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Evolution or Revolution?

  • By Richard Ellis
  • 21 Oct, 2014

The new pension rules create a great deal of flexibility for anyone with pension savings and are extremely positive from a financial planning perspective. However, there are a few pitfalls that unwittingly people without the appropriate advice may fall foul of which could result in a financial loss and/or loss of ability to mitigate tax through pension contributions.

The Taxation of Pensions Bill lays out the framework for 2015's new flexible era. There are no great surprises.  But it still contains several changes from the earlier draft which are worthy of note. Here are ten key points of interest:


55% tax charge on death

The Bill carries through on the promise to scrap the 55% tax charge levied on the pension fund on death in drawdown. The tax charge has been cut to 45% and importantly now only applies where death occurs after the age of 75 where benefit is taken as a lump sum. The charge will  also be levied on value protected annuities and pension protection lump sums from Defined Benefit schemes.

Capped drawdown retains £40,000 annual allowance

Anyone already in capped drawdown before 6 April 2015 can continue to make pension contributions up to the £40,000 annual  allowance. This relies upon them staying within the current maximum pension income limit and not accessing the new flexibility.

Accessing the new flexibility or entering drawdown after April 2015 through a separate arrangement will see the annual allowance cut from £40,000 to £10,000. We are shortly writing to clients over the age of 55 that have the ability to enter capped drawdown before April 2015 and want to retain the current £40,000 allowance for pension contributions.

Capped drawdown transfers

Where someone transfers their capped drawdown fund to a new provider they can retain their £40,000 pension contribution allowance.  If they wish to access the new flexibility following transfer they can notify the receiving scheme that the funds  are to be deemed 'newly designated', i.e. be classed as flexible-access. However, this would see their pension contribution allowance cut to £10,000.

£10,000 reduced annual allowance

A reduced pension contribution allowance of £10,000 applies when someone accesses the new flexibility of uncapped income. The Bill includes three new events which would see the annual allowance cut:
  • taking out a 'flexible annuity' which allows or could be varied to allow decreases in the amount of annuity (over and above the existing rules on decreases to lifetime annuities);
  • becoming entitled to a scheme pension from a money purchase scheme where there are fewer than 11 other people  entitled to payment of scheme pension under the scheme.
  • someone with primary protection taking a stand alone lump sum.

Pension Credits

The Bill confirms that an Uncrystallised Funds Pension Lump Sum (UFPLS) cannot be paid from a disqualifying  pension credit. This is a pension credit paid as a result of divorce and where the credit has come from a pension in  payment and from which tax free cash has already been taken. These pension credits are fully taxable to prevent anyone getting two bites at the tax free cash cherry.

At Fraser Heath we have a   Resolution Accredited Divorce Specialist   that can assist with the technical aspects of pension sharing on divorce.

Tax free cash recycling

Rules exist to prevent someone from taking tax free cash from their pension and making a fresh pension contribution which attracts tax relief. The original draft Bill amended the current 1% of lifetime allowance figure (used to measure the amount of tax free cash paid within a 12 month period) to £10,000. This is now been cut further to £7,500.

Triviality and small pots

Further relaxation has been given to the payments under triviality and small pots rules. The minimum age under which such pensions can be taken as a lump sum has been reduced from 60 to 55 (or earlier if under ill-health rules).

Valuing pre April 2006 pensions in payment

Pre April 2006 pensions in payment are valued for the lifetime allowance purposes at the date of the first post A-Day Benefit Crystallisation Event (BCE). For those in drawdown this is changing from 25 x the maximum capped drawdown income, to 25 x 80% of the maximum capped drawdown. This will counteract the effects of the increase in the income limits brought about in March 2014 from 120% to 150% GAD.

Those expecting to breach the Lifetime Allowance of £1.25m with their first crystallisation event since A-Day may wish to defer taking benefits until the new calculation method is in place. This will be effective where the first BCE event occurs on or after 6 April 2015. Originally this was intended to apply from the first BCE after the Act was passed.

Protected low pension ages

Restrictions on transferring pensions with a protected low pension age are to be lifted. It will be possible to transfer to a new scheme and continue taking income while still below age 55, without it being part of a block transfer.

Temporary non-residence rules

Rules already exist to prevent someone becoming temporarily non-UK resident and drawing their pension benefits in large chunks to escape UK tax.  For example, currently someone in flexible drawdown drawing the benefits while non-UK resident and then returning to the UK may be subject to UK income tax if they return to the UK within 5 tax years.

The Bill expands the rules to include the new flexible income options and now also includes 'flexible annuity' and 'money  purchase scheme pensions'. And imposes a tax charge on the return to the UK within 5 years where withdrawals while non-resident have exceeded £100,000.


Summary

The new pension rules create a great deal of flexibility for anyone with pension savings and are extremely positive from a financial planning perspective. However, there are a few pitfalls that unwittingly people without the appropriate advice may fall foul of which could result in a financial loss and/or loss of ability to mitigate tax through pension contributions.

Please   contact Fraser Heath   for an evaluation of your financial position and further information regarding any of the proposed changes to pensions.

The above information is based on our understanding of the new rules as at 20 October 2014. Individual advice should always be sought before taking action in respect of your pensions.

E&OE

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By Mark Fletcher 01 May, 2017
A mixed set of results this month reflects the fact that markets are waiting to see what happens in various political arenas around the Globe. Politics is definitely at the forefront of most news bulletins, whether it be President Trump's latest tweets, the UK government triggering Article 50 or the fight to become the next President in France or Chancellor in Germany.
By Richard Ellis 01 Apr, 2017

It has been a strong start to the year for investment portfolios, mostly driven by signs of continued strength in the US Economy and the promise of more to come under the Trump presidency. Markets always move ahead of the economy so to make money, investors will position portfolios to benefit from what they think is around the corner. But what if the promise does not materialise? One fund manager described this recent wave of enthusiasm as the “Trump Bump” and that this may well be followed by the “Trump Dump” if the new President is unable to deliver on his campaign promises due to lack of support from political colleagues. In this respect, it seems that the failed repeal of Obamacare has given investors pause for thought over the last week or so.

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By Richard Ellis 01 Mar, 2017

Markets made a much better start to the year compared to this time last year. However, investors remain wary of problems that are likely to rear their heads later in the year and so, in general, markets have paused for now. Politics seems likely to dominate sentiment again this year, with a number of key general elections to be fought in Europe, most notably in France and Germany. Volatility is likely to spike during these events. However, market volatility can be the friend of the active fund manager and in recent meetings and conference calls with managers many have expressed the view that there are plenty of good opportunities and are generally cautiously optimistic about prospects for the year as a whole.

Our view is that the strong equity returns we saw in the second half of 2016 are “in the bank”, as it were, so if markets do sell off at some point in the next few months, these profits can be eroded before we are worse off than we were before the EU referendum on 23rd   June 2016.  

By Mark Fletcher 31 Jan, 2017

The prospect of a protectionist Trump presidency and actions to spend their way to economic growth have led to a swing in investor sentiment towards those companies that will benefit from the US finally entering a period of strong economic growth.

UK

  • UK equity markets continued to rise in December, ending an initially volatile year on a strongly positive note. On the back of a “Santa Claus” rally, the FTSE All-Share index closed the year at an all-time high.
  • As was so often the case in 2016, the mining and oil & gas sectors fuelled much of the rise; following agreement by OPEC members on a production cap, the oil price hit its highest level since 2015.
  • On the macroeconomic front –the Consumer Price Index (CPI) rose by 1.2% in the 12 months to November 2016, its highest level in two years.
  • Market expectations of the impact of Brexit in 2017 weighed on sterling, which faltered against the Euro and US Dollar into the Christmas period.


US

  • The fed raised the interest rate by 0.25% in December. It also announced its intention to raise interest rates three times in 2017, the central bank indicated that it would likely raise interest rates by 0.25% each time.
  • The post-US election rally saw the S&P 500 index hold onto the previous month’s gains to post solid returns of 1.98%.
  • Stock sectors, led by so called ‘defensives’, across the board recorded positive monthly returns
  • The US Manufacturing Purchasing Managers Index (PMI) hit a 21-month high.
  • US Manufacturers reported stronger hiring and higher prices for raw materials, which support other signs of labour market strength and higher inflation, pointing to improving manufacturing conditions.
  • December also saw consumer optimism about the state of the US economy increase to the highest level since August 2001
  • US GDP growth for the third quarter 2016 surprised markets with a better-than-expected growth rate of 3.5%.
  • Positive contributions to GDP growth came mainly from exports, private inventory investment, personal consumption expenditure and federal government spending
  • In a sign that the post-US election rally was expanding, investors regained interest in so-called ‘defensive’ sectors while profit taking by investors weighed somewhat on the performance of financials stocks
  • Healthcare shares lagged most other sectors during the month. In particular, biotechnology companies in the S&P 500 tumbled the most since October 2016 after Trump declared himself an opponent of high drug prices.


EUROPE

  • European equity markets advanced in December, posting one of the best monthly performances in 2016.
  • Markets surged in the aftermath of the Italian referendum, a political event which had been significantly weighing on sentiment over the last few months.
  • With the vote out of the way, market participants regained confidence amid increased talks of fiscal stimulus globally, aimed at spurring economic growth.
  • Within European markets, cyclical sectors (more sensitive to economic cycles) continued to perform strongly, reversing the trend observed in the early months of 2016 where deflationary fears dominated investment decisions
  • On the macroeconomic front, the month of December witnessed important decisions from central banks in Europe and overseas. Following its governing council meeting on 8 December, the European Central Bank (ECB) decided to extend its quantitative easing (QE) programme by 9-months, to the end of 2017, or beyond if necessary, until it sees a sustainable increase in Eurozone inflation towards the ‘below 2%’ target level


ASIA & EMERGING MARKETS

  • Returns from the MSCI Asia Pacific ex Japan Index in December were largely flat in sterling terms, although there was a notable divergence in performance between the region’s equity markets with Australia joining in the broader rally in developed markets, while Hong Kong and China were the notable laggards
  • Most Asian currencies continued to weaken relative to the US dollar with expectations that the US Federal Reserve will raise interest rates further in 2017.
  • Investor sentiment towards China was impacted by an apparent shift in policymakers’ focus from prioritising growth to concentrating on credit risks.
  • Higher commodity prices, particularly for crude oil and iron ore, helped support Australia’s equity market performance, which also benefited from further rotation into financials.
  • It was a quiet end to the year for global emerging equity markets although there was significant dispersion of performance between the regions.
  • The EMEA (Europe, Middle East and Africa) region came out on top with all countries here registering gains for December. The Russian equity market led the advance, drawing support from higher oil and gas prices.
  • Latin American equities treaded water for most of the month with most countries here trading flat, except Colombia which got a boost from an interest rate cut.
  • For the second consecutive month, the Russian equity market advanced strongly with the energy sector benefiting from the commitment of global oil producers to cut supply. Sentiment towards Russia was also enhanced by a belief that relations between the country and the US are set to improve in 2017 following Trump’s presidential election victory.
  • Russia’s inflation rate continued its downward trend in December with the annual CPI rate falling to 5.8%. While not enough to trigger any change in monetary policy, Russia’s central bank said it would consider an opportunity to cut interest rates during the first half of 2017.


JAPAN

  • The Japanese equity market ended the month higher in local currency terms. The market has rallied due to a better outlook for global growth in 2017 combined with yen weakness versus the US dollar post the US election
  • Macroeconomic data releases were generally positive over the month. The Bank of Japan upgraded its economic outlook stating that the economy has continued a moderate recovery trend, and maintained all components of its monetary policy.


FIXED INTEREST

  • The 10-year Gilt yield fell 18 basis points (bps) to end the year at 1.24%. US government bond yields were higher following the hike in US interest rates, however, the pace of the increase was more modest than recent months with the yield of the 10 year US Treasury rising 6bps to 2.44%. Given the more benign government bond market, corporate bonds outperformed.
  • Deutsche Bank announced it had agreed a US$7.2bn settlement with the Department of Justice. This is significantly below the US$14bn figure initially proposed in the summer and the market reaction to the news was positive.


What do we think?

Talk of the UK Government’s stance to not join the Single Market has weakened the pound further in recent weeks, leading to a continuation in the increase in the value of the overseas assets in portfolios and the earnings expectations of UK companies with overseas earnings.

The prospect of a protectionist Trump presidency and actions to spend their way to economic growth have led to a swing in investor sentiment towards those companies that will benefit from the US finally entering a period of strong economic growth.

This has been a bizarre bull run in investments since the October 2008 Credit Crunch, as price rises have been focussed on safe and secure investments, while the riskier investments that often trigger the exuberance at the end of an investment cycle have largely been ignored. The movement towards those stocks has seen some of the reliable heavyweight fund managers underperform of late with their riskier counterparts finally being rewarded. That this rotation into these stocks has been due to the promises of The Donald should give us all good reason to tread carefully.


Date of next meeting:      21st February 2017

By Mark Fletcher 22 Dec, 2016
What we are pretty confident about is that equity and bond markets are likely to be volatile in 2017 ahead of the negotiations between our Government and the EU and the myriad of other political and social issues that continue to dominate news headlines. It may be another year for investors to hold their nerve and let the storm pass.  
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