Rethinking retirement income

Paradigm 2019 Autumn Group Forums

Kevan Ramanauckis – Pension technical specialist

Information approved for Professional Adviser use only – Not for retail clients

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Learning Objectives

As business owners, retirement income and financial planning can be challenging. How can we

deliver the best outcomes for all of our clients, no matter their wealth and grow our profits?

• EXPLAIN – Why the state pension is so valuable and how the DWP calculate what an

individual receives….is it good news or bad news and why it can impact retirement planning?

• DEMONSTRATE – using a case study, taking income from different tax wrappers in

retirement can help deliver tax efficient income and maximise inheritance by keeping more

clients invested longer?

State pension complexity:

Why it is critical for an adviser business to get the right number…

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State pension factoids: bedrock for peoples retirement

15,802,469 viewed online

statement (4th April 2016 to 18 August 2019)

282,000 receiving more than the

full amount – Protected Payment

53,700 viewed statement between

24th and 30th December 2018

Backto60 campaign – judicial

review heard, outcome to follow

365,000 receive less

than the full amount

Full amount 2019/20

£168.60 p.w. = £8,797.30 p.a.975,000 in receipt of

new state pension

Source: https://www.gov.uk/performance/state-pension-statement/transactions-by-channel FOI DWP dashboard April 2019

Cost to buy maximum state

pension £277,203**

Source: Canada Life illustration RA00135719 - 18/04/2019. Assume healthy, single life,, escalating 3% per annum**

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State pension timeline: changes along the way

2016

New State

Pension

Basic State Pension

Additional State Pension

1948 1961 1975 1978 1997 2002

1961 1975 1978 1997 2002

1961 to 1975

GRADUATED

1978 to

SERPS/GMP

2002

SERPS

2002 to 2016

S2P

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New Single Tier State pension: who qualifies and how?

• Men born on or after 6 April 1951

• Women born on or after 6 April 1953

• Maximum - need 35 years paying NI contributions

• Need a minimum of 10 years NI contributions

• Were working and paid your NIC’s for 52 weeks

• Were getting NIC qualifying credits

• Were paying voluntary NI contributions (Class 3a)

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What will the maximum state pension be - tax year 2019/20?

Greater of:

(1/35th of new State Pension for each year of NI - £168.60 per week)

and

(Old rules 1/30th of old State Pension for each year of NI - £129.20 per week plus

additional state pension – S2P, SERPS, Graduated)

Both calculations take full account of people’s contracted-out record

the new State Pension – the entitlement someone would have if the

new State Pension had been in place throughout their working life

the old state pension calculation – as if someone had reached State

Pension age in 2016

Online state pension forecasts: managing expectations

Online results page

If the pension forecast is greater than

Maximum Figure; then the difference is

known as Protected Amount.

Upon death 50% of difference is spouses

pension with conditions

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COPE

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COPE: Issues

• Many people may not be aware they were contracted-out; especially if done on

joining employer’s scheme

• The figure used is an estimate calculated by DWP

• May not be the same as the client actually receives from C/Out especially if DC

contract

• If in scheme, C/Out amount may not be clear to client

• If client has accessed C/Out pot or retired early from final salary scheme, then

online system doesn’t take that into account

• If client has transferred a previous final salary benefit to another final salary

scheme, then check direct with DWP

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State pension expectations: Case study

• Bill reached state pension age on 9

April 2017

• DWP wrote to him 4 months before

state pension age and told him his

pension was £127.39 p.w.

• Bill had read about the new flat rate

pension and so expected £155.65

p.w.

• He had worked and paid NI for 32

years (he had some breaks during

his working life)

• Why did he receive less?

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State pension expectations:

Greater of benefits on old rules and on new rules

Pre-2016 calculation

Consists of 3 elements in Bill’s case as at 5/4/16

1. Basic State Pension – he needed 30 qualifying years to get full

amount which he had. Bill is entitled to full BSP of £119.30

2. Additional State Pension – split into 3 separate calculations as

rules changed regularly during Bill’s working life (pre-97, post-97,

post-2002). Total is £54.39

LESS contracting-out deduction as Bill was C/Out between 1978

& 1982 then between 1988 and 1990 which is £78.99

Bill receives £0.00 ASP

3. Graduated State Pension – as Bill had a small period before 1975

paying NI. Bill receives £0.53

TOTAL BENEFIT ON PRE-16 RULES IS £119.83

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State pension expectations:

Greater of benefits on old rules and on new rules

Post-2016 calculation

Need 35 years NI record for full benefit

1. 32/35 of full amount (in 2017) which is £142.31 per week

2. LESS contracting-out deduction as Bill was C/Out between 1978

& 1982 then between 1988 and 1990.

This is a DIFFERENT figure to the pre-16 calculation (it cannot

exceed the ASP built up) so deduction is £54.39

TOTAL BENEFIT ON POST-16 RULES IS £87.92

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State pension expectation:

Greater of benefits on old rules and on new rules

Final calculation

1. Bill’s pre-2016 calculation is £119.83 per week

2. Bill’s post-2016 calculation is £87.92 per week

3. As the pre-16 benefit is higher, Bill’s starting amount is £119.83.

As he reached SPA after 6 April 2017 the amount is revalued up

to 2017/18 rates giving a final figure of £122.83

4. The tax year 2016/17 is also qualifying for state pension purposes

and can provide an additional amount of £4.56

5. Bill is paid £127.39

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Summary: Who should check their state pension?

• All your clients and spouse/partner – correct amount critical for cash flow modelling

• Clients looking to retire abroad

• Before SPA

• Lose ability to work and pay NIC’s

• After SPA

• No increases – Australia, New Zealand and Canada

• Increases – EEA countries, Switzerland, Gibraltar.

• DWP recently changed website – EEA residents potentially only 3 years of

guaranteed increases, due to Brexit

• USA, Mauritius and the Philippines plus 13 other countries under bilateral

agreements

• Protected Payment

• Have much younger spouse/partner

• Remarry before their own SPA

Rethinking retirement income:

As a business owner why its important to be advising in all markets

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Boom in tax receipts

HMRC received £5.2bn in IHT receipts in 2017/18 – nearly double that taken in 2011.

Driven by – increases in asset prices, including housing wealth, especially in the South

East.

Largely a voluntary tax – once famously described as “broadly speaking, a voluntary

levy paid by those who distrust their heirs more than they dislike the Inland Revenue.” –

former Chancellor of the Exchequer Lord Roy Jenkins (1986).

Pension freedoms - In total, over £28 billion has been flexibly withdrawn from pensions

since changes in 2015

Since pension freedoms HMRC has raised more than £5 billion additional tax

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Pension freedoms changed the framework

Biggest change in the pensions system seen in generations – ‘no one will have to buy an

annuity’ created the headlines

Shift from annuity to drawdown – clients looking for flexibility and certainty

Tax treatment of pensions on death also changed

• Removal of 55% ‘death tax’ for inherited drawdowns funds (age 75+)

• Inheritees now pay tax at marginal income tax rates

• Tax-deferred if the funds remain in the pension

• Not taxed if the benefactor dies before age 75

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Many clients have assets in multiple wrappers

Defined Benefit

pension

Defined

contribution

pension

ISA

Buy-to-let

property

Investments

onshore

Income

from state

pension

Holiday

(second)

home

Investments

offshore

Main

residence

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Clients will have many (and different) needs and priorities

1. How much income to take

2. How to provide for loved ones

3. Where to invest

4. Which tax wrappers to use

Sustainable

Tax

efficient

Flexible

and

controllable

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Combining retirement income and estate planning strategies

Estate

Planning

Retirement

IncomeProperty Collectives Onshore

BondPension

Pension

TFCISA

Tax-free income Phase to minimise IHT

issues

Flexible income to use

allowancesFree of IHT. Nomination

or trust

Spend, gift, reinvest

in suitable IHT trustTax-free income

IHT trust. Plan to

minimise income tax on

chargeable gain

Tax deferred 5%

withdrawal and/or

segment surrender

Tax free ‘income’ by part

disposals to utilise

annual CGT exemption

IHT trust. Planning to

minimise CGT on

disposal

Tax free ‘income’ and

fixed lifetime mortgages

Replace pension

income, gift planning

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Using different wrappers: Case study

• Alan is age 59 and has a variety of assets as well

as some income which will come into payment

• State pension > £8,500 a year from 25/9/2026

• DB > £12,000 a year from 25/9/2022

• Uncrystallised pension worth £800,000

• Crystallised pension worth £130,000

• ISAs worth £300,000

• Property wealth £1.34m

• He needs an income of £50,000 a year (after tax)

• Increasing by 4% a year for first 10 years, 2% a

year for following 20 years

• Wants to maximise his inheritance

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More traditional route: income

1. DC Pension up

to personal

allowance

2. Pension tax-free

cash

3. ISA

4. DB Pension

5. State Pension

6. Property Wealth

7. Targeted net

income

Assumptions

Pension growth 3%

ISA growth 3%

House price 2%

ERM interest rate 4.5%

State pension 2.5%

Tax allowances 2.5%

IHT allowances 1%

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More traditional route: inheritance

1. Uncrystallised

Pension

2. Crystallised

Pension

3. ISA

4. Property Wealth

5. NET value of

estate

Assumptions

Pension growth 3%

ISA growth 3%

House price 2%

ERM interest rate 4.5%

State pension 2.5%

Tax allowances 2.5%

IHT allowances 1%

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ISA and Property at earlier stage: income

1. DC Pension up

to personal

allowance

2. ISA

3. Pension tax-free

cash

4. DB Pension

5. State Pension

6. Property Wealth

7. Targeted net

income

Assumptions

Pension growth 3%

ISA growth 3%

House price 2%

ERM interest rate 4.5%

State pension 2.5%

Tax allowances 2.5%

IHT allowances 1%

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ISA and Property at earlier stage: inheritance

1. Uncrystallised

Pension

2. Crystallised

Pension

3. ISA

4. Property Wealth

5. NET value of

estate

Assumptions

Pension growth 3%

ISA growth 3%

House price 2%

ERM interest rate 4.5%

State pension 2.5%

Tax allowances 2.5%

IHT allowances 1%

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Income and IHT comparison: traditional v alternative method

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Summary and other factors to consider: wealthy and affluent clients

• Three stages of retirement – Active, Passive and Care

• What is the priority – income or estate planning?

• Traditional thinking

• Pension and ISA are income; Property and investments are legacy and care funding

• Buy to let and second home property assets

• Investments held in trusts

• Ad-hoc capital withdrawals

• Divorce

• Future legislation changes and future government actions

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Learning Outcomes

As business owners, retirement income and financial planning can be challenging. How can we

deliver the best outcomes for all of our clients, no matter their wealth and grow our profits?

• WE EXPLAINED – Why the state pension is so valuable and how the DWP calculate what

an individual receives….is it good news or bad news and why it can impact retirement

planning

• WE DEMONSTRATED – using a case study, taking income from different tax wrappers in

retirement can help deliver tax efficient income and maximise inheritance by keeping more

clients invested longer

Telephone calls may be recorded for training and quality monitoring purposes. MGM Advantage Life Limited, trading as

Canada Life, is part of Canada Life Group (UK) Limited. Authorised by the Prudential Regulation Authority and regulated

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Thank you – any questions?

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