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Bankhall Conference 2009 - Scottish Widows
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Bankhall Conference 2009 - Scottish Widows

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Pension change - opportunity or threat?

Pension change - opportunity or threat?

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  • You have heard a lot about the technical changes going on in out market and in the specialist sales team it is our job to work with both the technical team and our customers to try and turn these changes into mutual opportunities. In December we produced this adviser value proposition as a framework for presenting the various changes in our world in a sensible cohesive format. Since this time I have presented various aspects of this Value proposition to hundreds of advisers and their introducers. (talk through the slide build) Very much in line with what my previous colleague was saying the aim of this slide is to set out a range of opportunities for getting closer to professional connections – we know these guys – accountants and solicitors – have got many clients who are going to be affected by some of the changes we talk about – but are unlikely to have the specialist knowledge or focus that you as advisers have on these specific changes that have a big effect on our business. We had plenty of opportunities and risks before the budget but since April 22 nd the requirement for specialist knowledge has just exploded and what we can clearly see is a need for advisers and accountants to work closer together. Due to the new definition of earnings it will become a requirement for advisers to gather more information about a clients circumstances – whether he be in a group scheme or an individual client – if there is any risk that his entire earnings will take him into the £150k camp then you will need to know exactly what his total earnings look like. Time is short today so we are just going to focus on a few specific opportunities that the budget has given us.
  • Fairly well trailed opportunity Talk through the build – this means the effective amount of income before Tax Relief is limited is actually £169,999 – and higher if you use Gift Aid to manipulate the income below £150k Remember the definition of earnings means that if you have earned over £150k in any of the last 2 years means you are unlikely to be able to take advantage of this - and of course the £20k annual allowance is only there until 2011 I can think of one client who is able to take advantage of this – one of our Olympians who prior to the Olympics earned a reasonable amount but not anywhere near the £150k, he went to the Olympics did really well, has come back got plenty sponsorship and will earn much more than in previous years a. He is able to take advantage of this contribution flexibility for the next 2 years. Remember the only people who can really use the £245,000 annual allowance this year are those who earn less than £150k.
  • Talk through the slide If you are a high earner and don’t currently pay into a pension you effectively have a 2 year window to utilise a new allowance. Some advisers are viewing it like an ISA allowance.
  • Talk through slide – self explanatory As another example – if the client was earning £120k then based on current personal allowance the relief on the contribution would be Earnings = £120k £20k contribution = 53% relief (£20k x 40%) £8000 + (£6475 x 40%) = £10,590/£20,000 = 53% These clients can still use Salary Exchange to maximise not just income tax relief but NI savings also increasing the effective rate of relief even further!
  • The day after the budget much of the press coverage described “a sigh of relief” – most high earners were still able to get higher rate relief on their pension contributions. Another aspect of the post-budget commentary was a general feeling that the Chancellor had set his expectations of future growth of the economy too high. This has lead many to consider that he is going to have to make another future tax grab. According to the Revenues own figures tax relief on pensions alone costs around £30 Billion per year. So in the aftermath of the budget some of the better direct mailing financial advice firms produced really tidy synopsis of the budget focussing on the risk that higher rate tax relief would be taken away completely – in fact one of these companies went with a photo of some welly boots and the headline – FILL YOUR BOOTS It might seem a bit of scaremongering however, imagine if you earned £130k last year and consider that you have just escaped this new tax rate of 50% and the restriction on higher rate relief and salary exchange you might well be motivated to take advantage of all these reliefs whilst you still have them.
  • You have heard a lot about the technical changes going on in out market and in the specialist sales team it is our job to work with both the technical team and our customers to try and turn these changes into mutual opportunities. In December we produced this adviser value proposition as a framework for presenting the various changes in our world in a sensible cohesive format. Since this time I have presented various aspects of this Value proposition to hundreds of advisers and their introducers. (talk through the slide build) Very much in line with what my previous colleague was saying the aim of this slide is to set out a range of opportunities for getting closer to professional connections – we know these guys – accountants and solicitors – have got many clients who are going to be affected by some of the changes we talk about – but are unlikely to have the specialist knowledge or focus that you as advisers have on these specific changes that have a big effect on our business. We had plenty of opportunities and risks before the budget but since April 22 nd the requirement for specialist knowledge has just exploded and what we can clearly see is a need for advisers and accountants to work closer together. Due to the new definition of earnings it will become a requirement for advisers to gather more information about a clients circumstances – whether he be in a group scheme or an individual client – if there is any risk that his entire earnings will take him into the £150k camp then you will need to know exactly what his total earnings look like. Time is short today so we are just going to focus on a few specific opportunities that the budget has given us.
  • We have been talking about the age 50 to 55 change for quite some time now and have produced some great support material on it. You can see that the papers are now really beginning to pick up on this as well – here is a range of headlines from the past few months which indicate slightly different takes on the age change situation. Most of the articles are aimed at people who are still working and looking to take their Tax Free cash early and some are really sophisticated going on to talk about income recycling as a way of ensuring you can get a second tax free sum. Most IFAs see this age change as an opportunity to add value and I know that most of you will be writing to your clients who fall in the age bracket of being born between April 1955 and April 1960, but this also represents a good opportunity to work with your professional connections to ensure they are mailing their client banks. We have seen business coming out off the back of this and with more newspaper articles focusing on the change the opportunity is significant. Worth also noting that if you have a Scottish Widows Group Personal Pensions it may well be possible for clients to take benefits from this and continue to be a member of the scheme – this is something that the FT picks up on in their article – the importance of this kind of flexibility in troubled financial times.
  • The Retirement Account design allows those clients who are taking tax free cash but still in work to take income from the plan at the same time as they are contributing to the plan – without being hit with any double charging.
  • We have lots of support material for those looking to take benefits early including
  • You have heard a lot about the technical changes going on in out market and in the specialist sales team it is our job to work with both the technical team and our customers to try and turn these changes into mutual opportunities. In December we produced this adviser value proposition as a framework for presenting the various changes in our world in a sensible cohesive format. Since this time I have presented various aspects of this Value proposition to hundreds of advisers and their introducers. (talk through the slide build) Very much in line with what my previous colleague was saying the aim of this slide is to set out a range of opportunities for getting closer to professional connections – we know these guys – accountants and solicitors – have got many clients who are going to be affected by some of the changes we talk about – but are unlikely to have the specialist knowledge or focus that you as advisers have on these specific changes that have a big effect on our business. We had plenty of opportunities and risks before the budget but since April 22 nd the requirement for specialist knowledge has just exploded and what we can clearly see is a need for advisers and accountants to work closer together. Due to the new definition of earnings it will become a requirement for advisers to gather more information about a clients circumstances – whether he be in a group scheme or an individual client – if there is any risk that his entire earnings will take him into the £150k camp then you will need to know exactly what his total earnings look like. Time is short today so we are just going to focus on a few specific opportunities that the budget has given us.
  • Suggested commentary Following on from Ian Naismith’s piece on Personal Accounts, I just wanted to share with you some of the main issues in the current workplace pensions environment, and more importantly, why the Government felt that major change was needed. Replay most of the points (first three in particular) and then stress that there are approx (9M people in the UK saving nothing towards retirement and that is where Personal Accounts is aimed at Let’s face it, Stakeholder pensions by definition haven’t worked and as a result we have the introduction of Personal Accounts from 2012.
  • Choice of investment funds – likely to be vanilla or vanilla Self investment will not be an option, remember that self investment in a GPP can involve share ownership through SIP/SAYE rollover and the flexibility to do things like access your tax free cash from the plan whilst still working We pride ourselves on our communication material, and for those big schemes our ability to bespoke the message to fit with the company aims and values. We can add value and fine tune the communication material to help ensure that the Employees feel they are being provided something of value by their employer. Personal Accounts is seen as something which Employers are being forced to do because they have been unwilling to provide good benefits for members in the past. As there is a cap on contributions – if an 8% contribution was being provided to all the employees anyone earning above £50k would be exceeding the contribution limit and would have to pay their contribution elsewhere. PA is never going to be the scheme of choice for high earners Recognisable Brand 4 companies have been shortlisted as potential suppliers of personal accounts Logica UK Arbejdsmarkedet Tillagspension (Danish) Great-West Retirement Services (Canada Life/Group and Great West Life…) Tata Consultancy Services (Indian conglomerate) Only one of them is a recognisable brand in the UK Adviser Support – The existing Group Pension Arrangements have the adviser very much at the core of the relationship. Providing support to the employer and acting for the employer with the current provider. There will be no such relationship when dealing with Personal Accounts – it is a leap of faith and will be a major distraction for many companies.
  • Without Salary Exchange the member pays a net contribution of £100 out of his net pay. This is then grossed up by the insurer to £125. He would have exactly the same take home pay. But with his NI saving his pension contribution will have risen to £144.93. If his employer then added on his NI saving his contribution will have risen to £163.48. A 31% increase in the contribution over the net pay method. And a potential 31% increase in your income stream. It is also worth noting that by opting for salary exchange a higher rate tax payer gets his relief at source. the reason for this is that to get the same take home pay the client can exchange 1739.16 of his salary which if you divide by 12 is 144.93. We forget that the client not only saves NI by lowering his salary he pays less tax. I think most of us expect that the contribution should be 125 x 111% = 138.75. However, after looking at the figures for several minutes I have had a eureka moment.   By reducing his salary by 1739.16 he saves 347.83 in tax. His NI saving is 191.31. The total saving is 539.14. However, he is paying an extra £25 x 12 - i.e. under the net payment method he was paying 100 which was then grossed to 125.   So his overall saving is 539.14 - 300 = 239.14. If you divide this by 12 you get 19.93 which when added to the 125 you get 144.93!   The figure of 163.48 is much easier to understand. The employers NI saving is 1739.16 x 12.8% = 222.61 which divided by 12 is 18.55 which when added to 144.93 is 163.48
  • SUGGESTED COMMENTARY At Scottish Widows, we will keep you at the forefront of the regulaotry change in the corporate pensions marketplace. We have a range of support materials including a client facing guide to personal accounts written in conjunction with the Confederation of British Industry. This has been exceptionally well received by Advisers We also offer a suite of support materials around Salary Exchange including a full calculation system to assist you in showing the costs savings that these programmes can bring to any Employer. What’s more this system takes all the hassle and admin out of installing exchange programmes as the tool produce bespoke letters and templates for you and the client making it very straightforward. So to conclude, we’ll keep you up to date, we have a full range of support and your Account Manager will be happy to take you through any of this in more detail to support your objectives in this exciting marketplace.
  • You have heard a lot about the technical changes going on in out market and in the specialist sales team it is our job to work with both the technical team and our customers to try and turn these changes into mutual opportunities. In December we produced this adviser value proposition as a framework for presenting the various changes in our world in a sensible cohesive format. Since this time I have presented various aspects of this Value proposition to hundreds of advisers and their introducers. (talk through the slide build) Very much in line with what my previous colleague was saying the aim of this slide is to set out a range of opportunities for getting closer to professional connections – we know these guys – accountants and solicitors – have got many clients who are going to be affected by some of the changes we talk about – but are unlikely to have the specialist knowledge or focus that you as advisers have on these specific changes that have a big effect on our business. We had plenty of opportunities and risks before the budget but since April 22 nd the requirement for specialist knowledge has just exploded and what we can clearly see is a need for advisers and accountants to work closer together. Due to the new definition of earnings it will become a requirement for advisers to gather more information about a clients circumstances – whether he be in a group scheme or an individual client – if there is any risk that his entire earnings will take him into the £150k camp then you will need to know exactly what his total earnings look like. Time is short today so we are just going to focus on a few specific opportunities that the budget has given us.

Transcript

  • 1. Pension Change – Opportunity or Threat? Robert Cochran Pension Development Manager
  • 2. Adviser Value Proposition 2008 2009 2010 2011 2012 Equity Loss (Value) Value (£) Time Change in NRD 50% High Earners Tax PA changes above £100k Rise in Trust Tax Increase to National Insurance Lifetime & Annual Allowance Freeze 20% Tax Relief for high earners Personal Accounts Auto Enrolment Abolition of Contracting Out Full RDR implementation PCLS protection Large pension contribution rules Bed and Sipping Removal of Safeguarded Rights £20,000 Special Annual Allowance Risks? Opportunities?
  • 3. Budget opportunity – clients earning around £150k
    • Client earns £175k
    • Wants to make a pension contribution of £50k
    • How can they get higher rate relief on it all?
    £20k Pension Reduction Gift Aid £150,000 Income £5,001 contribution
    • Using £20k allowance and Gift Aid contribution can reduce Earnings below £150k
    • Entire £50k contribution will now get higher rate relief
    • Remember last 2 years definition
  • 4. Why should high earners use their £20k allowance?
    • Three different rates of tax relief for next three years
    • £20k payments in next two years generate extra £10k tax relief compared to £40k after April 2011
    £12k net cost £10k net cost £32k net cost £20k £20k £40k
  • 5. Budget opportunity – clients earning around £100k
    • Earn £110,000
    • Tax of 40% on all earnings above the threshold
    • Personal allowance reduced by £1 for every £2 above £100k
    • Personal Allowance reduced by £5,000 so pay 40% on this as well
    • This means they will pay 60p on every £1 over £100k
    • Earn £110,000
    • Tax of 40% on all earnings above threshold
    • Make contribution to pension of £10k
    • Keep full personal allowance
    • Effective relief of 60% on contribution
  • 6. Higher rate tax payers – a sigh of relief?
    • Higher Rate Relief – use it or lose it?
    • The importance of regular premiums
    • Bed and SIPPing/Pensioning for lump sums
    • www.scottishwidows.co.uk/budget
  • 7. Adviser value proposition 2008 2009 2010 2011 2012 Equity Loss (Value) Value (£) Time Change in NRD 50% High Earners Tax PA changes above £100k Rise in Trust Tax Increase to National Insurance Lifetime & Annual Allowance Freeze 20% Tax Relief for high earners Personal Accounts Auto Enrolment Abolition of Contracting Out Full RDR implementation PCLS protection Bed and Sipping Removal of Safeguarded Rights £20,000 Special Annual Allowance Risks? Opportunities?
  • 8. Age 50 change gaining momentum in the press
    • Baby boomers face tough decision on tax-free cash – 28 May 2009
    • Ban until 55 for Tax Free pension Grab – 01 June 2009
    • Time is running out for those wishing to take tax free cash early – 04 April 2009
    • Economic gloom spurs rise in phased pensions – 23 May 2009
  • 9. At retirement flexibility Scheme & Master Trust Simple Re-Registration of Assets through Designation
  • 10. Retirement Account Offer
  • 11. Support available
    • Expert Account Managers
    • Approach Letters for those affected
    • Ideas for maximising tax relief
    • Case studies
    • Income Recycling calculator
    • Bed and Sipping examples
    • scottishwidows.co.uk/three
  • 12. Adviser value proposition 2008 2009 2010 2011 2012 Equity Loss (Value) Value (£) Time Change in NRD 50% High Earners Tax PA changes above £100k Rise in Trust Tax Increase to NI Lifetime & Annual Allowance Freeze 20% Tax Relief for high earners Personal Accounts Auto Enrolment Abolition of Contracting Out Full RDR implementation PCLS protection Bed and Sipping Removal of Safeguarded Rights £20,000 Special Annual Allowance Risks? Opportunities?
  • 13. Why Personal Accounts?
      • Engages just over 30% of the private sector workforce in workplace schemes
      • 21% of Employers provided access to and contributed to a pension scheme
      • 42% of eligible employees had joined an Employer sponsored pension scheme
      • Average DC contribution is 6% Employer and 3.7% Employee but very much dependent on scheme type
    The Current System *Sources: DWP: Research Report No 545 - Employers’ Pension Provision Survey 2007 (page 2); DWP: Research Report No 546 - Employers attitudes and likely reactions to the workplace pension reforms 2007 (pages 2 and 3); Deloitte & Touche: Employer Pension Contributions and Pension Reform (page 18)
  • 14. Personal Accounts vs. Private Provision Adviser Support Recognisable Brand Maintain existing relationships One scheme for all employees Tailored communication material Self Investment Wide choice of Investment Funds Private Provision Personal Accounts
  • 15. The value of Salary Exchange
    • Assume client earns £30,000 per annum
    • Employee Net £100.00
    • Employee gross - £125.00
    • Salary Exchange –
    • By adding in Employee NI saving £144.93
    • By adding in both Employee and Employer NI saving £163.48
    • 31% increase in contribution over normal net pay method
    • Immediate HRT relief if applicable
  • 16. Salary Exchange the range of benefits
  • 17. Scottish Widows – Comprehensive support
  • 18. Adviser value proposition 2008 2009 2010 2011 2012 Equity Loss (Value) Value (£) Time Change in NRD 50% High Earners Tax PA changes above £100k Rise in Trust Tax Increase to NI Lifetime & Annual Allowance Freeze 20% Tax Relief for high earners Personal Accounts Auto Enrolment Abolition of Contracting Out Full RDR implementation PCLS protection Bed and Sipping Removal of Safeguarded Rights £20,000 Special Annual Allowance Risks? Opportunities?
  • 19.
    • This presentation represents Scottish Widows’ interpretation of current and proposed legislation and HM Revenue & Customs practice as at the date of publication - these may change in future.
    • This material is strictly for internal use only. It is not intended for onward transmission to private customers and should not be relied upon by any other person.
    • As part of the Lloyds Banking Group, Scottish Widows is proud to be an Official Provider of the London 2012 Olympic and Paralympic Games.
    • Scottish Widows plc. Registered in Scotland no. 199549. Registered Office in the UK at 69 Morrison Street, Edinburgh, EH3 8YF. Tel: 0131 655 6000.
    • Scottish Widows plc is authorised and regulated by the Financial Services Authority Our FSA Register number is 191517.
    • 33841 10/09