Nucleus User Sessions

October 2010

AgendaNucleus proposition• Operational update• New developments• Model portfolio enhancements• Discretionary fund management• Understanding Nucleus account types

Break

Nucleus best practice• Model portfolios• Transfer and re-registrations• Reports, Alerts and Tools• The new business process

Finish

Session 1 – Nucleus proposition

Cash

AssetsMutual funds

EquitiesGilts

BondsETFs / other

General Isa PensionOffshore

bond

IFA platform

Analytical and support tools

Onshore bond

Clientplatform

• Transparent• IFA control• Open architecture• Cost effective• Clear charging

structure• Wide range of tax

wrappers

Nucleus proposition

1.

2.

3.

New developments

New developments

• Client platform• Funds research• Jira enhancements• Reports• Discretionary fund management• Regular payments• Portfolio reviews• USP / ASP info• Client statements• Model portfolio enhancements

Client platform

• Transaction history (opt out)

• IFA branding• Memo assets• Correspondenc

e• Client reports

(opt out)

Fund research

• Screener across Nucleus fund universe

• Search across multiple criteria

• Easy access to fund factsheets, fund charges, charts

• Sort by:• Prices• Performance• Ratings• Charges

Client statements

• Transaction summary– Payments in– Withdrawals out– Income– Fees & charges

• Model portfolio info• Easier to read

transactions• Large print format

available• 3 main sections:

– Summary– Holdings– Transactions

• On platform: 28th October

• User guidance available

Jira enhancements

• Only enter data specific to query

• Resolution dates for requests

• Separation into following categories:– Instructions– Notifications– Issues

Due: November

Reports

• Download specific to advisers & firms / local offices

• Improved date search• Quicker to download complex report e.g.

Outstanding trades

Regular payments – asset allocation

• When updating model portfolio can also update asset allocation for regular payments

• Checkbox enables you to select whether regular payment asset allocation should also be updated

• Provides flexible mechanism to update lump sum, regular contribution and rebalancing asset allocations

Portfolio review

• Shows performance across any time periods

• Can be used to show valuations on a specific day

USP/ASP account information

• GAD limits• Income amounts• Payslips• Review dates• Tax codes

Corporate actions

• Correct transaction types to appear on transaction history

• Corporate action types for:– Equities– Collectives– Bonds

• Improved correspondence to IFAs

Corporate actionsUnit trusts / OEICS

Merger Two funds merge to create single fundDe-merger One fund is split and units in new company issues to investorsClosure Fund is closed to new business

EquitiesBonus issue Issue of further shares to shareholders without paymentSubscription Shareholder has right to subscribe for shares of different share classConsolidation Issuer decreases number of shares in issueRights issue Existing shareholders have right to subscribe for further sharesSubdivisions Number of shares is increased by reducing nominal value of sharesCompulsory call payments New shares issues and holders required to make further paymentsScrip dividends Shareholder opts to receive further shares instead of cash dividendOptional call payments Shareholder elects to make a call payment to subscribe to new issueAcquisition 2 companies merge into 1 to make new companyResale Where group of shareholders are invited prior to offer with subscriptionShare capital reduction as part of return of capital to shareholdersClosed offer Selected group of investors are invited to purchase shares

BondsName change Name of a bond changesOptional redemption Holders of a bond can redeem their holding without any paymentOptional conversion Holders can covert their bond into shares without any payment

Model portfolio enhancements

• Self-service model portfolios• Bulk rebalancing• Exclude cash from rebalance

Due: December

Self-service model portfolios

• Ability to add / edit new and existing model portfolios

• Single model portfolio used across multiple account types

• Modify model portfolios for new client sub-groups

1. Select model portfolio

2. View model portfolio

3. Add / edit model portfolio

4. Confirm product availability

5. Confirm MP profile updates

New business enhancements

New workflow making it easier to add new business

• Multi-client, multi-account• Enables joint accounts to be processed online• Removes need to send in application paperwork• Integrates illustration and new business

processes• Pre-population of forms• Signatureless direct debit mandates

IFA usability testing currently underway

Illustrations enhancements

• Integrated into new business process• Consistency across all pre sales, post sale and pension

review illustrations• Illustration will incorporate existing account value/data for

top-ups or for moving to USP• Growth rates used based on fund selection• Quick quote or full illustration• Fees in % or monetary amount / Multiple regular

contributions• Can do illustrations for joint accounts, lump sum and

regular contributions.• Save and retrieve illustrations / Copy illustrations • Download & print multiple illustrations

Automated sell-downs

• Automatically sell down if <1% cash in account

• Sell down in last week of each month, in order to pay monthly fees

• Sell down will:– Sell across assets held in proportion to their

holding– Sell in order to create 2% cash in accounts– Flagged assets will not be sold

• Accounts with too little cash will be escalated to Nucleus

• ‘Pending transactions’ will stop sell-downs

Gross general account

• Gross interest on distributions on cash• Applicable for:

– Non-doms– Corporates / trusts– Third party products

• Have had difficulties obtaining gross distributions from fund managers

• Provide update later in year

Recent changes

• Apply fees– Account search– Calculate % fee amount (as well a £ value)

• Alerts– Cash balance above 5%– Tax relief paid

• Client search list –alphabetical order• Fees tab – admin fees now shown• Payments tab – now has filtering• Export transactions

Other upcoming changes

• Bulk switching – will analyse existing fund status before switching in order to eliminate rejections

• Correspondence – USP Annual illustrations• Equity / ETF trading – better disaggregation of units• Back-office systems – Intelliflo• Links to Financial Express• ‘Print all’ accounts• Gross general account

Understanding Nucleus account types

Wrap contributions by account type

Pensions - the market• By far the largest accessible market for advisers

– Not recession proof but sales holding up better than other markets– Mainly transfer business so investors not required to sign a cheque– Gradual unwinding of occupational schemes continues to release money

into this market– Personal pensions legacy books a soft target – Main players are Standard Life, Skandia, AEGON, Scottish Widows and

AVIVA – nearly 2/3rd of the market.

• More than £3.1bn (APE) placed into personal pension market in 2009. – This is an annualised total to reflect effect of regulars– Means that singles and transfers (most of the total) are in fact reported at

1/10th their monetary value. FUM accessible is therefore much bigger than this.

• More than £270m (APE) or £2.7bn into Income Drawdown in 2009– Surge in Q1 ahead of age change rules– Doubled normal run rates– Main players are Standard Life, Prudential, Winterthur, Scottish Widows

Key Benefits

• Open to all UK residents, including non-earners

• Highly tax efficient

• Open to very wide range of investments

• Investment flexibility – shape around evolving requirements and risk tolerance

• Flexibility on what and when to take as benefits

• Risk management flexibility as benefits are taken

• Lifestyle flexibility - stay working, supplement earnings

• Security - trust based instead of insured basis

Going forward will provide materials on how to make most of pension options

Nucleus pension pots

Pension (non-protected rights)

Accumulation

Benefits and Income *

Pension (protected rights)

Accumulation

Benefits and Income *

Appropriate Personal Pension

Accumulation

Benefits and Income

Pension (Sipp)

* USP (can convert to ASP) / Income drawdown

Onshore bonds - the market

• More than £12bn placed in 2009– Down on 2008 but some evidence of trending back up in late

2009 and early 2010, particularly unit linked

• Main players are Skandia, Prudential (particularly with-profits), Scottish Widows, AVIVA and L&G who together control over half the market

Onshore Bonds – Key Benefits

• No CGT liability to the investor – due to ‘life funds’. Growth is subject to income tax rules for end investor but not necessarily payable when it’s released

• Tax planning - liability to investor only arises at encashment

• Retirement planning - defer encashment until in lower rate tax bracket

• Inheritance tax planning - can assign under trust

• Very flexible - fund switches free of charge and tax

• Nucleus feature – daily calculation of tax due - benefit increases with fund growth and term

Going forward will provide materials on how to use onshore bonds within a portfolio, including technical support including for trusts

Onshore bond tax account

• Tax account– Appears as ‘asset’ within account valuation– Calculated on daily basis to represent tax

deductions

Onshore bond tax account

• Tax account– Purpose is to show effect of tax deductions on full

encashment– Determined on asset gain (ignoring UK equity based

dividends)– Allowance for indexation (Consumer Price Index)– Tax rate of 20%– For example:

• Investment of £100K rises to £110K after 1 year• 50% of assets in equity based uk funds, CPI increase is 2%• Tax account value shows: 10K * 0.98 * 0.5 * 0.2 = £980• Tax account would show -£980• Calculated daily – cumulative balance shown

– Mitigates fund losses through tax rebate to client

Onshore bond tax relief

• Tax relief payable on initial adviser fees, as is classed as part of taxable business of life assurance company

• Reduces amount payable to client by 20%• For example:

– 3% initial fee• 3% * 0.8 = 2.4% is paid by client• 0.6% is claimed back as tax relief• 2.4% is deducted from client account

• Ignore this for purposes of new business application (e.g. Still put 3% as fee – tax relief works ‘behind the scenes’)

• Illustration– Keyed at 3% initial adviser fee– Illustration will show 2.4% in initial adviser charges (reducing

RIY)– Monetary amount of initial adviser fee will be equivalent to 3%

Offshore bonds - the market

• Nearly £5bn placed in 2009 with some trending upwards towards the end of 2009/start 2010

• Main players are AXA, Skandia, Canada Life and Scottish Widows who together make up over half the market

Offshore Bonds – Key Benefits• A ‘life’ contract issued by a non UK life assurance

• Benefits from ‘gross’ roll up outside the UK tax system

• Normally able to access a wider range of asset types than onshore bonds

• Tax planning

• Retirement planning

• Trusts– Manage disposal of assets and protect from inheritance tax – Considerable strength and expertise from the RL360 relationship– Work through Nucleus to get the best from this resource

Isas – the market

• Increase in the annual allowance from £7,200 to £10,200 has helped drive an considerable increase in ISA sales over the past few quarters

• Investment Management Association expects 2010 to be the strongest year since they were launched

• Total net sales in the year to the end of Q2 2010 were £4.8bn compared to £0.9bn for the previous year

• A total of £96.7bn is currently invested in equity based ISAs

ISAs – Key Benefits• Tax Efficient

– Especially for high rate tax payers or potentially exposed to CGT

• Flexible– Open to a very wide range of asset types– Can be used for a range of planning scenarios including retirement

• Accessible– Assets can be released at any time with no chargeable gain or tax

exposure

• Cumulative– £10,200 per annum can add up !

• Underused ?– Full ISA allowance ought to be used before considering anything

else

Nucleus platform assets

Cash accounts

• RBS – bank account associated with accounts– 1.25% Instant access

• SWB – treated as an asset– 1.75% General– 2% Pension

• Other cash accounts becoming available

Funds report

Flagged assets provide important information on funds

Fund manager Full fund name Isin CITI code MEX code Sector nameAEGON Asset Management UK AEGON Active Value Property B Acc GB00B3MZST88 IOF3 None UT UK Direct Property

AEGON Asset Management UK AEGON American Equity A GBP GB0007451858 SN04 SEAME UT North America

AEGON Asset Management UK AEGON American Equity B GBP GB0007450553 SN50 SEAMB UT North America

AEGON Asset Management UK AEGON Ethical Cautious Mgd A Acc GB00B1N9DX45 O982 SEECM UT Cautious Managed

AEGON Asset Management UK AEGON Ethical Cautious Mgd A Inc GB00B1N9DW38 O981 SECEM UT Cautious Managed

AEGON Asset Management UK AEGON Ethical Corporate Bond A Acc GB0005342646 SN83 SESRA UT Sterling Corporate Bond

AEGON Asset Management UK AEGON Ethical Corporate Bond A Inc GB0005342422 SN84 SESRI UT Sterling Corporate Bond

AEGON Asset Management UK AEGON Ethical Corporate Bond B Acc GB00B018K352 ZH97 SESRB UT Sterling Corporate Bond

AEGON Asset Management UK AEGON Ethical Corporate Bond B Inc GB00B0C4RP31 US88 SEBII UT Sterling Corporate Bond

AEGON Asset Management UK AEGON Ethical Equity A GB0007452484 SN13 SEETHA UT UK All Companies

Standard initial charge Nucleus initial charge Standard AMC AMC Rebate Min trade value Settlement period (t+) Flagged Asset0.00 0.00 0.50 0.00 0.00 0.00 None

5.50 0.00 1.25 0.50 0.00 4.00 None

0.00 0.00 0.75 0.00 0.00 4.00 None

5.50 0.00 1.25 0.50 0.00 4.00 None

5.50 0.00 1.25 0.50 0.00 4.00 None

4.50 0.00 1.00 0.50 0.00 4.00 None

4.50 0.00 1.00 0.50 0.00 4.00 None

0.00 0.00 0.50 0.00 0.00 4.00 None

0.00 0.00 0.50 0.00 0.00 4.00 None

5.50 0.00 1.50 0.50 0.00 4.00 None

Adding TERs to fund charges

Lists for unit trusts / OEICs, ITs, ETFs, Equities, Gilts / bonds, Structured products, other

Fund manager due diligence

• Can we administer asset– Pricing– Trading– Distributions / rebates– Reconciliations– Meets nominee requirements– Meets AML requirements

• Does not consider– Performance of fund– Security of fund manager / fund assets– Suitability of asset for client

Discretionary Fund Management (DFM)

IFANew businessClient management

DFMModel portfolio mgtRebalancingTrading

For IFAs-Investment management outsourced-Transparent fee structure-Retain control of client

For DFMs-Easily offer model portfolios to multiple parties with single login- direct remuneration with transparent fee

For clients- Cost effective mechanism of achieving best of breed IFA and DFM services

DFM functionality

• Both IFA and DFM access the same client with their own platform logins

• Post-sales illustration will list ‘investment management fee’

• Transaction history shows ‘investment management fee’

• Fees paid directly to DFM• Reports:

– How much is in each model portfolio– ‘What if I rebalance now’?– DFM report – which accounts are using a DFM

DFM – how to set up

Complete the following documents:1. Tri-partite agreement – between Nucleus,

IFA, DFM– completed once per 3 parties– Provides terms and conditions for service

2. DFM client authority – completed once per client– Specifies date DFM service starts and fees

APPENDICES

Pension - Key Benefits • Open to all UK residents, including non earners

• SIPPs open to very wide range of assets

• Highly tax efficient– Relief on contributions at highest marginal rate except

high earners (£150k +) – Can put in 100% of earnings up to annual allowance

ceiling (currently £245k)• But Gov’t is looking to reduce this contribution ceiling to

£40k per annum– Funds grow in a tax free wrapper as long as do not

exceed lifetime allowance ceiling (currently £1.8m).• But Gov’t is looking to reduce this to £1.5m

– Up to 25% of the fund can be taken as a tax free withdrawal at any point after age 55

Pension – Key Benefits • Flexibility on withdrawal

– Up to 25% available as tax free cash– Use the remainder to buy an annuity (not necessarily with the same

provider)– Draw a taxable income directly from the fund as an unsecured pension

(USP or Income Drawdown)– Draw a taxable income from age 77 as an alternatively secured pension

(ASP)• Like income drawdown but with more restrictions

• SIPPs can be used for:– Greater flexibility and control than traditional pension plans– Consolidating a number of different pensions arrangements– Attracting money from poorly performing and/or expensive personal

pensions• Most PPs started from late 90s onwards will not have exit penalties

– Protected Rights – up to £500bn in PR pots now accessible to SIPPs– Investing for someone else e.g. spouse, partner, child

• Attracts tax relief• No impact on investor’s tax bill

Income Drawdown – Key Benefits• Timing Flexibility

– Can remain invested in the market rather than use all of the accumulated funds to get the best annuity rates in the market at the time

– Decision can be deferred• Annuity rates improve as client gets older• Growth in the fund in the meantime• Possibly better pension than could have been secured at the outset

– Investors can vary the amount they withdraw and when– Phased Retirement

• Can put some into an annuity to obtain accompanying guarantees with remainder in drawdown

– Keeps options open• Can always go for an annuity later but once purchased, that’s it…

Note: Each time money is moved to drawdown it counts as a Benefit Crystallization Event (BCE) which could trigger an immediate review and therefore an adjustment of the max. income that can be taken.

Income Drawdown – Key Benefits• Investment Flexibility

– Can change the funds used over time to get better growth or to manage risk better

– Can select the types of funds (e.g. Cash) that they want the income to be drawn down from

• Risk Management Flexibility– USPs and ASPs can be shaped around risk appetite and other investment

options to provide more flexible approach than annuities e.g.:• If SIPP the primary provision then need to balance a cautious investment

approach with a desire for income• If not the only source then can perhaps afford to invest more aggressively with

the possibility of improved income as a result

• Lifestyle Flexibility– Don’t need to stop work. SIPPs/Income Drawdown can be part of a gradual

switch out of work related earnings– Access to tax free cash for mortgage repayment, university fees etc.

• Flexibility on Death Benefits– Continue with the drawdown– Take a lump sum (subject to 35% tax)– Purchase an annuity

Onshore Bonds – Key Benefits• ‘Life’ funds so no CGT liability to the investor. Growth is

subject to income tax rules but even so – not necessarily payable in the hands of the investor when it’s released

• Liability to investor only arises at encashment.– Assessment for high rate tax is made but growth divided by

number of years product has been invested– Unless that pushes investor into high rate bracket, no tax is due

• Up to 5% of original investment can be taken each year without having to be disclosed for tax. Can be carried forward.

• Very flexible – 5% withdrawals free of any cash in or dealing charge– Active investors can make switches free from CGT– Can be added to and accessed relative easily

Onshore Bonds – Key Benefits• Retirement Planning

– High rate taxpayers now but don’t expect to be when they’re retired

• Can take out 5% per annum with no immediate tax liability• Tax is paid on net profits after tax already paid on the fund• Tax on the investor deferred until they cash it in – if they are within the

basic rate (98% are) then no tax to pay– Over 65 and want an income

• withdrawals up to the 5% limit won’t affect the age related tax allowance– Not included in means testing assessment for residential care

home costs

• Tax Planning– Higher rate taxpayers investing in funds that produce interest or

dividends• No tax payable until encashment• A collective based investment would have an annual tax liability that

would need to be disclosed– Higher rate taxpayers with partners on the basic rate

• Bond can be assigned with no tax charge if designated a gift• No further tax to pay as long as they remain a basic rate taxpayer

Onshore Bonds – Key Benefits• Inheritance Tax Planning

– Can be written under trust• Assigned to a beneficiary with the future tax charge being

assessed on that beneficiary• Can be written on a joint life basis for greater flexibility

• University Fees– Can assign the bond to the child (from age 18) with no tax

charge if designated a gift– Any future tax charge assessed on the child and their tax

status

Offshore Bonds – Key Benefits• A ‘life’ contract issued by a non UK life assurance

company usually based in the Isle of Man, Dublin or the Channel Islands.

• Benefits from ‘gross’ roll up outside the UK tax system – except for unrecoverable withholding tax on dividends and

interest which varies from country to country– Investors may have to pay cash when the y take the

money but with planning they can control what and when they pay

• Normally able to access a wider range of asset types than onshore bonds

Offshore Bonds – Key Benefits• Trust Planning

– The is considerable scope to write an offshore bond within a trust.

– Main drivers are:• Probate Avoidance – can take the bond outside the estate of the

investor in the event of death• Taxation – can transfer assets into a trust thereby reducing their

personal wealth and their estate’s exposure to IHT• Other reasons – to apply specific discretion over the release of

assets perhaps where divorce is imminent or the beneficiaries are too young

– RL360 able to provide extensive support and expertise

Offshore Bonds – Trust Planning• Beneficiary Trusts if

– Investors don’t want to have to appoint trustees during their lifetime

– Know that intended trustees will act for them following their death– Want to ensure that intended beneficiaries will

• Isle of Man Probate Trust if– Want to retain access to the investment– Wish to avoid Isle of Man probate and ensure prompt payment of

proceeds– Need a trust to be created now rather than at death– Have no need for UK IHT planning at this point

• Gift Trusts if– UK domiciled for IHT purposes– Wish to reduce value of estate exposed to IHT– Want to gift away capital with no requirement for future access

Offshore Bonds – Trust Planning• Loan Trust if

– UK domiciled for IHT purposes– OK to gift away future growth but need access to capital– Need flexibility around frequency and amount of capital payments– Don’t want to create a potentially exempt transfer or chargeable

lifetime transfer– Might want to do more IHT planning in the future

• International Flexible Trust if– Wish to retain access to investment and growth– May become UK domiciled and will require protection from IHT– Want to provide trustees with full discretion on who can benefit

• New Discounted Gift Trust if– UK domiciled– Looking to reduce value of IHT estate and prepared to make a gift

whilst retaining the need for regular access – OK to gift away potential growth on the investment– Need an immediate reduction in IHT exposure– Are in good health !

• HMRC require us to ensure that this is not deathbed planning to avoid an imminent tax liability so we will need to obtain a medical report

Offshore Bonds – Key Benefits• Tax Planning

– Rules around income withdrawals broadly similar to onshore bonds

– Tax payable at encashment dependent on • Tax band the client is in at the time and the extent to which the bond

pushes then into the higher rate band• Whether or not they have lived abroad while they had the plan (and

therefore not liable to UK tax)• Whether or not they now live abroad, in which case they are subject

to that country’s laws

• Retirement Planning– High rate taxpayers now but don’t expect to be when they’re

retired • Can take out 5% per annum with no immediate tax liability• Tax on the investor deferred until they cash it in – if they are within

the basic rate (98% are) then no tax to pay– Prospect of lower ceiling to pension contributions that will attract

tax relief• Offshore bond able to grow gross of tax and can provide a ‘tax free’

income for up to 20 years.• No tax relief on actual contributions but same might be said for

contributions above the maximum for pensions

ISAs – Key Benefits• Tax Planning

– Will save investors money if they are a high rate tax payer or likely to have to pay CGT

– Even with the unrecoverable 10% dividend tax (payable whether inside an ISA or not) still much less than the 32.5% that would be deducted from non ISA investments

– Introduction of the 50% tax rate for those earning over £150k pa has made ISAs even more attractive for this group. Effectively a couple is now able to remove £20,400 per annum from tax each year by placing into an ISA wrapper

• Retirement Planning– For investors over the age of 65, income from an ISA will not affect their age related

personal allowance– ISAs can be used to generate tax free income in retirement. Can use annual

allowance to invest in equity over a number of years and then switch into tax free income producing assets at retirement

• Open to a very wide range of assets– Shares and corporate bonds– Gilt edged securities– Government Bonds– Unit trusts, investment trusts, OEICs– Any shares which have been transferred from an approved SAYE share option scheme– Life assurance policies– ETFs