New Year Round Up – 87 Days until Pension Freedom
Happy New Year to all our readers. I had a break from our regular email updates leading up to the festive break, so this note is to catch up on a few late entries from the end of 2014, a review of where we are today and a look forward to the first quarter of 2015.
The Autumn Statement by the Chancellor held a few Christmas treats. The changes to Stamp Duty being a big headline. Another and probably more relevant, was the introduction of an inter spouse transfer of ISA on death. This does not do anything for IHT but is welcome none the less and allows widows and widowers to maintain the tax efficient status of their spouses ISA on death.
It was also confirmed the NS&I pensioner bonds would be available in January, but we still do not have a date and the NS&I website has no further details as yet. The one year and three year bond look attractive on first glance paying 2.8% for a 1 year bond, and 4% for a 3 year bond.
The bonds are limited to £10,000 per person and you must be over 65 to apply. They only pay interest at the anniversary and do not provide an income option. For tax payers, consideration has to be given to the fact these rates are gross and are subject to tax. An ISA could still be better?
Death benefits featured again, in an extension to the new tax breaks of pension’s freedom. At the Conservative Party conference it was announced funds in money purchase arrangements whether vested or not would be tax free in the hands of beneficiaries on death after April before the age of 75. This was extended to annuities in payment in the Autumn Statement. This is a welcome change.
It still leaves those “gold plated” defined benefit schemes at odds, as widows pensions and lump sums on death under these arrangements will still be subject to tax, thus creating an anomaly.
The Pensions Freedom legislation is in place for April 6th, only 90 days away and tweaks are continually being made. The latest to emerge, relates to Tax free Cash from occupational pension schemes. Some occupational schemes offer a higher entitlement to tax free cash than the standard 25%, but do not offer pensions flexibility. Under previous rules this higher entitlement to tax free cash would have been lost if benefits were transferred away to a pension which offered flexibility. The good news is that the tax free cash protection rules have been temporarily relaxed and funds can be transferred in their entirety and the higher entitlement retained as long as tax free cash is being taken straightaway.
This is a big change and means many people who may have had to forgo a higher entitlement to tax free cash in order to gain flexibility no longer have to.
It seems though there may be trouble ahead for the Governments flagship Free Pensions Guidance service. This is a free service offered by TPAS on the phone, or by the Citizens Advice Bureau on a face to face basis. No firm details are still available even though we only have 90 days to go.
Worryingly, according to a job advertisement posted by Citizens Advice, the company will pay between £18,000 and £24,000 for pension guidance guarantee agents, who will be the first point of contact for consumers. The advert said the role required strong numerical skills and customer service experience, but said ‘some knowledge on pensions issues would also be an advantage.’ Fantastic! So they are only just recruiting people to deal with tens of thousands of potential enquires about one of the most complex areas of financial planning. To deal with a person’s life savings, who may well base their future financial well-being on this conversation, and they do not need pension’s experience?
It will be interesting to see how this pans out. Compare this to a regulated financial adviser, who has to have a minimum level of qualifications, undertake ongoing professional development, be registered and authorised by the FCA, carry professional indemnity insurance, and follow a strict code of conduct.
This is surely a very dangerous step and massively underestimated by the powers that be.
There again with Pensions Minister Steve Webb continually spouting his latest musing in the media, it’s not surprising things end up in mess. His latest idea is to allow people to sell their annuities for cash which the media then trumpet. There are so many potential issues with this, its hard to believe he announced this in the press. We can only think it’s a political vote grabber with actually little substance and virtually no chance of this seeing the light of day. For starters, who wants to buy the annuities? What value do people get? What are the tax consequences? What happens when the annuitant dies and the pension stops? Does a spouse still get their share on death? How is the transaction done, and many, many more questions. All we can suggest for anyone who might be eyeing this up, is do not hold your breath.
In terms of the current state of play, we have again been reminded of the volatile state of equity markets. Many pension funds have some exposure to equity investments to some degree. Some a little, some the majority, maybe knowingly or not.
We have seen the flagship FTSE 100 fall some 6% in the last month. For a pension fund of £100,000 invested in a FTSE tracker fund this has wiped £6000 off the value. This is largely due to the impact of Oil prices, with a bit of Greek turmoil thrown in.
The price of Oil is a hot topic, and people are benefitting at the pump, but this probably dwarfed by the losses in pension funds as noted above.
Oil now sits at just over $50 a barrel. Some of you may remember it was not that long ago Oil was $140 a barrel. How times change. In fact it fell from $140 a barrel in late 2008 to close to $40 a barrel in 2009 before rising again to $120 in 2011 before its recent decline. Black gold?
Gold also has been pretty stagnant. Again not long ago through 2011 and towards the end of 2012 gold was over $1800 an oz. and tipped to go to $2000. It is now languishing at $1200 an ounce. Gold was once seen as a safe haven in times of trouble, but times change.
The UK gilt market last month returned to its peak following a brief re-spite during the summer months. A 15 year gilt yield of just over 2% is simply not sustainable and its likely we will see capital values falling through this year.
Whilst most analysts will suggest the UK equity market is good value, and trailing our cousins in the US, equity markets do not like uncertainty. With a General Election around the corner this is bound to cause uncertainty in abundance. It will be an interesting year ahead for investment markets.
New Year’s resolutions may not be for everyone. But 2015 may just be different, especially in the pension’s world.
For anyone in an unfunded public sector pension fund it is very simply a now or never decision if they want to look at a transfer to the defined contribution regime and make use of the flexibility it offers. The door shuts firmly on this option as of 5th April 2015. But if this thought is preying on someone’s mind they need to take action right now. These pension transfers can easily take 3 months and if action is not taken right now, there is a significant risk that time will simply run out. You have been warned!
The Daily Mail ran an article, what for them was a reasonable article, over Christmas titled “Give your pension some attention in 2015.” It does cover a lot of the issues we have written about over the last few months and does go to prove the topical nature of pensions currently.
With all the changes about to happen, market volatility, changing products and the Pension Tsunami about to hit unprepared providers, maybe this year you should resolve to review your pension.
Probably sooner rather than later.
If you want further guidance on this or have any questions please contact us.