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May 2014 | business-reporter.co.uk

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How the new pension rules will make retirement more flexible

PENSIONS

Business Reporter · May 2014

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Pensions

Opening shots René Carayol

AVING spent 10 great years at Marks & Spencer during its heyday in the 1980s, we enjoyed many long-forgotten benefits, including a goldplated, non-contributory pension scheme. However, the end of the era of final-salary pension schemes was drawing ever nearer. The more constrained but supposedly more affordable “defined contribution pension scheme” was now here to stay. After M&S, I spent three years working for Pepsi. In very American fashion, there were no company pension schemes available, and everybody was happy to make their own pension arrangements – or not. Many of my American colleagues just didn’t understand why we Brits expected the state to look after us when it was obviously our choice to make our own arrangements, or not, for our retirement. Europe is now experiencing the most predictable economic and social time-bomb in its history. As life expectancy began to increase in the second half of the 20th century and fertility began to decline in the 1970s, the foundations of Europe’s generous state pension systems began to erode. A PricewaterhouseCoopers report in 2009 found that 96 per cent of companies considered final salary schemes to be “unsustainable”.

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Trust the people! Why George Osborne is right to give tomorrow’s pensioners more choice As with most of the important things in life, there are no risk-free actions. Many felt doing nothing has never been a viable option but instead of having the confidence to manage t he consequences and implications – for far too long, in fact for well over 100 years – governments have kicked tackling pensions into the long grass. The Chancellor, George Osborne, started to face down the pensions catastrophe in his recent Budget. “People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances,” he said. “And that’s precisely what we will now do. Trust the people.” His reforms are far-reaching but will remove the current requirement for people to purchase an annuity, and give them access to their pension pots without the constraints present today. We are seeing quite a few pundits, and certainly the Labour party, screeching that new pensioners will blow their savings in

one fell swoop. As ever, it must be down to the individual, and no one else. There is truth in the fact that existing pensioners will feel left out as Osborne’s pension reforms only apply to new pensioners. But overall, Osborne has done brilliantly to get rid of the unfairness of the annuity approach. Once you buy an annuity, you are locked into the income it provides for life, with no possibility of it increasing if rates improve. It is obvious that millions of pensioners have been receiving a raw deal from the UK’s multi-billion pound annuity market. Maybe Osborne didn’t have to act, and he might well have got away with it, but the bold and right thing to do was intervene for the benefit of many. There is no risk-free approach. History reminds us about the implications of wanting to do nothing. The Chancellor has rightly received praise for sticking his neck out and doing the right thing.

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By Dave Baxter IT IS A dream held by many on the daily grind: work hard, save diligently and retire in time for your 65th birthday. But for future generations, it is becoming increasingly unrealistic. The retirement age is quietly but steadily moving upwards for a variety of reasons. In the UK and other countries, the government has been gradually raising the state pension age for future generations, making it harder for people to supplement their income early on. Financially, people may also find it harder to retire at 65 because of difficulties around saving and the demise of many company pension schemes over recent decades. It may seem tough, but with an ageing and increasingly healthy and active population, there is some justification. In December, the Office for National Statistics (ONS) released figures projecting that around one in three babies born last year could live to celebrate their 100th birthday. The ONS added that, if this trend held, the total number of centenarians in the UK could rise from just 14,000 in 2013 to 111,000 in 2037. People may begin to rethink how they make plans for retirement. But some experts believe that employees and the firms they work for must prepare for completely different working lives as well. David Hughes (inset), chief executive at charity the National Institute of Adult Continuing Education, believes that the days of the so-called “job for life”, where an employee stays with one organisation for their entire career, are over. “Having more than one career has become much more widespread,” he says. “The world has moved on and most of us are stuck in a mindset that’s completely out of date. Very few people stay with an organisation for life now. Many people have two or three careers.” Hughes believes that older workers could return to the workforce for a number of reasons. “I think the demographics will change enormously,” he says. “The statistic that shouts out at me is the production of 13.5 million new jobs over the next 10 years – but there are only seven million young people entering the labour market in that period. We think people will retrain more often in order to take those jobs and extend their working lives.” These employees, Hughes notes, could come from different groups, including those with fewer responsibilities than before. “People will re-enter after lifechanging events, like women coming back

MPs recommend flat tax rate for savings

When do you retire

The age-old

question after having children and people in their 50s coming back after caring for elderly parents,” he says. “People will be needing to come back into the labour market.” As people move across careers and work longer, it could have numerous social and economic benefits. Hughes says: “The benefits to society are that [rather than] drudgery, people will be able to move into semiretirement, or find better-paid [full-time] work.” But it also means a number of challenges, particularly for business and education. Dr Deirdre Hughes, an employment specialist and associate fellow at War wick Universit y, warns that companies, employees and society need to be “flexible” about working practices. T his in par t icular mea ns t hat governments, individuals and employers need to look at skills and the concept of

Pensions

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retraining. “We have to be flexible and look after our careers,” she says. “I think we are also talking about employers introducing more flexibility for workers. We also need to anticipate future developments and look at the issues around skills and qualifications. “It’s incredibly important that people have somewhere to get help and support. The world is changing and there’s this thing of career adaptability and resilience.” She also warns that, as workers stay in some form of employment for longer than before, people of all ages will need to adjust to working together. “We are going to have t hat generat iona l sit uat ion w it h people working side by side from four generations,” she says. “What we are going to see is older people working alongside younger people and looking at skills and how people develop those.” With people retiring at a later stage, the daily grind could become much longer. But it could also be much more interesting.

A POWERFUL group of MPs has recommended a single level of tax on different forms of savings in future, including pensions. T h e Tr e a s u r y s e l e c t committee has published a repor t look ing at t he Chancellor’s March Budget, and argues that changes to the way people accumulate and spend their savings mean tax could need to be simplified over coming years. The reforms announced in the Budget have been both surprising and ambitious. They range from the increase in the tax-free annual ISA allowance to £15,000, to moves to liberate people from having to buy an annuity when they retire. The committee is now arguing that this could be a chance to bring together how different savings are taxed and incentivise people to put away money. It has also hinted that different types of savings could be brought together into a single fund. Andrew Tyrie (above right), t he M P who c ha i r s t he committee, has said: “For too long, double taxation has discouraged some forms of saving. These reforms take us towards only taxing savings once. The Budget has enhanced flexibility for those saving, whether in pensions or ISAs. The government now has the opportunity to build on its reforms.” He has argued that the tax c h a nge s a r e now mor e

achievable, though this would be a “long-term” goal. He said: “In particular, there may be scope in the long term for bringing the tax treatment of savings and pensions together to create a ‘single savings’ vehicle that can be used throughout working life and retirement. Cross-party support for these announcements offers the prospect of a more stable environment for pension and savings taxation. This can only encourage savings and reduce dependency.” He also warned that pension providers would need to adapt to recent reforms, but in a responsible way and without putting customers at risk. “The reforms are likely to lead to financial innovation,” he said. “That innovation needs to provide products in the interests of consumers and which are sold responsibly. Following the financial crisis and mis-selling scandals, the reputation of the industry is under scrutiny.”

Pension Fund Management with a different perspective

With thanks to... Publisher Bradley Scheffer...............................info@lyonsdown.co.uk Editor Daniel Evans.............................................dan@lyonsdown.co.uk Production Editor Dan Geary .................d.geary@lyonsdown.co.uk Reporters...........................................Dave Baxter and Joanne Frearson Client Manager Alexis Trinh........................alexis@lyonsdown.co.uk Project Manager Chris Barclay..............c.barclay@lyonsdown.co.uk

For more information contact us on 020 8349 4363 or email info@lyonsdown.co.uk

To find out more contact Richard Dowell tel: 020 3170 5926 email r.dowell@cardano.com Cardano – Investment Advisory – Fiduciary Management

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06/05/2014 16:09

Business Reporter · May 2014

Pensions

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Taking the global view Why advisers need to have relevant local regulatory status INDUSTRY VIEW

inancial advice is a complex area and financial professionals in jurisdictions devote many hours of study and spend years trying to gain the necessary experience. While qualifications and competence are vitally important, one area often overlooked is regulation. As part of a recent ruling, a UK adviser was ordered by the financial services ombudsman to pay compensation because he failed to inform the client that he would no longer be able to provide ongoing advice once the client was resident in Spain. In the same way as UK residents are entitled to protection from the Financial Conduct Authority (FCA) when receiving financial advice, the financial security of residents of other countries is maintained by local regulators. The key to regulation is residence. An adviser regulated in Australia is not necessarily regulated to give advice in Dubai, for example. A US citizen living in the UK falls under the remit of the FCA, whereas a UK citizen living in the US comes under the remit of the SEC and state regulators. If the adviser is not regulated in the client’s country of residence, then it is unlikely that there will be any recourse should something go wrong – therefore clients must choose their adviser wisely.

Regulatory permission to give financial advice can become particularly complicated in the European Economic Area due to passporting rules. Passporting into and around Europe is often only for insurance mediation which does not necessarily cover pensions and investments. It is therefore important to ensure your adviser has the right licence. This can be by way of adviser firms working together to cover the local licensing requirements where the client is resident.

“It is imperative for advisers to have relevant local regulatory status,” according to Paul Stanfield, CEO of Europe-wide trade association, Federation of European Independent Financial Advisers. “Regulated advisers are usually required to have a good working knowledge of the local tax situation and which financial products are compliant and appropriate in the client’s country of residence. Despite the high level of regulation, qualifications and general competence of UK advisers, for instance, there are, understandably, few with extensive financial planning knowledge related to other countries. Local expertise therefore becomes very important indeed.’’ It is key that when a client is applying for a financial product they declare the correct address based on their actual residency and likewise extremely important to check the adviser has authority and a licence to give advice in the client’s country of residence. Brooklands Pensions, as a provider of UK and international pensions, prohibits the sale of our international pension products in regulated markets by all but those who are licensed and regulated to do so based on the residency of the client. If you have been advised to transfer into an international pension product and would like more information on how the budget changes might affect you because of the recent significant legislation changes, or simply wish to find out more about issues highlighted in this article, then please contact technical@brooklandspensions.com. +44 (0)20 7100 4011 www.brooklandspensions.com

We like to think we’re a bank that doesn’t need to hide behind jargon, confusion and bewildering choices. So as part of our quest to make banking better, we want everything we do to be simple and clear – like our pension, which is the simplest in the UK. So if it feels like someone’s pulling the wool over your eyes, ask them nicely to stop. Then get in touch. You know where we are.

To find out more about our pension visit us at virginmoney.com or call us on 08456 10 20 40* On a quest to make banking better.

*Calls are charged at your service provider’s prevailing rate and may be monitored and recorded. Virgin Money plc – Registered in England and Wales (Company No. 6952311). Registered Office – Jubilee House, Gosforth, Newcastle upon Tyne NE3 4PL. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

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03/04/2014 15:52

Business Reporter · May 2014

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Pensions

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PENSION MACHINE Will the government’s new auto-enrolment scheme herald an across-the-board pensions revolution? Dave Baxter investigates…

AYBE it doesn’t sound all that sexy, but the gover n ment a nd others have hailed auto enrolment, which launched in 2012, as a “pensions revolution”. The system, which requires companies to enrol all eligible employees into a n opt-out workplace pension scheme, has already enjoyed great success. Staggered across a number of stages from 2012 to 2018, auto enrolment began with large companies – those with 250 employees or more – and has run smoothly so far. It begins with relatively low percentages of a certain part of a worker’s salary, paid by both companies and employees, which gradually rise until they reach 4 per cent from workers and 3 per cent from employers towards the end of 2017. Its impact is expected to be huge in terms of getting workers and their employees investing in pensions. The Office for National Statistics (ONS) has said it expects around nine million people to save for the first time because of the scheme.

The ONS also noted that workers in areas not normally known to save, such as sales assistants, technicians and dinner ladies, have started to do so. But a lt hough t h is is a n encouraging start, auto enrolment has a long way to go. This year saw the scheme begin to focus on smaller businesses, with enrolment dates kicking in for firms with between 50 and 249 people on their payroll. And while big companies have done a good job of implementing the scheme, industry figures worry that smaller organisations could struggle to adopt to the changes. David Blake (inset), professor of pension economics at Cass Business School and director of the Pensions Institute, says the scheme is cleverly designed but could overwhelm smaller firms. “The whole thing is predicated on a particular behavioural bias called inertia,” he says. “If something is new and it requires action, if we don’t do it and say we will wait until next week, it won’t happen. “Inertia is one of the strongest traits we have, and that’s used in

the design of the opt-out system. “It sta r ted w it h t he big companies such as the Tescos. Now it has been successful in the sense that it has had a take-up of around 90 per cent. “That was a big success, but from now to 2018 the mediumsized employers and the smaller employers and the mini-employers will join. It’s not obvious that they will be prepared for it or that the participation rates in those companies will be so high.” Blake believes that the biggest companies have a corporate culture and infrastructure, as well as economies of scale, that make them better suited to introducing this type of scheme – advantages smaller organisations will lack. Laith Khalaf, head of corporate research at Hargreaves Lansdown, says: “One thing is the companies so far are large companies with the resources, human resources departments and a large corporate culture to do it well. “With SMEs it’s more likely to be a problem because there are not big teams to do it. So far we have had around 2,000 companies enrolling. Over the next six months or so, there will be 30,000 companies enrolling. “I t h i n k t he

medium-sized companies have actually been well prepared, because they knew it was coming along and they have dealt with pensions before. The smaller companies are a big issue. They have probably never dealt with a pension before.” Anthony Carty, group financial planning director at Clifton Asset Management, also worries about a lack of readiness among smaller companies. “Looking at our own clients, there are SMEs who, despite our constant haranguing around the need to prepare and the different processes to take place and compliance,” he says. “We have got clients who have just recently decided they are going to look at it.” If smaller companies do fail to comply with the scheme for whatever reason, the Financial Conduct Authority may have to intervene. But it is uncertain what measures it may take. “If they don’t deal with it, what can the regulator really do?” asks Khalaf. “How is the regulator really going to police compliance with auto-enrolment?” Contingencies have been made for smaller companies without access to advice on the best pension schemes. There are systems in place to make joining up easier for firms,

for example, such as the National Employment Savings Trust (NEST), which has been designed for use with auto enrolment. But there could still be logistical problems for new joiners. Blake says: “The whole point is it will be automated, so NEST has got to talk to the payroll systems of the companies and you have different systems. “There is talk about how to harmonise these systems. It’s going to be a major logistic job. “Also, if we all decide to plump for NEST that would be OK, but I’m not sure there will be the resources to set all of these companies up.” There are also concerns around the rate of opt-outs over the next few years, and whether it will rise as pension contributions increase. “The level of contributions is quite low and steps up over the next four years, so it’s important to look at opt-outs,” Khalaf says. The auto-enrolment process has a long way to go, and could run into many difficulties. But it could also have a huge impact on employees across the UK. “What it’s doing is bringing to the pensions system millions of people who were not saving and were unlikely to save,” Khalaf says. “It will be massive – absolutely huge.”

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Retirements at risk from helping children onto housing ladder By Dave Baxter

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PARENTS could be putting their retirement plans at risk in order to help their children to buy property, a survey suggests. A su r vey ca r r ied out by Halifax and released in May analysed 3,000 views from parents across three years. The results showed that 38 per cent of parents worried about their future fi nances after giving their children support in getting a home. It also showed that around twothirds of people aged between 20 and 45 who had bought a home had done so with fi nancial assistance from their parents. Craig McKinlay, mortgages director at Halifax, said: “For many buyers, parental support is now the fundamental first step onto the property ladder.

“This is becoming a universal expectation of all parents, not just the wealthy. More parents are dipping into their savings and don’t envisage it being repaid, compromising their retirement funds. “For parents whose children are looking to buy, and those first-time buyers now wanting to own, real consideration needs to be given to set realistic timescales and ways in which this can be achieved without either party being overstretched or facing longer-term financial difficulty.” Deposits have risen over recent years. Another piece of Halifax research, released in January, showed that the average deposit for a first-time buyer had reached £30,943 in 2013. The average fi rst-time buyer deposit for 2012, in contrast, was £28,001. The figure for 2007 was £13,444.

Contributions must increase to cover care costs, warns report

Parents are risking their retirement plans by helping their children buy property

The size of deposits varies significantly across the country. The research showed that the smallest average deposit for firsttime buyers, in the North East, stood at £15,862. The largest average

deposit, in Greater London, was as high as £56,183. If house prices continue to rise, the situation could remain difficult, both for budding homeowners looking to come up with a deposit, and their parents.

AN INCREASE in the amount people contribute to their pensions could help tackle the cost of caring for the elderly, an industry body claims. The Institute and Faculty of Actuaries has published a new report, “How pensions can help meet consumer needs under the new social care regime”, arguing that the recently announced pensions reforms, giving people more flexible access to their money, could encourage people to save at a younger age and take alternative approaches to accessing their funds, rather than buying an annuity. It suggests that “flexible drawdown” – the option to withdraw chunks of a pension pot and paying tax on a proportion of the amount – could be used, or that a new Pension Care Fund, similar to a defined contributions pension scheme but ring-fenced for care costs or insurance, be set up and given similar tax treatment to pension savings. A £72,000 government cap on how much of an individual’s care they will have to fund is expected to come into force in 2016. But the report argues this will benefit just 8 per cent of men and 15 per cent of women and that people could spend as much as £140,000 on average before they hit the cap because the limit only covers certain care costs and not things like food and accommodation.

Keep up with the pensions revolution Reforms represent the biggest shake-up to our pension system for more than a century INDUSTRY VIEW

he changes made to our pension system in the UK over the last two years are revolutionary, not evolutionary. The recent Budget gave people more control over their pension savings than ever, but the auto-enrolment reforms that began in 2012 are probably more significant. Together, these reforms represent the biggest shake-up to our pension system for more than a century. Both these changes have been made possible by the current government’s move to increase the state pension for future retirees to a basic subsistence level that removes the ignominy of meanstesting and its effect of devaluing people’s private pension savings. Since the early 1960s around half the UK workforce have been in workplace pension schemes run by their employers, but the other half have not. Auto-enrolment will change that. Once all employers have been through the process of implementing auto-enrolment every employee in the country will have access to a

pension scheme at work. The larger firms have already been through this process and over the next few years it will be time for the smaller firms to do so too. Employees who are enrolled into workplace pension schemes are allowed to opt out if they wish, and there were fears that many would do so. As the large employers have implemented pension auto-enrolment, those fears have appeared to be groundless as few employees have opted out. Many have said this would be different as smaller firms reach their staging dates, and that young employees in particular would opt out once enrolled. The argument held by many has been that young people these days have unprecedented levels of debt and are struggling to get a foot on the property ladder, and that pension saving is unlikely to be a priority, even with a contribution from their employers. Our experience of working with mid-sized employers over the last six months or so suggests that is not the case. Indeed, our findings are that young employees are no more likely to opt out than employees of any other age, and that opt-out levels look set to remain low as the

smaller employers start rolling out workplace pension schemes. It looks to me that these important reforms will succeed, but I would like the government to consider yet more radical changes. While it is true that half of all employees have been denied access to pension schemes at work in the past it is also the case that today half the workforce are denied life assurance at work too. With employers of all sizes now having the benefit of modern middleware systems to operate their auto-enrolment

compliance and run their pension schemes, it would be possible to use such systems to run life assurance and other workplace benefits too. Cost-effective life assurance and the peace of mind that would come with it could be brought to nearly 13million employees and their families in this way. That, I think, would be truly revolutionary. Steve Bee is CEO at Jargonfree Benefits 020 3141 9391 www.jargonfreebenefits.co.uk

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Alexander defends public sector pensions reforms By Dave Baxter

PRIVATE companies may be awaiting a raft of big changes to the way pensions and pension schemes are managed, but equally big reforms are soon to reach the public sector. The government has big changes planned for the public sector, including increasing member contributions, making employees retire later but also making changes to the state pension. The government says changes to public sector pensions will “deliver better value for the taxpayer, while keeping the pensions offered to public service workers among the very best available”. Danny Alexander, the chief secretary to the treasury who has been involved in trade union negotiations over the proposed changes, has defended them, saying: “An excellent pension has long been part of the reward for a career serving the public. “It is only possible to ensure public service workers continue to have the best pensions available if we also control the costs in the long term.” The government believes it will be important to regulate the costs of public sector pensions to stop them from spiralling out of control and ending up with taxpayers. As part of this, it has come up with a system known as the employer cost cap mechanism, allowing schemes to set cost boundaries and adapt if they become too expensive. A paper on the employer cost cap mechanism explains: “All schemes must set a cap, expressed as a percentage of pensionable pay, and calculated in accordance with these directions. “If a future valuation shows that the costs of a scheme have risen more than two percentage points above the cap or have fallen more than two percentage points below the cap, action will be taken to return costs to the level of the cap. This may be achieved via adjustments to member benefits accruing in respect of future service, or adjustments to member contributions.” Changes to the sum employees pay towards or receive for their pension could be changed to adapt to new costs if “stakeholders” in the scheme agree to this.

Treasury secretary Danny Alexander inisists pension costs must be controlled

The government has stressed the need to make sure public sector pensions are financially sustainable, but some have warned that the reforms themselves could introduce new, unexpected costs. Michael Johnson, a pensions analyst, believes that the changes being brought in create an extra $9billion of costs which will have to be footed by the taxpayer. Johnson, who wrote a research paper on the subject for the Centre for Policy Studies, says the new system could be unsustainable because of this. He argues the introduction of a new flat-rate state pension, which will

come in at the same time as the public sector scheme reforms, will create large unexpected costs. He claims, for example, that the government will have to fund a $3.4billion increase in National Insurance contributions. He also says that Lord Hutton, who carried out a report on pensions which has instructed the reforms, misjudged the costs involved by using life expectancy figures which are now “six years out of date”, which could result in “a further $2billion a year in additional costs”. He notes that, as well as these unexpected costs, other issues will add to the bill – particularly

deficits between what is paid into schemes and what is taken out, which have been running up in recent years. “I think what we have to do is focus on cash flow,” he says. “There is a deficit between what is paid out and what is taken out.” The shortfall for the year 2005-2006 was $200million, but had grown to $5.6billion for 2010-2011. The Office for Budget Responsibility has projected this figure to rise to $15.4billion by 2016-2017. With the changes due in 2016, the government hopes to bring in a more sustainable system. But some are concerned about surprises.

Firefighters union takes action over retirement conditions FIREFIGHTERS in England, Wales and Scotland have clashed with the government over proposed changes to their pensions. The Fire Brigades Union (FBU) and the government have been at loggerheads over plans to raise the retirement age for firefighters from 55 to 60 and increase pension contributions. The latest phase in the dispute came over the May Day bank holiday weekend, when firefighters stuck to a ban on voluntary overtime. It followed three other bouts of industrial action last year. In a statement, FBU general secretary Matt Wrack said: “An overtime ban was observed solidly across all three nations and I’d like to congratulate FBU members on another impressive display of strength and unity. “This dispute has now dragged on over three years, and all firefighters will now hope the government can finally let reason prevail and present new pensions plans that are affordable, workable and fair. “But as the overtime ban and 12 periods of strike action show, firefighters remain as determined as ever to put the futures of their families – and our fire and rescue service – first.” But the government has been critical of the FBU and its “unnecessary strike action”. A spokesman for the Department for Communities and Local Government said: “This weekend’s unnecessary strike action shows the FBU is not serious about finding a resolution to this dispute for its members and will only serve to damage firefighters’ standing with the public. “The deal on the table gives firefighters one of the most generous pension schemes in all the public sector, and the proposals protect the earned rights of a higher proportion of members than any other public sector scheme. “Under the new scheme, a firefighter who earns £29,000 will still be able to retire after a full career aged 60, get a £19,000 a year pension, rising to £26,000 with the state pension.”

Business Reporter · May 2014

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Pensions

Auto enrolment signals payroll reform INDUSTRY VIEW There is an emerging shift in demand from traditional payroll providers to more sophisticated solutions providers encompassing payroll, tax and pensions management. The introduction of automatic enrolment has changed the face of pensions and revolutionised the role of payroll providers. So far, we have only seen the larger companies enrol their employees into schemes, but it is already clear that auto enrolment is not a pensions problem but, in fact, a payroll opportunity, says James Doyle of Cobia. He says: “There is now a widening gap between the various pension provider requirements for constant data and information, and the ability for payroll companies to deliver it. At Cobia, we employ a team of technical experts dedicated to bridging the gap between the traditional function of payroll and the increasing burden of pension requirements created by auto-enrolment.” As more businesses hit their staging dates the pressure on payroll providers will continue to increase. Those without the ability to talk to multiple pension firms through tailored data streams will simply not be able to service their clients’ needs. Payroll has often been seen as the unrecognised link in the pension value chain, but those able to offer bespoke solutions, particularly in the SME space, will be in a strong position to take advantage of auto-enrolment. When you consider the advantages of adopting salary sacrifice, the Pensions Regulator’s requirements, RTI responsibilities and the challenges created through auto-enrolment, you see why businesses recognise the greater need for broader solution providers. James Doyle is commercial director for solutions provider Cobia Ltd 0845 226 0580 www.cobia-uk.com

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Future imperfect? The government’s Budget reforms will certainly give pensioners a greater choice in how they manage their retirement. But at what cost? Dave Baxter reports

OTHING, the saying goes, is certain apart from death and taxes – but pensioners could soon have a much better idea of how long they might have to spend in retirement. This morbid revelation, it is argued, could be useful in giving people an idea of how much money they will need for their life after work. Pensions minister Steve Webb (below), who recently made the suggestion, defended it by telling broadcasters: “We might think perhaps about how long our grandparents lived, and, of course, in the generation since then people are living a lot longer. What we need to make sure is that people have up-to-date information so they can plan effectively.” He said that companies could check certain details in order to estimate how long someone could live as a pensioner. “We’re talking about averages, something very broad-brush,” he said. “Based on your gender, based on your age, perhaps asking one or two basic questions like whether you’ve smoked or not, you can tell somebody that they might, on average, live for another 20 years or so. People tend to underestimate how long they’re likely to live.” If death dates are the most unsettling development for the pensions industry, they are not the most significant. George Osborne announced huge changes to the

pensions industry in March, and from April 2015 savers approaching retirement will be allowed much greater access to their pension pots. Pensioners who have used defined contribution schemes will have greater freedom to draw money from their savings without being harshly penalised fi nancially, making them less reliant on the option of buying an annuity to secure a regular income until death. The proposals have attracted flak from some quarters. In his reaction to the Budget Paul Johnson, director of the Institute for Fiscal Studies, wrote: “There are clearly advantages to this liberalisation. It will allow people freedom to manage, and make choices over, their own affairs. It will likely increase the incentive to save in a pension.” But he added: “There are some genuine uncertainties about the effect of the policy. Most importantly, it will likely make annuities even more expensive for those who do want to buy them. “The market will become much thinner and there will be greater levels of adverse selection – only those expecting to live a long time will want to buy an annuity, thereby driving up the price. There will be losers from this policy. Without wanting to be seen as patronising, it is important to point out that increased choice could lead to more mistakes. “People at 60 or 65 are known to underestimate their own life

expectancy, and especially the likelihood of living to extreme old age. They may overspend early in retirement.” One fear is that, whether it is by helping out financially squeezed grandchildren, making poor investments or through generally excessive spending, new pensioners could blow their savings with years left to live, leaving them reliant on the state pension. The noise around this issue was loudest when the pensions minister said he was “relaxed” about how people spent their money – even if this meant splashing out on a high-end sports car. In an interview with the BBC he said: “If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.” But others claim that the risks have been overstated. Joanne Segars, CEO at the National Association of Pension Funds, says: “People are generally pretty sensible and the older we get, the more sensible we get. I think people will be pretty sensible. If people want to go and buy a Lamborghini then they need to know the consequences of that. She does add that people must be aware of certain issues, and that the free “face-to-face advice” George Osborne promised for consumers must be sound. “Quite clearly it offers consumers more choice and we hope it would help to improve confidence in pensions and saving for retirement, and encourage people to save more for their old age,” she says. “But I think with that extra

choice comes more responsibility to make sure they have made the right choices, so they’re spending their money over the long term. “We know people find it quite difficult to think about how long they are going to live after they stop work. I think the challenge is to [make sure] people can be guided through the processes and make sensible decisions.” Others are keen on the new freedoms afforded to consumers. Chris Hannant, director general at the Association of Professional Financial Advisers, says taking some cash from a pension pot could provide a useful emergency fund for pensioners to dip into at short notice. Tony Attubato, head of dispute resolution at the Pensions Advisory Service, adds: “For some people, using a lump sum might be quite sensible. It will vary from person to person. But it’s important that people have those conversations. It is unknown what effect the changes could have on different industries, but some suspect it could prompt investment in a number of areas as pensioners find themselves having more capital to play with. Attubato says: “I think there’s an attractiveness to property as a good investment. I don’t know the rights and the wrongs of it. I can see some people viewing their pension pot that way. A lot already look at ways to invest to provide themselves with an income.” The pensions industry itself has already been affected, in some cases quite dramatically. The days following the Budget saw shares tumble in specialist

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Q&A QA How the new pensions reforms will take effect

How did it previously work?

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annuity providers such as Just Retirement and Partnership Assurance, with fears people would ditch annuities as an option. In its interim management statement for the quarter leading to March 31, Just Retirement acknowledged the impact of the changes, noting that its sales had fallen to “around half of prebudget levels”. But this does not mean annuities will cease to exist. Segars believes the

changes could encourage innovation in the pensions industry, leading to a raft of new pension products. But she does not think the annuity is extinct. “Innovation could be one of the good things that comes out of this,” she says. “We have been pushing for innovation and a better deal for people to get goodvalue annuities and to give people the ability to shop around.” Hannant adds: “I don’t think it will

spell the end for annuities. I think some people mainly want the certainty. Most people still want some sort of investment that will yield a steady income. They may want to manage that, or they may want something off the shelf.” With much of the detail yet to come, it is uncertain whether people retiring in a year will be given a death date. But it is certain they will have much greater choice than before.

Before the changes, people who saved into a defined contribution scheme – in which a set amount is put aside by the employer – had three main ways of accessing their money. Those with less than £18,000 in total pension savings were allowed to use a process known as trivial commutation to take the whole amount as a cash lump sum. The fi rst 25 per cent of this was tax-free, with the marginal rate of income tax to be paid on the rest. Those with more than £18,000 were allowed to take two pensions worth up to £2,000 each as cash lump sums, but had to pay income tax on the fi nal three quarters of this. A second option – a process known as income drawdown – was to keep a pension invested in the stock markets and take a staggered income from this. Normally this income would be capped. The option of flexible drawdown – using income drawdown, but without any caps on how much you take out – was available to those with a pension income of £20,000 a year from other sources. The final and most commonly used option was to buy an annuity. This is a fi nancial product that converts a person’s savings into a guaranteed regular income until they die.

What is the situation now?

O n M a r c h 27 a number of temporary r efor m s k ic ked in, changing the

rules around how people access their pension savings. Trivial commutation will apply to total savings of up to £30,000 rather than £18,000. Those with larger amounts will be allowed to take three pensions worth up to £10,000 each rather than two worth £2,000 each. People will be able to take an increased amount using the income drawdown process, and flexible drawdown will be available to people with a pension income of £12,000 from other sources. This gives people greater flexibility to use their pension pots without resorting to an annuity, which can often pay out low amounts.

What happens next year?

In April 2015 these temporary changes will be replaced by new rules. According to these, from the age of 55 savers will be able to access all of their pension savings at any time. The first 25 per cent of this will be tax-free, and income tax will be paid on the rest at marginal rates. There is no cap on the amounts withdrawn, but savers will have to pay income tax on the amount taken out. On announcing the changes, Chancellor George Osborne told MPs that everyone on a defi ned contribution pension scheme would be given “free, impartial, face-to-face advice” about their options. People can still opt for an annuity if they want a stable, guaranteed income, but they now have greater choice.

Probably the biggest financial decision of your life – so you’d better get it right INDUSTRY VIEW

t was welcome news that from around 2015 those retiring from defined contribution schemes will be able to decide how they want to draw an income from their pension pot. However, increased choice and flexibility means that individuals need to understand the options. A recent survey conducted by WEALTH at work, a leading provider of financial education in the workplace, found that only 14 per cent of employers believe their employees are aware of the various options available to them at retirement. In addition, only 23 per cent believe their employees consider their total wealth as part of their retirement planning – in other words, other savings and assets, not just what is in their pension pot. Jonathan Watts-Lay, director of WEALTH at work, comments: “These figures are shockingly low. Therefore, it

is critical that companies offer financial education to ensure employees not only save towards their retirement but understand the various retirement income options available to them at the point of retirement. As more employees retire from DC plans it is becoming ever more apparent that having a comfortable retirement is not just about the level of pension contributions or the funds selected but what is actually done with the pension pot when retiring, as this can significantly impact the level of income which is generated.” Watts-Lay adds, “It is important to consider all assets, not just pensions when making decisions at retirement. Consideration also needs to be given to wealth held by partners, as this can influence decisions. It is important that, after what may have been a lifetime of saving, employees know what the options are and are able to access advice to ensure they are making the correct decisions. If

they do not, there is a danger that employees will end up in a poorer position than perhaps they needed to.” 0800 234 6880 www.wealthatwork.co.uk

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Putting you in control Q&A with Steve Patterson of Intelligent Pensions INDUSTRY VIEW

nder new government proposals, if you are a member of a personal or defined contribution pension scheme you can have unlimited access to the money by switching to a pension drawdown plan. If you’re approaching retirement this could be your opportunity to create the retirement lifestyle that you want, by shaping your pension income around your needs, rather than the other way round.

So what do the changes mean? The changes announced in the Budget provide freedom in retirement for those in a personal pension, making retirement much more attractive by putting you firmly in control.

Do you have any concerns regarding the announcements? The main drawback is running out of money and so

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it’s important to plan ahead so you can take the money confidently and enjoy your retirement.

Is the planning difficult? It can be complex depending on your circumstances, so you should find an adviser who specialises in it. At the heart of the planning process is understanding what your needs and objectives are. It may be that you have a mortgage to pay off, want to take the trip of a lifetime or are helping out other family members. You may want to make sure that in older age you have enough money for private care at home. Everyone is different.

How do you do this for your clients? We start with financial modelling, which gives a clear picture of how much money to take each year from your retirement plan and still leave enough for later years to provide a secure pension income through an annuity. It also takes into account your state pension, investment income, partner’s pensions and your estimated expenditure at each stage of retirement.

You mention an annuity. I thought this was the death of them? We don’t think so. Annuities still have their place for some people, in particular

those who are older or in poor health, when the income is much higher. They also provide security in later retirement.

per cent lifetime allowance tax charge if you have a large fund.

Is it done online?

I think what is really important is that the government is handing people the keys to their pension. They have acknowledged that people should be able to have flexibility and control and won’t spend it all at once. So embrace this opportunity and use all the options at your disposal to make the most of your retirement.

We provide online tools that give you a basic picture with more detailed analysis available through supported online consultations with a qualified retirement analyst to help model your retirement using different scenarios. Technology also helps with ongoing monitoring, which will now be more critical than ever. The amounts you need each year may differ according to your changing needs and tax position, assuming you want to avoid higher rates of income tax or the 55

Any final thoughts?

Steve Patterson (left) is managing director, Intelligent Pensions 0800 077 8807 www.intelligentpensions.com

Taking on the pensions challenge How a different approach meets this head on INDUSTRY VIEW

or many, the defined benefit problem remains… but that’s not to say it can’t be solved. It’s widely known that most UK defined benefit pension funds are in a sorry state, but some funds are taking on the challenge and adopting a different approach to pension funds to help solve the problems. To see

why, we need to take a step back and analyse how we got into this situation. UK pension schemes typically run three large risks – equities, interest rates and longevity. Since the beginning of this century, equities have returned 15 per cent over inflation, but the value of the liabilities are up 100 per cent due to falling interest rates. Longevity improvements have added to the woe.

Source: Cardano. The starting point of 100 per cent is for illustration only. Performance shown is for our clients following our solvency management approach. *Average pension scheme performance is estimated based on information contained in the Purple Book, published by The Pensions Regulator and The Pensions Protection Fund.

So, a few big risks went wrong, leaving many sponsors crippled with the burden of supporting their pension schemes. Sponsors have reacted by closing schemes, but this doesn’t address the legacy issue. There’s also been a scramble to offload the risk to insurers, but this usually makes sense only for well-funded, very mature schemes. In short, it’s a solution for those that need it least. The reality is that the average defined benefit pension fund is about 60 per cent funded on a risk-free basis, and needs to earn 2 to 3 per cent per annum on its assets above the growth in the liabilities. But to get these returns, most funds cannot afford the risks they have run in the past. All but the privileged few need steady, predictable results, not the boom/bust performance of this century. So how do you earn a decent return and reduce risk? 1. Diversify. Rather than relying on two or three large risks, take lots of different risks in small sizes. For diversification to work, the investments need to be genuinely different. This probably means accessing specialists, and accepting higher costs, but with more predictable results. 2. Use risk control tools. Extreme and unaffordable risks should be hedged. This makes the portfolio resilient to market shocks. 3. Adopt a time horizon that is more in tune with your needs (ie, two to three

years as opposed to 20 years). This means becoming more dynamic and responsive to the investment environment These principles might sound straightforward, but successful implementation is challenging. While large schemes can build up resources and systems in-house, the majority of schemes should seriously consider accessing a full time, well-resourced investment team who can implement these principles effectively. These teams are more commonly now known as fiduciary managers. Fiduciary management can offer excellent results. Our fiduciary management approach (the green line in the chart, left) can be compared with our estimate of the average scheme’s experience (the orange line). Since inception, the asset performance has outstripped the pace of liability growth by more than 2 per cent per annum (net of fees), whereas the average scheme has lost ground against the liabilities by 1 per cent per annum. More importantly, the outperformance has been achieved with around one-third the amount of risk, equivalent, in risk terms, to a portfolio of around 90 per cent indexlinked gilts/10 per cent equities. Richard Dowell is Head of Clients at Cardano r.dowell@cardano.com www.cardano.com

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Inspector Dogberry As often as it can, the pensions industry likes to remind people they should be saving for a comfortable retirement. But some groups may face a bigger challenge than others. This, at least, is the suggestion from recent research by Prudential, claiming that women are almost three times more likely than men to retire with just the state pension to rely on. The insurer’s annual “Class of” study, which looked at the

circumstances of people set to retire in 2014, found 20 per cent of women said they had no pension savings, compared to 7 per cent of men. The divide between the genders may have a number of reasons. Prudential found, for example, that women tended to have less income from company pension schemes than their male counterparts.

Even Dogberry, raised on the lights and noise of London, finds it hard to take his eyes off the twists and turns of Scotland’s independence debate as a vote approaches on whether the UK should remain united. While the inspector remains studiously neutral, he was interested to see a Department for Work and Pensions report warning that an independent Scotland would have a bigger task paying for its ageing population than as part of the United Kingdom. The report says an independent Scotland would “face a more acute challenge than the UK as a whole, both in terms of the demographic change, and its ability to absorb the impacts from a narrower tax base”. Will this make a difference to Scots at the ballot box?

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The research also noted an alarming trend, where both men and women overestimated the impact a meagre state pension could have on their income in retirement. These attitudes could be set to change, though. With pension reforms and a new focus on workplace schemes, the idea of retirement could gain a higher profile and new generations could become more interested in squirreling away money. This would be the best possible outcome – for men and women.

Dogberry gets the appeal of self-employment. What’s wrong with chasing your dreams, setting your own hours and liking your boss? But the self-employed seem particularly vulnerable when it comes to pensions. The Resolution Foundation, a UK think tank, argues in a recent report that, with the number of people working for themselves surging by 650,000 since 2008 to reach 4.5 million, self-employment has become “one of the stories of the recovery”. But it also frets that the nation’s freelancers and entrepreneurs are a vulnerable lot, with only 30 per cent of self-employed people contributing to a pension compared to 51 per cent of employees.

By Matt Smith, web editor

u Editor’s pick Pensions Blog www.nowpensions.com/blog The NOW: Pensions blog provides regular news and insights into the world of UK pensions, including reactions to proposed government policy changes, analysis of the Budget, and advice for companies of all sizes that plan to offer pension packages to their employees. There’s also a fairly large archive of past posts to explore.

PwC Pensions Blog

Saving the day? With the credit crunch still fresh in people’s minds, the financial services sector is not massively popular. But an industry-wide project to get more people saving – for retirement, among other things – may help it win back fans. The Tax Incentivised Savings Association, a trade association working with financial services firms and others, has launched what it dubs a “savings and investment policy project” to move people away from a culture of debt. It calls for new regulations and services, as well as a shift in UK culture, in order to make sure that the UK becomes a nation of savers

Twitter: @dogberryTweets

and “encourage greater personal financial security”. It could be a while until banker bashing dies down – but this is a promising start.

Ros Altmann

http://pwc.blogs.com/pensions

http://pensionsandsavings.com

Keep up with pensions analysis and advice from the experts at professional services firm PwC at this blog. Regular articles and webcasts tackle the biggest issues facing the UK pensions sector. Recent articles include a look at local government pension schemes and PwC’s predictions for 2014.

Ros Altmann is an investment banker who is an expert on pensions policy. She has also spent time as an academic at UCL, LSE, and Harvard. On her blog, she writes about a range of topics related to UK pensions, including policy reform, tax issues, and the charge cap’s importance for workers.

Pensions Talk www.pensionstalk.co.uk

Pension Tracker (FREE – Android)

Public Sector Pensions Calc (FREE – Android)

Keep track of UK personal pension plans with this app, which provides information through easy-to-read graphs.

Pensions info for the fire brigade, NHS, police, teachers, and more. Also features built-in calculations for common queries.

The Pensions Talk blog, run by Allen & Overy LLP, provides a space for a range of experts to share their pensions experiences and discuss the pressing matters facing the sector today. Recent articles tackle the Budget, taking pensions issues to court, and things you should know as a pensions trustee.

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Don’t let the government make a profit out of penalties It’s £500 per day for employers with 5-49

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Troubles victims should receive ‘conflict pensions’, claims Northern Ireland pressure group

George Osborne at the Royal Mint earlier this year. His 2014 Budget included radical pension reforms

Public now more receptive to saving after pension reform By Dave Baxter

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MORE than a quarter of people could take saving for a pension more seriously after the reforms announced in this year’s budget, according to a survey. The Spring Workplace Pensions Survey 2014, released by the National Association of Pension

Funds (NAPF), found that 28 per cent of consumers were more likely to either start saving or save more into a pension following the changes announced in March. The planned changes include giving people more flexibility with their pension pot by no longer obliging them to buy an annuity. The pension reforms appeared to have had an

effect on younger people, with the survey finding 54 per cent of those aged between 18 and 24 were likely to save for a pension following the budget. It also found that 42 per cent of those with a combined household income of less than £14,000 a year felt more attracted to saving for a pension after the announcements.

Three per cent of respondents said they were less likely to save into a pension or would stop saving altogether. The survey also found that 23 per cent thought they would need to save more than £150,000 to provide for a comfortable retirement. The results are based on responses from 1,009 employed people.

PENSIONS should be granted to anyone who has been severely injured in the Irish troubles, according to a group representing victims of the conﬂict. The Commission for Victims and Survivors for Northern Ireland, which aims to support those affected by the conﬂict, has released a report, Dealing With The Past, recommending how to deal with the aftermath of the Troubles. One of its main four proposals has been to introduce a pension for victims severely injured in the Troubles. The report reads: “It is imperative to deal with these issues imminently, as time is running out for a lot of victims and survivors to get what they need in terms of truth, justice, acknowledgement and reparations.” Full details on how the pension would work are yet to come, but the report argues that a “conflict-related pension” should be considered for those seriously injured. Politicia ns have been reluctant to commit to any proposals before fuller details

have been laid out. There has also been controversy over who can be classed as a victim. The report, which has come as the result of a consultation with the survivors of the Troubles, bears a number of similarities with the Haass report, which came out late last year after talks between Northern Ireland’s political parties, chaired by former US diplomat Richard Haass. The report reads: “The ﬁrst requirement of any comprehensive treatment of the legacy of the past must be to provide for the social and health needs of victims and survivors; they must necessarily command a prominent place in matters related to the past.” Northern Ireland’s past was thrown into the spotlight with the recent arrest of Gerry Adams, reigniting the debate over the legacy of the Troubles. Shaun Woodward (left), who served as Secretary of State for Northern Ireland from 2007 to 2010, recently wrote that the British and Irish governments should propose how to tackle the past, and then put this to a public referendum.

Britain’s love affair with property looks set to extend to SIPPs Consumers have greater control over retirement planning INDUSTRY VIEW

t has been nearly 25 years since then-chancellor Nigel Lawson announced legislation in his Budget that would pave the way for Self-Invested Personal Pensions (SIPPs) to be born. Fast forward to today and more than one million consumers now have a SIPP, allowing them (and their financial adviser, should they have one) greater control and flexibility for their retirement planning. Interest in SIPPs really took off in 2006, sparked by Gordon Brown announcing he planned to allow SIPPs to invest in residential property – “buy to lets for pensions” as it was known. Those plans were withdrawn at the last minute so it would be easy to overlook the fact that SIPPs have always been able to invest in another form of property – commercial property. Examples of commercial property include retail outlets, office buildings, agricultural land and medical, dental and veterinary surgeries. The UK bought and sold more than 100,000 commercial properties in 2013*. That may seem a relatively small number compared with the one

million-plus residential properties transacted in the same year, but the number is growing. More and more of them are being bought by investors using their SIPPs (Suffolk Life bought more than 500 properties on behalf of SIPP investors last year) and there are some compelling reasons why. The UK’s love of property – a physical, tangible asset that we can see, touch and walk inside – shows no sign of diminishing. Property ownership remains higher in the UK than on the continent. However, there are more substantial factors behind why more and more SIPP investors are considering commercial property as an investment for their SIPPs, the primary reason being tax. When invested via a SIPP the rental income received from a commercial property is free of income tax, a feature that normal buy-to-let investors will doubtless recognise as highly beneficial. Like residential investors, SIPP investors can also borrow in order to purchase a commercial property although the amount is limited to 50 per cent of the net pension fund value. When the property needs maintenance, it can be paid from the SIPP fund itself, as can insurance, meaning that meeting these costs is

also tax efficient. Finally, when the SIPP comes to sell the commercial property, any gains in value will also be free from capital gains tax. It is clear that commercial property presents a genuine option as an investment towards retirement. But there are some potential downsides too. There can be substantial costs involved in buying and selling property, and property is not a liquid asset – it can take a long while to sell to realise cash. Investors must also be cautious about investing too much of their retirement savings into a single asset and, as with residential buy-to-lets, the property can be at risk should any loan payments not be made, a risk heightened should the property be vacant of a tenant. Investors should weigh up the pros and cons together, and if in doubt always seek professional financial advice. Greg Kingston (left) is head of marketing & proposition, Suffolk Life (part of the Legal & General Group) 0870 414 7000 www.suffolklife.co.uk * Source – HM Revenue and Customs UK Property Transaction Statistics April 2014, properties valued at £40,000 and over.

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Report: one in four would reduce pot to cash in early SOME people would be willing to sacrifice the amount of state pension money they receive if they can have more of a say over when they start to receive, a study has shown. The PwC report One Size Fits None, based on a study of 2,000 people, found that one in four respondents would want to receive their state pension earlier, even if meant the weekly amount being cut. The report argues for a “state pension window”, giving people more flexibility around when they start to receive money, albeit with an adjusted amount. An introduction reads: “ T h i s paper proposes a

complementary approach which builds on current policy and thinking, suggesting that one way to tackle people’s appetite for more flexibility on when they can access their state pension is to dispense with the concept of a single state pension age and instead introduce a state pension window. “This would be the final essential piece of the government’s ‘freedom and choice in pensions’ proposals by also allowing people to choose when they receive their state pension between a range of ages, and receive an adjusted amount for the life of their pension, based on their chosen start date.

“The current rigid state pension system, where the age people receive their state pension is set by the government, doesn’t provide the flexibility people want and need.” The study also argues that making state pension administration more flexible could be in line with recent proposals to increase people’s choice around how they use a private pension pot. It reads: “Providing more flexibility in the system would match the reforms to workplace pensions, following the government’s announcement in the Budget that it will no longer require people to buy an annuity at retirement.”

Companies still at risk from unwieldy employee schemes, claim experts

By Dave Baxter

UNWIELDY pension schemes are less likely than before to bring down private businesses, but could still divert them from potential investment and growth, a specialist claims. In previous years there have been concerns about troubled companies being closed down by regulators in order to pay for expensive pension schemes – creating a sense of anxiety around whether firms can risk taking the schemes on. But Hugh Nolan, chief actuary at insurance group JLT, says that this is less of a problem than a few years ago, though there are still are still arguments for and against private pension schemes. “I think that we haven’t seen so many companies being forced out of business as has been feared,” he says. “That has partly been because the economy of late has been a bit better. “One big thing that has changed is that the Pensions Regulator set a new objective in the autumn statement of 2013, saying there has to

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be regulation for the sustainment of employment when setting contribution rates. “It was a very clear sign for more thinking about the short-term impact and the economy, when companies need a bit of breathing space. “They have been agreeing longer periods to pay those debts down. Companies say, ‘Here’s our minimum contribution, and if our balance improves we can pay more’.” Nolan believes pension schemes are now less likely to pose an existential threat to businesses – but warns that they could distract them from investment and have a detrimental effect on the economic recovery. “People are putting money into the pension scheme,” he says. “That’s going to divert them from investment in the business. “The more money you put there, the less you are spending on growing the business.” UK arms of international companies, he says, may also have difficulties persuading their parent organisations to provide funding for pension schemes, particularly if they are not conventionally used in other countries. He says: “If a UK operation has a parent company in Singapore or Germany, they often don’t understand the detail. “When this is going back to the parent company and the UK operation needs more money [for a pension scheme], the parent company doesn’t understand. “So when the parent company has to choose where they build their new company and it’s between the UK and Germany, that may make a difference.” But he is optimistic that, because of different economic factors, pension schemes will become better investments for many companies. “There will be a rise in inflation levels over the next few years,” he says. “It seems perverse, but pensions are linked to inflation, so you could get investment returns.” With the economy improving, it could well be a good time for pre-existing workplace pension schemes.

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Choppy waters in your retirement? INDUSTRY VIEW

ollowing the proposed changes announced in the March Budget, people now need some time to consider what the best retirement options are, and it’s important that these decisions aren’t taken lightly. There are already a number of alternatives which can continue to offer security and peace of mind with added benefits. Unit-linked guarantees such as Aegon Secure Lifetime Income plan, for example, provides you with a guaranteed income for life. Different to an annuity, it also provides you with opportunities to lock in higher income through any potential investment growth – offering a different kind of flexibility. If you’re concerned that falls in investment performance or low

interest-bearing accounts could impact your retirement income, the Aegon Secure Lifetime Income plan can offer you an alternative way to fund your retirement. It guarantees your retirement income, while also allowing the opportunity for investment growth and potential income growth. Your basic income is guaranteed, but it could go up. And it will never go down. We don’t offer a guaranteed fund value so you could get back less than your original premium. Taking additional withdrawals will reduce the guarantees proportionately. Have a look at the example below to see how Joe’s guaranteed lifetime income increased through the monthiversary feature. For more information contact your financial adviser or visit www.unbiased.co.uk

Joe’s story Mr Joe Jones – 66 years old – invested £100,000 in an Aegon Secure Lifetime Income plan in June 2012. He received a guaranteed income of £3,900 each year for life based on his age at the date he started to take income in August 2012 (age 67). We looked at the fund value on the plan anniversary – 28 June 2013 – and looked back over the last plan year to see what the value of the fund was on each of the corresponding monthly anniversaries (monthiversaries). For Joe this meant that the value in April 2013 was the highest monthiversary and we automatically locked this in as his new income base – £111,793. This meant his guaranteed yearly income increased from £3,900 to £4,359.91 – an increase of £460 or 11.79 per cent. Locked -in value

£112,000 £111,000 £110,000 £109,000 £108,000 £107,000 £106,000 £105,000 £104,000 3 3 3 2 3 2 3 3 2 2 2 2 01 01 01 01 01 01 01 01 01 /201 01 01 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 4 3 1 2 6 8 5 9 7 1 2 0 /0 /0 /0 /0 /1 /1 /0 /0 /0 /0 /0 /1 28 28 28 28 28 28 28 28 28 28 28 28

Key facts • Joe received 12 opportunities each year to lock in gains to his income base • His fund value on 28 June 2013 was £104,328.28 and £111,792.63 in April 2013 - the highest monthiversary

• Joe’s guaranteed lifetime income increased from £3,900 to £4,359.91 (3.9% x £111,792.63)

• He still has access to the capital should he need it

Business Reporter · May 2014

Pensions

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Giving clients complete control over investment choice Leaders of the pack when it comes to SSAS INDUSTRY VIEW

mall Self Administered Schemes (SSAS) have been around for many years. The explosion of SIPPS in 2006 seemed to make SSAS less popular. One firm, Pension Pracititioner.Com, went against the SIPP trend, and launched the first simple, low-cost SSAS product directly to small business owners in 2008. The approach at the time was groundbreaking. It led Pension Practitioner to be the fastest-growing SSAS operator, outstripping the growth of mainstream SSAS operators for three years running, according to industry statistics compiled by Pensions Management. Its SSAS offering allowed the client to be both the trustee and beneficiary of a pension scheme for a low, fixed cost. This, according to Dave Nicklin at Pension Practitioner, “gives the client complete control over investment choice and financial management of their pension affairs cost-effectively”. Most of Pension Practitioner’s clients use

SSAS to pay contributions to a scheme bank account, thereby getting a tax deduction and reinvesting part of their contributions into their own business. Nicklin explains further how this works. “Quite simply, you would not invest your pension into a business if it was either ailing nor good for the money,” he says. “The same approach applies on investing into a business you are connected to; you need to protect your pension fund first and be sure that your business can repay the loan on good commercial terms back into your pension. For this reason your SSAS will have a first charge on security.” The investment into your business from your pension can be in the form of a cash loan. It can be used in a number of ways such as: • Freeing up cash flow for your business • Consolidating existing debt at a lower interest rate • Increasing purchasing power • Expanding into new product and service sectors

• Acquiring commercial property and land As the loan is paid directly from your SSAS bank account into your business account, the interest you charge your business is repaid back to your pension, which is a preferable option than borrowing from your bank. You will get a tax break on the interest you charge on the loan. Money built up in other pensions can be transferred in to your SSAS bank account. Pension Practitioner has a panel of regulated advisers who can give you guidance on whether it makes financial sense to transfer in the cash value of those pensions to your SSAS. The idea of the Pension Practitioner SSAS is to enable you to grow a pension you have financial control over, in

conjunction with your business, very tax efficiently. As an SSAS is ring-fenced from your business’s creditors, those business creditors cannot come after the SSAS if your business fails. In the opinion of Pension Practitioner: “As part of a nation of shopkeepers every small business owner must have an SSAS if they wish to grow their business and shelter their assets tax-efficiently.” The team at Pension Practitioner can be reached on Freephone 0800 634 4862. info@pensionpractitioner.com www.pensionpractitioner.com

Get the most out of your pension An expert guide can help you find the right path INDUSTRY VIEW

oney worries can easily destroy the dream of a comfortable retirement. That’s why everyone heading towards retirement must carefully consider how to squeeze the most out of their pensions. Reforms announced in the Budget will, from next year, remove the barriers to retirees taking cash lump sums directly from their pension funds. With this extra freedom comes extra responsibility. Extracting more from a pension will be possible, but will it be wise? There are likely to be tax implications and any money taken early will mean less later on. While the reforms may smooth the financial transition into retirement, we shouldn’t underestimate the scale of the change. Once a regular wage ceases, most people experience a sharp drop in income and become far more cautious about how much they are spending and how much risk they are willing to take with their financial assets. Average life expectancy predictions are little help at an individual level where real people need income

payments to survive as long as they do. Older people also have to take into account other factors such as providing for partners, dealing with debt, inflation, inheritances and care costs. While most of us recognise the danger of running out of money in old age, there is also a parallel risk of being overcautious and having a far lower standard of living than necessary. One of the reasons annuities have been a cornerstone of retirement income is because they take away the worry that the annuitant is spending either too much or too little. Popular perceptions of the annuities sector have suffered from the fact that many pension savers have taken the first offer from their own pension provider instead of shopping around for a competitive income on the open market. The result is that eight out of 10 missed out on a better deal. The losses were highest among those who could have generated a higher return due to health problems or lifestyle factors. As a leading provider of individually underwritten annuities – income plans that reflect the individual’s own health and lifestyle – we believe retirees will continue to value guaranteed income. With the state pension as a foundation, an annuity can deliver the next tier of secure income, protected from volatile financial markets or living longer than expected. Once a personal minimum income requirement has been secured, any remaining pension fund can be invested, spent or given away.

It’s sobering to think that some people who saved for 30 years into a pension that may have to last 30 years perhaps thought for less than 30 minutes about how to get the best from the fund. It has been far too easy to make hasty and uninformed decisions. From next year the government’s plan is to offer all retirees free and impartial guidance at retirement to help them understand the responsibilities, risks and options. However, this will fall far short of the personalised recommendations provided by professionally qualified and regulated financial advisers. It’s been heralded as an exciting new world of retirement opportunity but only the most intrepid should venture there without a professional guide. Stephen Lowe (left) is group external affairs and customer insight director at Just Retirement +44 (0)1737 827 301 press.office@justretirement.com

Business Reporter · May 2014

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Pensions

A policy that protects With the right insurance you don’t have to worry about possible liabilities INDUSTRY VIEW

rustees of occupational pension schemes have an increasingly difficult job to do with the expansion of the regulatory and legislative burden following the Maxwell debacle. This is also borne out by the growth in claims that demonstrates that errors can occur in even the best managed schemes – particularly in the increasingly dominant environment of defined contribution schemes. Liability for breach of trust is a personal liability, and a trustee is liable to both the scheme beneficiaries and to scheme creditors. The risk is potentially greater after a winding up, when there may be missing beneficiaries or other contingent liabilities but no assets. A trustee or

trustee director is also potentially at risk of having to pay a civil fine for breach of pensions’ legislation. A trustee’s personal exposure does not cease when they retire and their post retirement situation may make them particularly vulnerable. Problems in pensions also often take a considerable time after the event to materialise. It is important, therefore, that the position of retired trustees and pension managers is properly protected and that lifetime insurance cover is available to provide this protection. Many trustees will have the benefit of clauses within the trust deed and rules exonerating them from liability, and in many instances, an indemnity may be given by the scheme or the sponsoring employer company. However, it is not always appreciated that such clauses are subject to statutory limits and other restrictions. Insurance plays an important role in protecting trustees, pension scheme assets and the balance sheet of the sponsoring employer. By purchasing a properly drafted insurance policy, trustees can be confident that they have protection against the liabilities that might

arise in performing their duties, while also giving members comfort that their interests are being looked after properly in preserving the scheme assets, which is particularly important today when deficits are common. Jonathan Bull is executive director at OPDU Limited jonathan.bull@opdu.com www.opdu.com

Instant flexibility from Budget changes Giving you greater control of your pension INDUSTRY VIEW

here has been much discussion regarding the wide-reaching proposed changes to pension legislation, but there are some immediate opportunities which can already be taken advantage of. The most significant of these involves flexible drawdown, which allows you to take as much or as little of your pension out as income immediately. There are some rules surrounding this, one of the most significant being that you must have a secured pension income of £12,000 per year. This is a reduction from the previous limit of £20,000.

This may not seem a great deal, but in order to purchase a secured pension income of £8,000 per year at age 65, you would currently need a pension fund of around £130,000. In a survey conducted by Talbot and Muir, one in five financial advisers believes they have clients who would now qualify for flexible drawdown, whereas previously they did not have enough secured income

and were unable or unwilling to buy the extra needed. The basic state pension is now nearly £6,000 per year, so if you take into account your state second pension and any personal or company pensions, you are likely to already be able to use flexible drawdown without having to wait for the consultation on the new rules and the passing of legislation, immediately giving you much more flexibility and control of your pension. Also, if you have a number of smaller pension pots you are now able to take three of them up to £10,000 each as a cash lump sum with no reference to other remaining pensions. For those whose total pension pots are worth up to £30,000, there is also the option to withdraw the whole amount. In both these circumstances income tax is paid on 75 per cent of the value of the funds, while 25 per cent remains tax free. Claire Trott (far left) is head of technical support, Talbot and Muir 0115 841 5000 www.talbotmuir.co.uk