2018 Autumn budget and pension tax change speculation

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With the summer holidays drawing to a close, the inevitable round of speculation about pension tax relief changes in the Autumn Budget has begun.

Media reports suggest that Chancellor Philip Hammond has his eyes on cuts to higher rate tax relief on pension contributions when he presents his Budget statement to the House of Commons in November.  The Chancellor has a challenging Budget ahead, with a desperate need to find extra funding for the NHS, the £20bn already pledged by the Prime Minister.

According to an unnamed senior government minister, Hammond believes higher rate tax relief on pensions represents ‘one of the last remaining pots of gold we can raid’.  This suggestion will worry higher rate taxpayers who currently enjoy this generous tax relief on their pension contributions.

As things stand, basic rate relief is added to the pension pot, with the ability for higher rate taxpayers to reclaim the difference between basic and higher rates of income tax through self-assessment.  However, the unnamed government source is also reported to have said Hammond is only likely to target those who can afford to contribute tens of thousands of pounds to their pension pots each year.

Pension tax relief is always under threat in the Budget, if media reports leading up to the big day are to be believed.  The last major round of speculation was a couple of years ago, when then Chancellor George Osborne had his eye on £1.5bn of tax savings by changing pension tax relief to a flat-rate.

Lending weight to the speculation on this occasion is a Treasury Committee report, published last month, which concluded existing pension tax relief was neither an effective or well-targeted way of encouraging people to save into pensions.  Despite recommending the Treasury considered making fundamental reform to pension tax relief, the report recommended that the current system could be improved through further, incremental changes to tax relief.  According to the report, ‘Household finances: income, saving and debt’:

“The government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.”

Cutting the pension annual allowance is an option on the table for Hammond.  The annual allowance is a limit on how much you can contribute to your pension each year, while still receiving tax relief.  It currently stands at £40,000 but is tapered down to as low as £10,000 for higher earners with earnings exceeding £210,000 a year.  For those who have taken taxable income flexibly from their pensions, a Money Purchase Annual Allowance (MPAA) of £4,000 applies instead of the £40,000 figure.  In any case, your earnings in the tax year need to be sufficient to justify the size of the pension contribution, with opportunities to bring forward any unused annual allowance from the previous three tax years – unless that is, the MPAA applies to you.  This ability to carry forward unused annual allowance could also be attacked in the Autumn Budget, changing to a ‘use it or lose it’ approach, similar to use of Individual Savings Account (ISA) allowances in each tax year.

Should the Chancellor decide to cut the annual allowance in his Autumn Budget, to a yet unknown figure, he might give back the abolition of the lifetime allowance as a concession.  The lifetime allowance is a limit on the total value of pension benefits you can draw from all pension schemes, either as lump sums or retirement income, without it triggering an extra tax charge.  Since April 2018, the lifetime allowance has been set at £1,030,000 and is due to increase at the start of each tax year, in line with price inflation.  A relatively low number of people are caught by the lifetime allowance, and many of those who will be, are entitled to a higher lifetime allowance figure by virtue of applying for ‘protection’ certificates when it was historically set at a higher level.  For some of those individuals with lifetime allowance protection certificates in place, this entitlement to a higher lifetime allowance came at a cost, that is, not being able to make any future pension contributions, or losing that protection and seeing more of their pension benefits being subjected to a future tax charge.

Abolishing the lifetime allowance entirely would be a popular move for those fortunate to have this level of pension benefits, even if it came with a corresponding reduction in the annual allowance.

Another possibility is the Chancellor will scrap the current system of pension tax relief, replacing it with a flat-rate tax relief.  Earlier this year, the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) put forward the case for a flat-rate of pension tax relief at 30%, specifically as a way to help the self-employed.  They estimated this reform would leave three-quarters of savers better off, including those earning low incomes and the self-employed.  It would also save the Treasury a great deal of money each year in tax reliefs.

Of course, the one pension perk where conspiracy theories circulate ahead of each Budget is pension tax-free cash.  Since tax-free cash was renamed the ‘pension commencement lump sum’, it has seemed fair game for the Treasury to place a cap on how much lump sum can be taken tax-free, or simply subject all cash withdrawals from pensions to income tax charges.  This form of attack on pensions seems far less likely than a cut in the annual allowance or even the introduction of flat-rate pension tax relief.

Other potential opportunities being considered for the Budget will undoubtedly include cutting tax breaks on smaller company investing, which could spell bad news for higher-risk, tax planning products such as Venture Capital Trusts and Enterprise Investment Schemes.

If you find yourself potentially worse off should the annual allowance be cut, ability to carry forward unused annual allowance removed, or pension tax relief changed to a flat-rate, then taking some action ahead of the Budget could make sense.

Talk to Wells Gibson about your options, and we can help you understand the impact of any of these changes on your own long-term financial planning and in particular, your desired lifestyle and goals.

What is the Financial Services Compensation Scheme and how does it protect my money?

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When things go wrong, it’s reassuring to know there’s a safety net in place.  This is especially important when it comes to our personal finances, including savings, investments and insurances.

The Financial Services Compensation Scheme (FSCS) is an independent body set up by the UK Government to provide compensation or some other form of resolution for people where their authorised financial services provider gets into financial difficulties.  The FSCS operates different levels of compensation for different products and funds selected.

For insured products, the cover is 100% with no upper limit applied. This category of FSCS protection includes workplace pensions (including Additional Voluntary Contributions/AVCs, Group Personal Pensions and Group Money Purchase Plan), Personal Pension Plans, annuities, endowment policies and Investment Bonds.

For investments, the protection level is also 100% of the loss, but with an upper limit of £50,000 per person.  Financial products falling into the investment category for FSCS purposes include Unit Trusts, Open Ended Investment Companies and Stocks and Shares ISAs.

There is no upper limit for FSCS protection in respect of general insurance policies, but only 90% of the amount is covered.  General insurance includes policies like your car or home insurance.

Finally, and perhaps most discussed in the news media, are bank and building society deposits. These receive FSCS protection of up to £85,000 per person, per authorised deposit group.

It’s also worth noting that, since 3 July 2015, the FSCS provides a £1million protection limit for temporary high balances held with your bank, building society or credit union if it fails.  Temporary high balances include things like the proceeds from a house sale or a redundancy payment.

One aspect of FSCS protection which often raises questions from our clients is how it would apply to the assets held within a Self-Invested Personal Pension (SIPP).  A SIPP is a type of ‘wrapper’ which can include a mixture of the different products covered by the FSCS.  These products can be insurance, investments or deposits.  The result being that each ‘sub-element’ of the SIPP (e.g. OEICs, Life Funds, Cash Account) is usually subject to its own FSCS protection up to the relevant product limit.  The SIPP wrapper itself is protected under the FSCS up to £50,000 per person, per authorised firm.  The investments within the wrapper are protected depending upon the structure of the product i.e. Insured, Investment, General Insurance or a Deposit.  This can mean that the products held within a SIPP can be protected up to a maximum of 100% with no upper limit but can also be limited to £50,000, depending on its FSCS category.

What is important to remember is fund managers typically appoint a depositary, custodian or other organisation, the purpose of which is to help ring-fence invested money from that of the fund manager and therefore help protect the invested money in the event the fund manager is insolvent.  As a result, if the investment provider managing the investment funds within your SIPP was to get into financial difficulty, the FSCS would cover you up to £50,000 per investment organisation.  However, the likelihood of this occurring is extremely remote as the assets are ring fenced from the investment manager.  This means that, if the investment provider became insolvent, the administrators should not be able to access client funds to meet any of the parent companies’ obligations.  In addition, UK authorised fund managers operate internal risk controls to help ensure that client assets are managed with proper care and diligence and within regulatory rules and guidance.

If you have any questions about FSCS protection levels for the various financial products you hold, please do get in touch.

Cost of pension and investment advice revealed

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What does it cost to get professional financial advice in respect of your pension pot or investments?

According to some new research, the average cost of pension financial advice is close to £3,000.  The research, carried out by consumer group Which?, looked at the fees charged by more than 100 financial advisers.  Its findings tell us about the typical cost of pension financial advice but also about the range of charging structures used by different financial advisers.

In order to carry out the research, Which? presented five different advice scenarios to 102 different independent financial advisers.

According to their research, it costs an average of £2,897 to get advice on the consolidation of a number of pension pots worth a total of £150,000 into a single pension plan.  This average covers a wide range of different charging levels for the same activity, with the highest fee quoted at £6,000.

For retirement advice on a pension pot worth £100,000, the average cost of advice was £1,837. Which? found the lowest price quoted for this type of advice was £300 and the highest was £4,000.

In respect of taking tax-free cash from a pension pot worth £150,000 and then entering into a drawdown plan, the average price quoted was £2,383.

The average advice charged quoted for investing an inheritance worth £60,000 was £1,472, and the advisers surveyed quoted an average of £524 for an annual review of a portfolio of investment funds valued at £60,000.

Which? also found that only one in five of the advisers they looked at published full details of their advice charges on their websites, in respect of the five different advice scenarios they considered. This meant the researchers had to call the advisers to determine the level of fees that would be charged.  They found that a further 34% of advisers had published a rough indication of costs on their websites, or alternatively had published their key facts document which details of some fees and charges.  However, nearly half of adviser websites contained no information about advice fees.

Calling the advisers who were included in the survey resulted in a better experience, with 87% of those called prepared to offer a rough idea of the charges involved for a scenario during an initial telephone conversation.  Most of the advisers called offered this price information without being specifically asked.

In terms of advice charging structures, which differ between advisers, the survey found that most advisers are charging an upfront fee which is calculated as a percentage of the amount to be invested. In fact, 79% of the independent financial advisers charged a fee on this basis.  The average upfront fee being charged was 2.9% of the amount invested which incidentally compares to Wells Gibson’s typical initial charge of 1%.

Which? found that a similar proportion of advisers were using this same method of charging for ongoing advice and annual reviews, with 87% charging based on a percentage of assets under advice.  The average rate being charged for ongoing advice and annual reviews was 1.3% and this compares to Wells Gibson’s typical ongoing charge of 1% for comprehensive Wealth Planning.

When considering financial advice costs, it’s important to keep in mind the value it can bring especially if your financial adviser or planner stops you making the wrong decisions, at the wrong time and for the wrong reasons!  There are some free alternatives, including the government-backed Pension Wise service but these can only offer information or guidance, rather that financial planning and advice which is tailored to your personal and financial position and lifestyle, financial and investment goals.

Pensions can be complex, with a wide range of choices and options to consider.  When you have worked hard and saved money for your entire working life, making the best possible decisions about your pension pots is essential.

Pensions revisited

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New pension reforms came into being on 6thApril 2015.  The materially greater freedoms that now exist have much appeal, yet they come with greatly increased complexity both in understanding and in execution.  On balance these reforms were and still are welcome, but the need for high quality advice has never been greater, both to minimise the risks, but also to maximise the opportunities that they provide.

The British have had a love-hate relationship with pensions for many decades.  After some years in the doldrums, the cycle is on the upswing – or certainly deserves to be – largely due to recent changes made by the Chancellor.

Continuously moving goalposts

Successive governments have always tinkered with the pension regime.  Until George Osborne stepped in, the nanny state – not trusting someone to spend money from their pot responsibly in retirement, despite having been responsible enough to save for retirement in the first place – dictated how much money could be withdrawn from a pension, and forced retirees to hand over their hard-earned pot of money to an insurance company (forever) in return for an income for life in the form of an annuity.

Enter the Chancellors April 2015 reforms so let’s have a look again at the rules which were introduced:

Change 1: Freedom to take out as much as you like, when you like

Prior to April 2015, the amount that could be withdrawn from a pension portfolio was limited by the Government (using a calculation related to 15-year gilt yield), unless the individual had £12,000 of secure income such as annuities, state pension or defined benefit pensions.  This withdrawal limit was abolished and, from age 55, retirees are free to take as much as they wish, when they wish.  They will, of course, be required to pay tax on these withdrawals, beyond any 25% tax-free portion, at their marginal rate of income tax, i.e. the highest tax band that they fall into, given all of the income they earn in that tax year.

Talk of retirees depleting their pots and going wild with their cash is both condescending and laughable.  Most people realise how important maintaining their pot is for their future well-being.

It is important that pension pots are not seen as ATM machines! Once the 25% tax-free pension commencement lump sum is taken, all withdrawals are taxed at the pension holder’s marginal rate of tax.  As such, the tax consequences need to be calculated carefully, before any money is withdrawn.

Change 2: No requirement anymore to buy an annuity

Thankfully, another of the central pillars of nanny state influence was abolished; retirees are no longer required to buy an annuity.  They will be free to make the decision that is right for them.  For some that may still be to buy an annuity now or delay the purchase until a date of their choosing.  For others it will be taking out money, also known as drawdown in pension jargon, from their pension pot at a sensible rate.  The important issue is that retirees are now in control of that choice and can seek guidance from their financial planner on what the best course of action might be for them.

Change 3: Pension pots can be passed on to anyone

Perhaps one of the most material changes that the Chancellor made was to allow pension pots to be handed on to anyone, on the death of the member.  Prior to April 2015, a pension could only be passed on tax-free if death occurred before 75 and the plan member had not begun taking an income from the portfolio or taken the tax-free cash allowance.  Outside of this narrow definition, any assets withdrawn suffered a usurious ‘death tax’rate of 55%, unless donated to charity.

From 6thApril 2015, if the plan member dies before 75, any income withdrawals or lump sums are tax free, provided the plan has been passed on to the ‘successor’ i.e. the person inheriting the plan within two years.  If this transfer is delayed beyond two years, then they will have to pay income tax at their marginal rate on any withdrawals.

If the member’s death occurs after 75, then the beneficiary can take either a lump sum or draw down the money flexibly at any time.  Where income is taken, this will be taxed at the successor’s marginal rate of tax.  Lump sum withdrawals are also taxed at the successor’s marginal rate of tax.

As pension pots usually fall outside an individual’s estate for inheritance tax planning, the astute reader will quickly see that these new arrangements allow for some sensible and legal intergenerational tax planning, in certain circumstances. Professional advice should always be taken as a matter of prudence when making any such choices.

Change 4: Private sector defined benefit pensions can be transferred

The new regulations also allow for those individuals with private sector defined benefit pensions to transfer the lump sum value of their pension into a defined contribution pension (e.g. a self-invested pension plan or SIPP).  However, they are required to take professional advice before they do, unless the fund is below £30,000[1].  It may seem tempting to transfer assets however at Wells Gibson we start from the assumption that a transfer will be unsuitable.  Again, help from a trusted adviser is essential.


The pension reforms should continue to be welcomed.  Yet, despite their positive contribution to flexibility, and fairness, they also bring increased choices for individuals around contribution levels, the timing and quantum of pension withdrawals and their use as tax-efficient intergenerational asset transfer opportunities.  These decisions are complex and important to the future financial well-being of clients and their families and should not be taken lightly.  It is hard to think of a more obvious area that a good financial planning firm can add material value to its clients than by empowering them to make informed decisions on what to do with their pensions.

If you want to find out more or talk to us about these or any other pension issues, please do not hesitate to call.

What the slowdown in life expectancy improvements means for your financial planning

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Life expectancy is always an important topic in the world of pensions and financial planning.  Considering how long we might live is an important assumption to make when creating a long-term financial plan.

For the purpose of retirement planning, you need to be confident that you won’t run out of money before you run out of life!

In recent months, there has been much speculation that the recent history of rising life expectancy is now slowing down. New official figures show that life expectancy in the UK has been increasing for a number of decades, until recently. This was happening until 2011 when the UK, along with several other countries, experienced a notable slowdown in improvements in both. male and female mortality.  The ONS reported that, between 2011 and 2016, the UK experienced one of the largest slowdowns in improvements in life expectancy at birth and at age 65 for both males and females, out of the various countries analysed. The slowdown in life expectancy improvements was observed most widely across the countries analysed for 65 to 79 year olds.  Women have been more affected overall by the slowdown than men.

Bucking the trend of slowing life expectancy improvements was Japan, where there has been an acceleration of mortality gains in recent years.  Alan Evans from the Office for National Statistics said:

“The slowdown in life expectancy improvements that has been observed in the UK since 2011, is also evident in a number of countries across Europe, North America and Australia. However, the UK has experienced one of the largest slowdowns in life expectancy at birth and at age 65 years for males and females.

“By contrast, Japan has come through a period with low life expectancy gains and has recently experienced an acceleration of mortality improvements, showing that even after a period of slow growth in life expectancy, a country may again return to faster improvements.”

It’s an interesting time for these figures, coinciding with the latest weekly death statistics which show the eighth consecutive week that the number of deaths has exceeded the five-year average. With some parts of the press attributing the high level of the weekly death rate to the recent heatwave experienced in the UK, what other factors could be contributing to the current slowdown in life expectancy improvements?

According to some work carried out by The King’s Fund last year, two factors which contribute to the life expectancy slowdown are largely uncontested.  One factor is the result of changes in mortality among older people.  Put simply, more older people – particularly older women – than expected given historical trends are dying.  Another undisputed factor contributing to the life expectancy slowdown is that flu contributed to excess deaths in some years, notably 2015 and also in 2017.  However, the scale of this contribution is still being debated.

Beyond these two factors, views about the underlying factors are hotly contested.  Some have put forward the impact of austerity measures as a contributing factor, which includes cuts to NHS funding.  It remains unclear whether the slowdown is a temporary blip or the start of a longer-term trend.

As a result of the life expectancy slowdown experienced here in the UK, we have fallen to the bottom of an international league table of life expectancy improvements for women.  For men, the UK is now second bottom on the table, with only the US having a worse record.  In the previous six years, the UK was one of the top performers on this international league table.

Although many countries have seen a slowing in the improvement in life expectancy, several Scandinavian countries such as Norway, Denmark and Finland, have seen large and increasing improvements in life expectancy.  Commenting on the figures, Steve Webb, Director of Policy at Royal London said:

“The UK has slumped from being one of the strongest performers when it comes to improving life expectancy to bottom of the league.  There is a real human cost behind these statistics and we urgently need to understand more about why this is happening.

“The current extreme summer weather is clearly taking its toll in the short-term, but there are also big, longer term factors at work.

“The Government needs to conduct urgent research into these worrying trends. If other countries can ride out economic storms and continue to drive up life expectancy, there is no reason why the UK should not be able to do so.”

What do you make of these official figures showing a slowdown in life expectancy improvements in the UK?  How will you factor life expectancy into your own retirement and financial planning?