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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
by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales. Registered
no. 08395855. Registered office: 6th Floor, 110 Cannon Street, London EC4N 6EU.
110 Cannon Street
London
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Canadalife.co.uk
Thank you – any questions?
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