime allowance purposes, be calculated?
Bernadette Lewis: Okay, so the first BCE will always be at the point that somebody crystallises their funds. In most cases you actually have two kinds of BCE. Eg if you go into drawdown, you will have BCE1 for the drawdown part and BCE 6 for your tax-free cash. If you do go into drawdown, your second lifetime allowance test normally applies at age 75, but for the minority of people who convert their drawdown fund into an annuity, it is calculated on the growth at the point that you move into the annuity. So you use the same formula but it will be at an earlier date than age 75. And for people who reach age 75, without having crystallised some or all of their funds, they will also face a first lifetime allowance test at age 75.
Tom Coughlan: Thank you Bernadette. Question about protected tax free cash; can you move an uncrystallised fund with more than 25% tax free cash into flexi access drawdown ? Yes, you can, and in fact that is the way you have to do it (other than with annuity purchase). If you do that through UFPLS, you will only get 25% of the payment, tax free, so those clients that do have greater than 25% tax free cash from A-day they should use flexi access drawdown although it is also available with annuity purchase as well. Another question perhaps for Bernadette as well, death benefit, if the first person to die was over 75, and the second person to die was under, would it be – well, who would that payment be tax free for?
Bernadette Lewis: Yeah, so it’s one of those very weird things. It’s always based, for some odd reason, on the age of death of the last person to die. So, if the member themselves dies over age 75, the beneficiary drawdown for say their spouse would be taxable. If they had a very young spouse who then died under age 75, and the successor was their children, their children would be paying no tax. It’s one of the oddities in the way that the legislation was written, but that is how it works.
Tom Coughlan: Okay, thank you Bernadette, yeah, there are quite a few questions still in there, but we perhaps haven’t got time to deal with them on today’s session, but like I said, we will answer you or email you directly with an answer to your question, hopefully today, but some of them will probably be tomorrow. So, thank you very much. I’ll hand back to Simon Harris for closing comments.
Simon Harris: Okay, thank you very much Tom and Bernadette, there’s no doubt members have some great flexibility available to them at retirement, but as we’ve seen throughout the presentation today, with many advice areas involved in guiding and advising a client to and through retirement, they will only benefit from your support. Hopefully the slides today have helped to consolidate your knowledge and maybe improve understanding in some of the main areas. Scottish Widows is well placed to support all of these areas, through the retirement account proposition, Scottish Widows can accommodate both capped and flexi access drawdown and now with the addition of drip feed drawdown can offer further flexibility to match clients’ needs. Access to drawdown comes at no additional cost to the client.
The retirement account also offers a comprehensive investment range, which includes the very popular governed multi-asset portfolio funds. This range of multi-asset funds were added to earlier this year with the launch of the retirement portfolios. These have been specifically created for the drawdown market which include dynamic volatility management; this is designed to manage significant volatility for clients taking income. The range of multi-asset portfolios available within retirement account, represents excellent value starting from as low as 0.1 total annual fund charge, and are DT and defector rated. The proposition also benefits from a strong service proposition, with digital support allowing for many transactions to be completed online. If you’d like further information on the retirement account, in the first instance, please speak to your Scottish Widows contact or you can visit the Scottish Widows adviser extranet, as with our previous master classes, a recording will be placed on the extranet for further review, as Bernadette was pointing out earlier on. CPD certificates will also be issued following today’s presentation.
My thanks once again to Bernadette and Tom for taking us through the slides. Thank you for joining and thank you for all the questions you’ve raised. As Tom was mentioning there, we’ll – for those we didn’t get to today, we will issue an answer directly to you and that concludes today’s presentation, so thank you very much.
Operator: This concludes today’s call. Thank you for your participation ladies and gentlemen, you may now disconnect.