Month: March 2018

New Guidelines on Pension Transfers – and how to spot a great adviser!

HOT OFF THE PRESS

Your pension is a vital part of your financial future, especially if you are considering transferring from a defined benefit to defined contribution scheme.

It’s fair to say that, as Defined Benefit (DB) pensions and other safeguarded benefits generally provide a guaranteed pension income, most consumers will be well advised to stay put.

But with the ever-changing pensions environment, bought about through the introduction of the pension freedoms, that provide more options to access you pension savings, there is an growing demand to access pension savings.

As a result of this desire to access pensions, earlier this month the Financial Conduct Authority (FCA) issued new rules and guides regarding how advice should be provided to you on pension transfers. These are designed to make sure that advisers fully consider the client’s circumstances and properly consider the various options, where clients may be considering giving-up safeguarded benefits.

Although these guidelines are aimed at firms advising on pension transfers and those advisers acting as pension transfer specialists, I always feel that clients should know just what great advisers are aiming to achieve. As it helps you distinguish between a good adviser and a great adviser.

So what does great advice look like?

Apart from the obvious increase in the rigor around qualifications needs by advisers to provide advice in the pensions transfer marketplace, the FCA has also provided best practice guidelines for providing advice.

Quite rightly the FCA maintain that any adviser should start from the assumption that any form of pension transfer will be unsuitable for their client. This starting point has come from the high proportions of unsuitable advice the FCA have seen in supervisory work.

This assumption that a transfer is unsuitable is actually a smart position to take, as it means that the adviser then has to demonstrate why a pension transfer is the right thing for their client.

The FCA go on to highlight a need for better consideration regarding how pension transfers should be paid for by clients.
With this in mind, the new rules and guidance will include the following:

  • All advice on pension transfers must be personally recommended by the adviser
  • There should be a greater clarification of the role of the Pension Transfer Specialist (PTS) when checking advice being provided
  • Greater analysis to support the advice being given – The FCA aim to replace the current Transfer Value Analysis (TVAS) requirement with a new requirement to undertake an ‘appropriate pension transfer analysis’ (APTA) of a client’s options. There should also be a prescribed Transfer Value Comparator (TVC) that indicates the value of the benefits being waivered, along with the true cost of purchasing the same income in a defined contribution environment
  • There should be a consistent approach applied to pension opt-outs where there are any potential safeguarded benefits
  • The adviser should consider the proposed destination of the transferred funds, including both the proposed scheme as well as the investments being proposed within that scheme. This review should take into account the client’s attitude to transfer risk, as well as their attitude to investment risk

This also means that where a firm/adviser is assessing the client’s attitude and understanding of the risks involved in giving-up safeguarded benefits in exchange for flexible benefits, then they should consider the following:

  • the benefits and the risks for staying in the original safeguarded scheme
  • the benefits and the risks of transferring out to a flexible benefits scheme
  • the attitude of the client regarding certainty of income throughout retirement
  • if the client is likely to want unplanned access to the funds and the associated impact of that on the funds long-term sustainability
  • the client’s attitude to any restricted access of their funds in a safeguarded benefits scheme
  • their client’s attitude to managing investments themselves, or to paying for them to be managed in a flexible benefit scheme.

Knowledge is power – and we’re here to help answer your questions

All I ever aim for in my blogs is to share knowledge with you, give you the heads up on important changes coming your way. If you are considering a pension transfer, then there is nothing more important on the immediate and predictable horizon than these changes.

They are being introduced right now to protect you and your investments and by reading through the proposed changes I hope that it has given you a greater understanding of pension transfers, as well as better enabling you to make the right decisions regarding your own circumstances.

5 things to do before the 5th

Some tax year tips!

As 5 April approaches, along with the cut off for any potential tax savings to be gained this financial year, now is the time to take a quick look at your finances and make sure you are as tax efficient as possible.

After all, you really don’t want to wake up in a bad mood on the 6th realising you’ve missed some golden opportunities to save money!

So my top five tips are as follows:

1. Make the most of your capital gains tax allowance

Your Capital Gains Tax (CGT) allowance is a simple way to reduce any tax liable on the sale of certain assets, especially at this time of year as we approach the end of tax year.

Everyone has an annual £11,300 CGT allowance. Which means that you can sell assets that are liable to CGT without having to pay any tax on the first £11,300 of gains. There are certain assets that are exempt of any CGT liability (such as your main home, car and ISAS.)

Now is the perfect time of year to consider the way in which you dispose of your assets. As you cannot carry your CGT exemption over to the next year, you can stagger the way in which any tax becomes liable. For example, if you are planning to sell shares and are likely to make £20,000 from the proceeds, then you can take advantage of this time of year and sell them in two batches, either side of the 5 April Tax year end.

Married couples and civil partners should consider asset transfers between each other, in order to minimise their tax liability on future capital gains. As the CGT allowance is an individual one, married couples and civil partners are able to cover up to £22,000 of gains between them once they have shared ownership of joint assets. Just make sure that any transfers are genuine, outright and unconditional with no strings attached.

2. Use your seasonal bonus wisely

Any year-end bonus payment you may receive is an ideal way to top up your pension in order to make sure you are taking full advantage of your allowance. Especially as any allowance not used in a particular tax year is lost forever.

If you are able to make a pension contribution using your bonus sacrifice, then the boost your pension would receive could be worth almost double the net amount you would receive if you took the bonus as cash.

3. Keep your child benefit

Introduced in 2013, many families have been hit by the “high income child benefit charge”. The claw back is at the rate of 1% of the amount of child benefit for every £100 of income over £50,000. Which means that when your adjusted net income hits £60,000, you effectively lose all of the benefit.

Anyone approaching, or earning above £50,000 will start to see a reduction in the child benefit allowance if their bonus takes them over the £50,000 threshold.

So putting any end of year bonuses into your pension could also help avoid crossing that threshold and seeing your child benefit reduced.

4. Gift your way out of an Inheritance Tax Bill

It’s likely that, upon your death, your estate will be subject to Inheritance Tax (IHT). Currently charged at 40% on anything over £325,000.
You can however use your annual exemption to make £3,000 worth of gifts every year, without being liable to IHT.

You can also carry over any leftover annual exemption from one tax year to the next, but the maximum figure is £6,000 per year. You can choose to gift smaller items too, including £250 each to as many individuals as you wish. Wedding and Civil Partnership gifts are also tax exempt up to £5,000 to a child, £2,500 to a grandchild or great grandchild and up to £1,000 for anyone else.

5. Your ISA allowance is there – so use it

There are just a few weeks left to use this year’s ISA allowance, as the amount you are allowed to invest in ISA’s resets on 5 April, with no possible way of you carrying over that tax break into the next financial year. In short – if you don’t use it, you lose it!

So any UK resident aged 18 or over, can invest £15,000 this tax year. You can split this between one Stocks and Shares ISA and one Cash ISA, or you can just invest in one type.

If you are aged 16 and 17 you also have a £15,000 ISA allowance (to be used in a Cash ISA only). And let’s not forget that parents can also put up to £4,000 into a Junior ISA for each of their children under the age of 18. Either way that’s a big tax saving sitting there waiting to be taken advantage of.

As always, if you need some more information, or want to discuss your personal circumstances, please contact us at Bridgewater Financial Services and we’d be delighted to help save you money!