1. The major changes and elements in pension planning.
2. How to meet client objectives.
3. The future issues affecting pensions and savings in the UK.
Tutors on the panel are:
Stan Russell, Business Development Manager, Prudential
Jan Holt, Business Development Team Manager, Just Retirement
Pension freedom rules: the basics
STAN RUSSELL: Absolutely. April 2015 saw the biggest pension changes probably in the
history of the pension world. Certainly in my lifetime, which is probably as long as the
pensions world history! So we started off with a number of changes which have really
sparked the interest of the general public out there into looking at investing back into
pensions, and using their pensions much more flexibly when they finally get to retire. We’ve
got a slide here that we can put up, which will show hopefully. These are the new ways in
which individuals can take their pension benefits.
So, if we look at the right hand side, tax free cash is standard 25%. The rest of the pension
pot can now be taken in a variety of ways, either a new lifetime annuity or a scheme
pension, flexi-access drawdown, or if you were in capped drawdown before April 2015 you
can carry on in cap drawdown. The new kid on the block really is the UFPLS. That’s the
uncrystallised fund pension lump sum, if I can get that out after a few beers, and we retain
access to small pots.
Now I think the biggest issue here is that everyone has to understand, advisers and clients
alike, that new pension freedom brings with it a few dangers if you like. Taxation being one
of the big ones, the changes to death benefits, and one that I think the regulator’s going to
really focus on, which is sustainability of income.
PRESENTER: Indeed absolutely. Jan, I was going to say has the dust settled, have we got
complete clarity on all these big issues?
JAN HOLT: I think we’re as clear as we can be for now. There’s still some change ahead, as
we’ll see later. But I think primarily whilst the freedoms have opened up many more
choices, the underlying regime didn’t change that much. So when it comes to generating
retirement income, the pension options for people remain as either guaranteed income for
life through an annuity, or drawdown, or indeed a combination of both.
PRESENTER: So, Stan, advisers shouldn’t be afraid of the new pensions regime.
STAN RUSSELL: Absolutely not. Once they get their head round the slight variations in the
rules, then for sure it’s very much business as usual. So, as Jan said, annuities, they’ve been
around since time began really. And drawdown, flexi-access drawdown is a variation on cap
Annual allowances for higher earners
PRESENTER: So since April have there been any other additional changes as such, Stan?
STAN RUSSELL: Well, yes, I mean the summer budget that George Osborne announced back
in March has brought around some revolutionary changes again. The three major areas I
think that advisers need to concentrate on are the loss or the reduction in the annual
allowance for high earners. That brings in a couple of new terms that we’re not familiar
with. One is adjusted income, which was introduced at the budget, and the other one is a
threshold income. And advisers need to get their head round how those will affect the
client’s annual allowance going forward.
Basically once you have adjusted income greater than £150,000, you will then start to lose
your annual allowance on a two for one basis. So by the time you’ve got income of £210,000
you’re down to a £10,000 annual allowance. So that’s the way it’s going to pan out going
forward. There’s a get out clause for those with what they call threshold income of
£110,000, and anyone with income below that level will not be subject to the tapering. So
that has to be looked out for.
Changes to pension input periods
Changes to pension input periods, major changes in that area. Historically, we were able to
manoeuvre pension input periods so we could get a lot of money invested for high earners.
That’s all gone. You’re no longer allowed to change pension input periods, so we’re fixed
with a pension input period as of next year which will just run with tax years. So advisers
need to understand that as well, and over and above that…
PRESENTER: None of this carry forward/carry back stuff.
STAN RUSSELL: Carry forward will continue, but what you can’t do is just simply move the
pension input periods so that you could end up with a greater amount of money going in
than historically you could do. So that’s important. The other big change is the confirmation
that the lifetime allowance is going to go down to £1 million. And that’s certainly going to
curtail high earners in terms of how much they can put into that.
JAN HOLT: And then also out of the budget we heard that the secondary annuity market,
which was due to launch next year, will actually be delayed until 2017, so that’s another
change. And then aside from the budget we also had confirmation that the cap on the cost
of care that was due to be introduced again in April 2016, has been postponed under 2020,
along with some other elements of the Care Act 2014 which had been due to be
implemented next year, and they’ve all been postponed.
The advice gap and pension freedoms
PRESENTER: There is then still quite a lot for people to keep an eye on isn’t there? There
was though a fundamental split between the mass market and those who can afford advice.
That was talked a lot about at the time, has it transpired, has that come to fruition?
JAN HOLT: I think so, and I think this is why we’ve now got the work and pensions
committee actually reviewing whether people are properly supported to make the right
decisions or good decisions through the information, the guidance and the advice processes
that are available to them. So that’s very much an area of concern really is to make sure
that people are properly helped to get the right outcome.
PRESENTER: From your experience of talking to advisers, Stan, are clients coming along
asking the right sorts of questions, or are they completely at a loss?
STAN RUSSELL: Well surprisingly considering the amount of publicity we got at the time of
the original announcement back in 2014, clients are still confused as to exactly what they
can do. They think it’s quite simple that you just come up and you take your pension pot, a
bit like a bank account, and draw money out of it, or just take the whole lot and spend it.
And it isn’t as simple as that, sadly. And I think that the publicity perhaps took people down
the wrong route, and I don’t think it’s really helpful to start referring to pensions as bank
accounts going forward.
PRESENTER: No, indeed, absolutely, the ATM as it were.
STAN RUSSELL: The ATM yes.
The tax implications of cashing in pensions
PRESENTER: All right. So what are people actually doing? Are they taking account of these
taxation issues, what do advisers need to look out for, Stan?
STAN RUSSELL: Two areas they need to look out for. First of all, the emergency tax
situation. We have a slide coming up on that one. So what will happen, or what has been
happening is clients have been approaching insurance companies directly, and/or via
advisers and asking to take their entire pension pot, or large chunks of it out at one go. The
issue with that is that the provider of the pension won’t have a tax code for the client, and
so they go onto emergency month one tax. And you can see from this slide here, we’ve
taken all the bills out of it, quite simply you’ve got a client with a £70,000 fund of which part
of it, the green box, £17,500, is tax free cash. And the balance, if the client was going to take
all at once would then be taxed.
However, you would expect the tax to say well I’m going to pay some of that at 40% and
some of it at 20% and some tax free. But that’s not the way it works. In effect what
happens with emergency tax coding, everything gets divided by 12. So the personal
allowance is divided by 12, the basic rate tax band, the higher rate tax band, as you can see
from the calculations there. And effectively someone will pay additional rate tax at 45%,
even on cashing in a pot of £70,000. So the net result is the client gets a tax bill much higher
than expected, therefore a cheque in their hands much lower than expected. Now that’s not
the end of it, because they can obviously claim that tax back, and there’s a number of forms
that you can access on the revenue website that will help you do that, or you wait until your
next year’s self-assessment and do that.
So that’s issue number one, that’s the emergency tax coding. The other point is just
generally, and we’ve had a few incidents at Prudential where clients are simply taking the
entire pot, massive pots, and paying tax at 45% on a huge pot of money. Quite difficult to
understand why anyone would do that, but they are doing it. So you’ve got emergency tax
problem, and you’ve got just general higher than need be tax.
PRESENTER: So from an adviser’s point of view it is their bound and duty to say tax, you
must consider tax in all these situations.
STAN RUSSELL: Absolutely.
Understanding capacity for loss
PRESENTER: All right. In our earlier sessions together we talked quite a bit about risk. And
risk has come to the fore again, particularly with the markets being so volatile at the
moment. Jan, do you think people coming up to their pension and thinking about what’s
going on with their pension pots, do you think the message about risk has actually got
JAN HOLT: Possibly not, and I think this is very much where advice has a key role to play,
because ultimately a lot of people have been attracted to drawdown because it’s a way of
being able to access cash, even if that’s just the tax free cash element. But what they may
not appreciate is that actually to be in drawdown you have to have capacity for loss. So you
have to understand the potential risk of whatever is remaining in the drawdown fund is
going to be subject to any market volatility. And I’m not sure that everybody fully
understands that, but certainly through a good advice process they would.
STAN RUSSELL: Absolutely. I think advisers have got their head round the whole risk area,
it’s the clients who are not understanding it, and they’re going to advisers and saying I want
my money, I’m going into drawdown, I’m going to strip out income, I’m going to take lumps
out. And the effect of reverse pound cost averaging, the well-used phrase now in terms of
the drawdown risk, is coming home to bite them. Especially as we saw in the last few weeks
with what’s happening in the Chinese market and dragging every other market down.
PRESENTER: It does mean that in your phrase there is a need for regular and robust reviews.
JAN HOLT: Yes, absolutely, because one of the other considerations of course is people
who’ve left some of their pension fund in drawdown also may have adopted an investment
strategy that’s trying to generate growth. And so of course if at the point that they want to
switch on the income they don’t go back through a proper review process, then potentially
they’re taking out, they’re stripping out income within the wrong investment strategy. So an
adviser would be able to start to then look at the correct asset allocation to provide income
as compared to generating growth. So I think one of the key things is for advisers to be very
clear with their clients in terms of what that review process will entail, to help clients
identify what the triggers for review might be. Because of course the worst thing that could
happen is that they go off in interim periods switching on income without having taken
advice, and they get it wrong, and that could be catastrophic.
PRESENTER: Yes, indeed, and there is a tendency for the herd mentality to take over that
when the markets are falling sell, which is of course…
JAN HOLT: Yes, and it’s a timing issue.
PRESENTER: It’s the timing issue as such, and with pensions, that’s very important is it not,
STAN RUSSELL: Very important. Particularly in the new world, we’ve got clients who not just
would take a linear income stream out, but perhaps can come along after six months or a
year and take a much larger chunk out. If the markets have gone south at that time it is
well-nigh impossible to recover from that. Now advisers fully understand that, but what I
think we’re all searching for is something that will see them through those difficult market
conditions. There are some solutions out there. Seeing a lot of multi-asset solutions which
seem to be coming to the fore, a lot of investment houses bring out multi-asset funds, and
that could be the answer.
PRESENTER: And I notice the investment trust industry seems to be gearing up to look
towards pensions as well.
STAN RUSSELL: Yes.
PRESENTER: Product innovation, again there was a thought that once all these new
announcements had been made the industry would come over the horizon with all these
great new products. Have they Stan?
STAN RUSSELL: I would say my experience so far is no. I think we have, I think it’s well
documented most of the providers have been spending the time between the budget
announcements and today getting up to speed with the legacy products, making sure we’re
in a position to deal with the demand. And I think we may see some innovation going
forward. But actually we’re more likely to see just traditional tax wrappers perhaps within a
single wrapper, so you perhaps have an annuity and a drawdown within the same wrapper.
PRESENTER: So you would concur with that?
JAN HOLT: Yes.
PRESENTER: You haven’t seen anything majorly new out there.
JAN HOLT: No, I don’t think it will be too long before we see those wrapped solutions;
however, they’re nothing that advisers can’t do today by combining the right mix of
PRESENTER: So there should be no fear that something’s going to come along and knock
your solution out of the water, because of this great new gadget that’s come out.
STAN RUSSELL: I can’t see it happening.
JAN HOLT: No, I think, yes, and I think those who are adopting a wait and see stance in
advance of new products may be disappointed.
PRESENTER: It used to be 50 ways to take your pension, still 50 ways, maybe 51 or 52, but
still 50 ways to take your pension, but basically…
STAN RUSSELL: Yes, 50 ways to leave your lover as well according to certain singers.
Drawdown – the post April 2015 experience
PRESENTER: Yes, 50 ways to take your pension is still out there; basically there are only two
ways though aren’t there?
STAN RUSSELL: Really yes, it’s variations on a theme. So it’s annuities and drawdown as
we’ve always known and loved them, but there’s variations on a theme really.
PRESENTER: And you would agree with that.
JAN HOLT: Yes, or a combination of those two things I think is quite important.
PRESENTER: From your point of view, Jan, what has really happened, what are people doing,
particularly with their drawdowns, what evidence have you got out there of their actions?
JAN HOLT: Well we’ve had some ABI statistics published very recently which are telling us
that £2½ billion has been released. So that’s been either fully encashed or released through
drawdown. The average size of that release was about £15,000. And we’ve had £2.3 billion
invested. So we’ve had £1.3 billion going into drawdown, and the remainder, £990 million,
going into guaranteed income solutions or annuities. So the other point to note here is that
55% of those who use drawdown actually changed provider to do so, and 45% of those who
bought guaranteed income also changed providers - which suggests interestingly and
ironically that the numbers using the open market option have actually gone down rather
than up since pension freedoms.
PRESENTER: Wow, and that’s an undesirable outcome for most people is it not?
JAN HOLT: Potentially yes. In terms of DB transfers, there have been lots and lots of interest
in that, so countless enquiries from those requesting transfer values as they get closer to
retirement. But what we haven’t seen yet I don’t believe is the same impact on DB pensions
as DC. So whilst there’s been lots of interest in that, the number of people who’ve actually
translated that interest into action have been fewer, because I think most people value the
guarantee that effectively is underwritten by their employer when they’re in a defined
PRESENTER: And so they should.
JAN HOLT: And so they may be making that call between well hang on, I could actually have
a lump sum here, or I could have a guaranteed lump sum every month for the rest of my life
through retirement. And they’re making that distinction, they value that security.
Using pension savings to pay off debt
PRESENTER: So that’s ABI stats. Pru stats, anything interesting or are you seeing a similar
sort of scenario?
STAN RUSSELL: Similar really. We issued some stats at our half year results back in July
actually, and what we found is that one in six of those, so we’re looking at the small pots
under £25,000, one in six were actually using the monies to repay debt. Interestingly
enough we did some research where almost 20% of people retiring this year were retiring
with a debt averaging just short of £22,000. So that’s significant money.
PRESENTER: That’s mortgage and credit cards.
STAN RUSSELL: That’s the whole kit and caboodle, so that’s a large percentage going into
retirement carrying debt. So using the pension fund to pay off high cost debt is probably
quite a good idea. Two in five of those with the under £25,000 pots were using them for a
wedding, hopefully not their own wedding but a daughter’s wedding or a grandchild’s
wedding, a car, a holiday, something like that. One in four bizarrely, this one really surprised
me, were taking the money to reinvest it somewhere else. Now that surprises me because
you’ve got the most tax efficient investment medium, a pension, you’re taking it out,
potentially paying tax as we saw already, and putting it into what? Unless it’s an ISA for Joe
Public it’s going to be a less tax efficient area of investment. And the rest wouldn’t tell us
why they were taking the money, so.
PRESENTER: We did all imagine there would be something of a dash for cash, did we not?
That was what we suspected most people would do. And it hasn’t really transpired. People
have been a bit more sensible than we would give them credit for.
JAN HOLT: Well £2½ billion released in three months is quite a significant amount.
PRESENTER: So it has been a dash for cash.
JAN HOLT: To some extent, but of course all of those didn’t cash in everything. Some of
them just took an amount and then have left some invested.
PRESENTER: And are we expecting that to slow down as people become more attuned and
more accustomed to what they should be doing rather than let me get my hands on the
STAN RUSSELL: I think that’s likely to be the case. I think the big bulk of the withdrawals at
the early stage were people waiting from the previous tax year holding off until April 2015.
So the combination of those holding over, plus those going into retirement, so it probably
boosted the number in some ways, and I think we will see a slowing down as we go through,
as people become more aware of the dangers if you like, and will go to Pension Wise and
places like that and get advice, and understand actually this is not as simple as I thought it
was going to be.
Zero income drawdown (ZID) clients
PRESENTER: Absolutely, what about ZIDs, explain what they are? Jan, when you first
described them to me I was somewhat shocked that we use the term ZIDs, but there it is, so
what’s a ZID and why has that come to the fore?
JAN HOLT: Well they’re not the latest enemy from Dr Who, that’s for sure, so one to keep
an eye on, I think, this rise of the ZID. So what we mean by that is zero income drawdown
clients. So these are all the people who’ve been attracted to releasing tax free cash because
they can, and they haven’t gone so far as to cash everything in.
PRESENTER: No, they’ve taken their 25% or up to 25% of their tax free cash.
JAN HOLT: Yes, so they have an amount now in drawdown, and I think from an advice point
of view if you’ve got clients like that within your books then you need to be keeping an eye
on them. And maybe I think there’s a slightly different drawdown review process to
consider for them. So it might be that you want to flag with these people pre-review,
because normally when you’re reviewing somebody in drawdown you’re looking primarily at
the investment and also any changes in personal circumstances. So it’s pretty much the
same thing. However what you would want to be doing I think is to send them out a
questionnaire before the review, so that when that comes back in you can almost triage
them before you sit down in front of them, and you’ll be able to know quite quickly whether
So have they exhausted the tax free cash now for example, is that the trigger to switch on
the income? Or are they now in receipt of a state pension so maybe they don’t need to
switch on the income just yet. Any changes in health, absolutely critical. And I know many
advisers start to think well there’s a retirement health form that runs to tens of pages here,
do I really want to have to complete that all the time? So what you can do is you can use a
series of simple gateway questions.
So you could ask them five things and if they respond positively to any, so you’d be asking
them about do they smoke, do they take prescribed medication, have they been hospitalised
for any medical condition, what amount of alcohol they drink, and then finally their BMI, so
the relationship of their height to weight. And if they answer to those in such a way that you
believe there may now be a change in health which could secure them a higher level of
guaranteed income from an annuity, then you might want to go and find out what level of
income they could get.
Combining annuities and drawdown
PRESENTER: So it is this idea of moving from drawdown to an annuity.
JAN HOLT: Yes, and what would be the trigger for that? Now many believe that in the new
world 70 is the new 65, and people won’t buy annuities until later. However you’ve got to
consider that the client’s equivalent age could actually be higher than 65 if they’ve got some
of those health and lifestyle factors. So the great news is you could be getting a 70 year old
annuity rate for a 66 year old if things stack up.
PRESENTER: Yes, and so definitely annuities are not dead and they are very much alive and
part of the equation.
STAN RUSSELL: Yes, very much so. In fact I believe between March and September almost
£1 billion went into annuities this year, so that just proves the point that there’s, and that’s
with a lot of people still holding off trying to suss out what’s happening, so we could see a lot
more going in there.
PRESENTER: One thing is certain, it’s not just one solution for most people anymore, it is a
blend, is it not, mix and match as you call that, is that so?
STAN RUSSELL: Yes absolutely. Mix and match is something that most of us in the provider
world have been suggesting advisers should look at historically. But there was a reluctance
to go down that route, but I think we’re seeing a lot more mixing and matching now. I think
we will see, I need my own personalised minimum income guarantee, I can get that from an
annuity, and I’ll play around with the rest if you like.
PRESENTER: Jan, I think you have an example for us of a mix and match solution.
JAN HOLT: Yes.
PRESENTER: You’ve called him Simon.
JAN HOLT: Simon yes.
PRESENTER: Who thinks up these names in the marketing department?
JAN HOLT: It’s a fairly straightforward case study. Simon’s 65, he’s married and he’s a
smoker who takes one medication a day for high blood pressure. So he’s in a position now
where he’s got £133,000 in his pot. He wants to take the tax free cash, so he’s going to take
£33,000 out of that, and he needs to make decisions now in terms of what to do with the
remainder. So we can also see that Simon’s got defined benefits of £4,000 a year being paid
out. And he’s got his state pension of just over £6,000. So by going through that process
Stan talked about, the personal minimum income requirement, he’s been through that
process with an adviser, and he knows that he needs to generate another £3,000 income in
order to get there. So that’s going to cover all of his essential income requirements.
So once he’s done that - we go to the next slide then. We can see here it’s actually going to
cost him nearly £62,000 of his £100,000 to buy an annuity which will generate a guaranteed
income of £3,000. So one of the considerations for Simon of course could have been well
just leave the whole amount invested and drawdown against it; however, coming back to
this topic of capacity for loss, his position was if his income did drop beneath that particular
level, then that would have made life very difficult.
So that would have put him in a difficult position and therefore he chooses to spend that
£62,000 and make sure his PMIR, his personal minimum income requirement, is fully met.
And of course if we move on to the next slide, then we can see that he actually still has over
£38,000 that he can invest. And he can draw that off as and when he chooses to
supplement his retirement income. The other key thing for Simon was wanting to provide
some degree of protection for his wife. And he’s been able, that annuity rate, so the annuity
figure actually includes 100% value protection. So there is a death benefit there in place
should he predecease his wife.
So we’ve been able to meet his objectives without exposing him too much with the amount
that is subject to any investment volatility.
PRESENTER: You can almost hear the adviser conversation going on there can you not, Stan?
STAN RUSSELL: Absolutely, and I think we’ll see a lot more of this going on as we move
through time. At the moment I think advisers are still getting their head around it. Clients
are still coming and saying I want my cash without the wider consideration of how you’re
going to see yourself through retirement with a level of income that’s going to meet your
Government consultations and future trends
PRESENTER: Let’s move on really to the trends, things to look out for in the future. What
should advisers be looking out for, Jan?
MC NOTE – CAN WE GET THE LINKS TO THESE
JAN HOLT: Well we’ve three consultations going through at the moment. So we’ve got the
government’s initiative, which is to strengthen the incentive to save. So this is looking at
whether we move from an EET, so exempt-exempt-tax regime through to it being
completely the other way round, so taxed-exempt-exempt, or whether they in fact just
tinker around with lifetime allowances and annual allowances to create a regime that is
simple, transparent and sustainable, because that’s the ultimate aim here.
PRESENTER: That’s what they want you to do, simple, transparent and sustainable.
JAN HOLT: Yes.
PRESENTER: That’s still there as a desire rather than de facto.
STAN RUSSELL: Desirable yes.
MC CAN WE GET THE LINK
JAN HOLT: So that consultation closes end of September. And then we’ve also got, the
government has kicked off an initiative with the FCA which is a financial advice market
review, and this is very much focusing in on looking at the advice gap for the mass market, or
for those without significant wealth. So this is saying well are there barriers to firms actually
being able to provide that advice? So for example is there regulatory clarity that would help
open that up, can we use new technology to open it up? Ultimately what they want to do is
encourage innovation and stimulate demand.
PRESENTER: And I suspect they’re expecting the industry, the government is expecting the
industry to come along with solutions for that.
JAN HOLT: Very much so yes. They’ll consult through autumn on that one, but they are
suggesting they would like to get some final proposals out before the 2016 budget, so it
won’t be a lengthy process.
PRESENTER: A real opportunity for a savvy adviser to get their act together on that.
STAN RUSSELL: Yes, well we’ve seen almost since our day there was a big fear about Joe
Public being disenfranchised from the advice, and this sudden freedom access to pensions,
people were suddenly thinking I’m just going to go and do this without taking advice
because I don’t want to pay for it. There’s been a lot of concerns about the cost of advice.
So it’s hopefully going to generate some level of education, information and guidance,
advice, whatever it happens to be for everyone out there really.
PRESENTER: DB to DC transfers, you mentioned that briefly, are we expecting any more on
that as a trend in the future?
JAN HOLT: I think time will tell. I think anecdotally what I’m hearing is, as I said earlier, it’s
not been the same big bang in the DB world as it has in DC. But the DB managers I think are
sitting tight and saying well we’ll see, we will see. However, longer term, you know, there’ll
be fewer people with as much defined benefit available to them, and there’ll be more
people with increased amounts of defined contributions, so that in itself may well generate
new trends, different trends.
STAN RUSSELL: It could well do. I mean there are currently round about 5.1 million deferred
pensioners in private sector DB schemes in the UK. That’s a lot of people who are sitting on
a pot of money who are not very sure what to do with it. Just to give an example, we talked
about trends. Pre-budget 2014 we were at Prudential doing around about 40 transfer
analysis per month. It’s currently, well it peaked at 600 a couple of months ago; it’s round
about 4-500 a month at the moment. And if that’s reflected across the other providers then
there’s certainly a lot of interest in people, because gilt yields are compressed so we’ve got
transfer values going up. And if an adviser has a client and wants to revisit a transfer value
from 18 months ago, two years’ ago, they’ll find significant increases in those transfer
values. And that might spark a greater interest in moving that money - remembering of
course that the move away takes you away from that promise to pay a pension for life.
PRESENTER: So it always comes with a health warning there.
STAN RUSSELL: Always yes.
Pensions and estate planning
PRESENTER: One of the things that intrigues me more than anything in all the pension
changes was the ability to pass on a pension pot to your children or whoever is inheriting
your wealth. How does that fit in with the advice process, Stan, and what’s your experience
STAN RUSSELL: Well very much so is the almost brought pensions back to the forefront of
estate planning, HD planning, whichever way you want to term it. And funnily enough going
back to the DB to DC world, the DB world, defined benefit world does not have this new
flexibility of transfer, intergenerational transfer of wealth that the defined contribution
world has. And that in its own may be a driver for some of those deferred members to make
the move over. But unquestionably that being able to pass your pension wealth down
through not just one generation but forever, if you can match the income stream with a
return from on the fund, is a very attractive way of doing it.
PRESENTER: You’ve called it cascading pensions wealth isn’t it, you’ve got a slide on it.
STAN RUSSELL: Yes, we’ve got a slide on it.
PRESENTER: Talk us through the slide.
STAN RUSSELL: So this slide here is really about Gerry. Again, the same question, where do
we get those names from? But Gerry’s here, he’s a high rate taxpayer and so if you assume
he spent £10,000 net in his pension, because he’s a high rate taxpayer that grosses up to
£16,600. So we use that number, it’s all rounded down here. Gerry retires and becomes a
basic rate taxpayer as you can see, and after tax he gets £664 in his hand from that money.
STAN RUSSELL: £664 a year for 10 years takes it to £6,640.
PRESENTER: Understood yes.
STAN RUSSELL: So that’s what he’s taking. Then he dies and passes it on to his spouse. She
takes the income tax free because poor Gerry died when he was under 75. He was probably
drinking all my Stella and smoking my cigars. And so she then takes the income for the next
20 years, and she, because it’s paid gross of basic rate tax, because Gerry’s under the age of
75, she gets £16,600 out of that pot for 20 years. And you can see the way this is going. She
then dies, passes it onto her daughter. She was over 75 when she died, so the daughter
takes the same level of income out as originally, so this is all based on a 5% withdrawal, and
a 5% return on the fund I might add. So it’s almost staying as, what’s the word we would use
there, it’s equilibrium in terms of what’s going in and what’s coming out. So she passes it
on. Daughter takes it for 16 years, this time taxed, you can see £10,600 comes out. She
dies, passes it onto her son who takes it as a lump sum, and he takes the whole fund out.
So effectively that £10,000 net cost to the client generates £50,400, which may not seem a
lot but if you make that £100,000 it becomes £½ million, and if you make it £200,000 that’s
£1 million that’s passed on through the generations here, so a fantastic way of passing the
wealth through the generations.
PRESENTER: You don’t have to be a lord and live in a manor house for intergenerational
wealth to be cascaded these days.
STAN RUSSELL: No, absolutely right.
PRESENTER: Really interesting. So when do we reach the new normal? I love this, Jan
you’re great at coming out with these phrases, the new normal in the tax world briefly.
JAN HOLT: I think we’re a little way off that yet. I would say if we’re lucky at some point
during 2016 but let’s see what the current raft of consultations hold, and then we’ll know
PRESENTER: Fair enough, in that case at that point we need to leave it. But where should
people look to to keep up to date, Stan?
STAN RUSSELL: Well there’s a whole host of websites out there. Obviously you can go and
get guidance from Pension Wise. You can go to your provider. Prudential have a whole host
of information on their website that everyone can access that will bring them up to date
with all the major changes that have been going on, and potentially are going to come about
in the next few months or so, next few years even.
JAN HOLT: Well I think people value predictability. In fact there’s some recent evidence
from the Strategic Society Centre that has linked very strongly wellbeing and quality of life in
retirement with guaranteed income. So I think what we need to do is to help people use
good advice processes and planning tools and solutions to actually create at least some
certainty for our clients. And so just adviser.com, which is our website, we’ve got another
range of tools, calculators, technical support material, a lot of collateral there to actually
help advisers achieve that for their clients.