HEALTH WEALTH CAREER
SUMMER BUDGET 2015 PENSIONS – THE TIPPING POINT? 1 6 J U LY 2 0 1 5
Nigel Roth Gary Evans Paul Enderby
MEET THE TEAM
Nigel Roth
Gary Evans
Paul Enderby
Contact Details:
Nigel Roth Tel: 020 7178 3526
[email protected]
Gary Evans Tel: 020 8260 4997
[email protected]
Paul Enderby Tel: 01483 777055
[email protected]
© MERCER 2015
1
S O W H E R E W E R E W E AT 7 J U LY 2 0 1 5 ? Annual Allowance Excess – penal taxation applies
Double taxation tax charge applies
25% Lifetime Allowance charge on excess
Pension (taxed)
£40,000
Total HMRC value of annual pension savings
£1.0m from 2016 (with some Protection available) Pension (taxed)
25% tax free cash - max £250,000 from 2016
Annual Pension Savings © MERCER 2015
Lifetime Pension Savings 2
SUMMER BUDGET
8 J U LY 2 0 1 5 ?
HEADLINES
Progressively lower Annual Allowance (AA) if ‘Adjusted Income’ exceeds £150,000 AA will be tapered – as low as £10,000 if Adjusted Income is £210,000 or more Pension Input Periods will be aligned to the tax year over 2015/16 Green Paper introduces a consultation on whether pensions tax relief should be reformed or whether the current system should be kept
© MERCER 2015
3
S C O P E O F T O D AY ’ S W E B I N A R
1
The detail of the Summer Budget
2
How can this all be implemented?
3
The Green Paper - where are pensions and savings going?
4
Pensions and savings designs of the future
5
Other areas of interest
6
Conclusions
5
© MERCER 2015
4
T H E D E TA I L – M E R C E R ’ S C U R R E N T I N T E R P R E TAT I O N TAP E R E D AN N U AL AL L O WAN C E
Threshold Income Individual’s total taxable income i.e. earned income, rent, dividends etc Less member contributions to a contract based pension scheme Plus employer contributions to a new salary sacrifice arrangement
Adjusted Income is Threshold Income Plus member and company contributions to any DC scheme Plus Pension Input Amount to a DB scheme But don’t count a new salary sacrifice arrangement twice!
© MERCER 2015
5
T H E D E TAI L – T H E TAP E R E D AN N U AL AL L O WAN C E
230
210
ADJUSTED INCOME (£’000S)
190
170
150
130
10
20
30
40
AN N U AL AL L O WAN C E ( £ ’ 0 0 0 S)
E X AM P L E : AD J U S T E D I N C O M E = £ 1 6 5 , 0 0 0 AN N U AL AL L O WA N C E = £ 4 0 , 0 0 0 – ( £ 1 6 5 , 0 0 0 - £ 1 5 0 , 0 0 0 ) / 2 = £32,500 © MERCER 2015
6
T H E D E TAI L – T H E TAP E R E D AN N U AL AL L O WAN C E
If Threshold Income does not exceed £110,000 than no Tapered Annual Allowance applies irrespective of the level of Adjusted Income
Threshold Income
Adjusted Income
Does Tapered Annual Allowance apply?
£109,000
£160,000
No
£110,001
£160,000
Yes (*)
£120,000
£155,000
Yes (*)
£150,000
£150,000
No
£150,000
£160,000
Yes (*)
* BUT MEMBER CAN MAKE A PENSION CONTRIBUTION T O G E T T H R E S H O L D I N C O M E B E L O W £ 11 0 , 0 0 0 T O AV O I D T H E TA P E R ( B U T N O T T H R O U G H A N E W S A L A R Y SACRIFICE ARRANGEMENT) © MERCER 2015
7
T H E D E TAI L – T H E TAP E R E D AN N U AL AL L O WAN C E I M PAC T OF M ON E Y P U R C H AS E AN N U AL ALLOWAN C E
230
ADJUSTED INCOME (£’000S)
210
190
ASSUME MEMBER PAY S AT L E A S T £10,000 INTO A MONEY PURCHASE ARRANGEMENT
170
150
130
10
20
30
40
A LT E R N AT I V E A N N U A L A L L O W A N C E (FOR DB ACCRUAL)(£’000S)
© MERCER 2015
8
T H E D E TAI L – T H E TAP E R E D AN N U AL AL L O WAN C E
Worked Example
DB Scheme
Threshold Income
£115,000
Pension Input Amount (PIA)
£65,000
Adjusted Income
£180,000
Tapered Annual Allowance
£25,000
Excess pension savings
£40,000
Annual Allowance charge
60% of £7,000 + 40% of £28,000 + 45% of £5,000 = £17,650
T H E M E M B E R M AY W I S H T O PAY AV C S O F £ 5 , 0 0 0 T O R E D U C E T H R E S H O L D I N C O M E T O £ 11 0 , 0 0 0 ( B U T W I L L ST IL L EXPER IEN C E A VERY L AR GE AA C H AR GE)
© MERCER 2015
9
ALIGNMENT OF PENSION INPUT PERIODS HOW THINGS WERE - EXAMPLE
1 J U LY 2014
2 0 1 5 / 1 6 £ 4 0 , 0 0 0 AN N U AL AL L O WAN C E + C AR RY F O RWAR D F R O M 2 0 1 2 / 1 3 , 2 0 1 3 / 1 4 & 2014/15
30 JUNE 2015
1 J U LY 2015
2 0 1 6 / 1 7 £ 4 0 , 0 0 0 AN N U AL AL L O WAN C E + C AR RY F O RWAR D F R O M 2 0 1 3 / 1 4 , 2 0 1 4 / 1 5 & 2015/16
30 JUNE 2016
© MERCER 2015
10
ALIGNMENT OF PENSION INPUT PERIODS(PIP) REALIGNMENT IN 2015/16
C AT E G O RY 1 : 2 0 1 6 / 1 7 P I P H AD AL R E AD Y S TAR T E D ( 7 AP R I L – 8 J U LY S TAR T D AT E )
C AT E G O RY 2 : 2 0 1 5 / 1 6 P I P N O T Y E T E N D E D ( 9 J U LY – 5 AP R I L S TAR T D AT E )
C AT E G O RY 3 : P R E V I O U S LY AL I G N E D T O TAX Y E AR ( 6 AP R I L S TAR T D AT E )
© MERCER 2015
11
REALIGNMENT OF PENSION INPUT PERIOD IN 2015/16 C AT E G O RY 1 E X A M P L E
– L AT E S T
PI P STARTED
Pre Alignment Tax Year
1 JULY 2014
2015/16 £40,000 ANNUAL AL L O WAN C E + C AR RY F O RWAR D F R O M 2 0 1 2 /1 3 , 2013/14 & 2014/15
Post Alignment Tax Year
30 JUNE 2015
REOPEN THIS CLOSED PIP – 365 DAYS
© MERCER 2015
1 J U LY 2 0 1 5
1 JULY TO 8 JULY 2015
9 JULY 2015 – 5 APRIL 2016
8 days
272 days
12
REALIGNMENT OF PENSION INPUT PERIOD IN 2015/16 C AT E G O RY 2 E X A M P L E – L AT E S T
Pre Alignment Tax Year
1 JANUARY 2015
2015/16 £40,000 ANNUAL ALLOWANCE + CARRY FORWARD FROM 2012/13, 2013/14 & 2014/15
189 days
© MERCER 2015
PI P STARTED
1 JAN
2015
Post Alignment Tax Year
8 JULY 2015
9 JULY 2015 – 5 APRIL 2016
272 days
13
REALIGNMENT OF PENSION INPUT PERIOD IN 2015/16 C AT E G O RY 3 E X A M P L E – L AT E S T
Pre Alignment Tax Year
6 APRIL 2015
2015/16 £40,000 ANNUAL ALLOWANCE + CARRY FORWARD FROM 2012/13, 2013/14 & 2014/15
94 DAYS
© MERCER 2015
PI P STARTED
6 APRIL 2015
Post Alignment Tax Year
8 JULY 2015
9 JULY 2015 – 5 APRIL 2016
272 days
14
AVA I L A B I L I T Y O F A N N U A L A L L O WA N C E S P L I T T I N G T H E 2 0 1 5 / 6 TAX Y E AR PRE-ALIGNMENT 1 JULY 2014
2015/16 £40,000 ANNUAL ALLOWANCE + CARRY FORWARD FROM 2012/13, 2013/14 & 2014/15
POST- ALIGNMENT
30 JUNE 2015
1 JULY To 8 JULY 2015
AN N U AL AL L O WAN C E = £80,000 PLUS C AR RY F O RWAR D F R O M 2012/13, 2013/14 & 2014/15
© MERCER 2015
9 JULY 2015 to 5 APRIL 2016
AN N U AL AL L O WAN C E = £80,000 – PRE-ALIGNMENT PIA BUT WITH MAXIMUM OF £40,000
PLUS AN Y R E M AI N I N G C AR RY F O R WAR D F R O M 2012/13,2013/14 & 2014/15
15
C A L C U L AT I N G T H E P E N S I O N I N P U T A M O U N T F O R 2015/6 - DC SCHEMES
Pre Alignment Tax Year
Post Alignment Tax year
Amount contributed by or on behalf of a member in Pre Alignment Tax Year
Amount contributed by or on behalf of a member in Post Alignment Tax Year
© MERCER 2015
16
C A L C U L AT I N G T H E P E N S I O N I N P U T A M O U N T F O R 2015/16 - DB SCHEMES
Best Illustrated via an example
Calendar year example
Accrued pension at 1 January 2015
£40,000 p.a.
Accrued pension at 5 April 2016
£46,070 p.a.
PIA for Combined Period (Pre and Post Alignment Periods combined)
[£46,070 – (£40,000 x 1.025)] x 16 = £81,120
PIA for Post Alignment Period
£81,120 x 272 / (189+272) = £47,863
PIA for Pre Alignment Period
£81,120 - £47,863 = £33,257
© MERCER 2015
17
PENSION INPUT AMOUNT FOR 2015/6 AN ALY S I S O F E X AM P L E – AS S U M E N O C AR RY F O R WAR D
• Pension Input Amount for Pre Alignment Period (£33,257) is less than the £80,000 available • Balance of Annual Allowance available for Post Alignment Period
=£80,000 - £33,257 = £46,743, but subject to a maximum of £40,000 • Pension Input Amount for Post Alignment Period (£47,863) is more than the available £40,000 • Annual Allowance charge is based on £7,863 (£47,863 - £40,000) • Note that Annual Allowance charges can arise in both the Pre Alignment Period and Post Alignment Period
© MERCER 2015
18
Section 2
How can this all be implemented?
© MERCER 2015
19
HOW CAN THIS ALL BE IMPLEMENTED? A D M I N I S T R AT I O N I M P L I C AT I O N S
Simple PIP Transition – Categories 2 & 3 (slide 11) 6 April 15
PIPs
Trustee / Provider
Employer/ Member
5 April 16
8 July 15
Pre 8 July PIP
Post 8 July PIP Issue 2014/15 PIA statements
Retirement / Leaver communications
Member tax return Scheme Pays election
2016/17 PIP New PIA calculations / comms ready for Trustees
Issue 2015/16 PIA statements Who is above (T)AA
Member tax return Scheme Pays election
Support for IP14, ‘FP16’, ‘IP16’ Guidance for PIA 2015/16 31 Dec 15 31 Jan 16
© MERCER 2015
5 April 17
31 Dec 16 31 Jan 17
20
HOW CAN THIS ALL BE IMPLEMENTED? TRUSTEE / PROVIDER PRACTICALITIES
• Trustees/Providers provide Pensions Savings Statement, where PIA exceeds AA TAA applies where earnings are above the threshold If TAA applies, value will depend on earnings including PIA Not clear how trustees will know if earnings exceed threshold/PIA exceeds TAA and when
• Current practice for pensions savings statements • Need to consider different approaches post TAA Conservative approach to earnings / TAA or employer driven 2015/16 transition period: PIA calculations & delivery dates
© MERCER 2015
21
HOW CAN THIS ALL BE IMPLEMENTED? TRUSTEE / PROVIDER PRACTICALITIES (2)
• Differences in PIPs E.g. Individual PIPs • Retirements / leavers - need to consider: Will PIA be correct for retirees/leavers pre 8 July? Probably (but not always) and context will be incorrect What should be said to imminent retirees? Difficult to say before autumn General member communication may be appropriate NOTE: Members can elect Scheme Pays at retirement May need to unwind this
© MERCER 2015
22
HOW CAN THIS ALL BE IMPLEMENTED? EMPLOYER / MEMBER PRACTICALITIES
• Support for decisions about contributions in 2015/16 How much Employer support? Is it an employment issue or a personal tax issue? How much will cost be a factor? • Provision of support for individuals who wish to register for IP14, ‘FP16’, ‘IP16’ IP14 should still be supported – provision of LTA calculations FP16 and IP16 will also need to be supported But number potentially affected is growing all the time How will trustees / employer manage demand?
© MERCER 2015
23
HOW CAN THIS ALL BE IMPLEMENTED? EMPLOYER / MEMBER PRACTICALITIES
• Communications to members Consider proactive communications to members Cover position for recent and imminent retirees / leavers Also heads up on next steps • Scheme design Issues Benefits limited to PIA May lead to alternative investment routes
© MERCER 2015
24
Section 3
The Green Paper - where are pensions and savings going?
© MERCER 2015
25
T H E G R E E N PAP E R – W H E R E AR E P E N S I O N S AN D S AV I N G S G O I N G ? RECAP ON DIFFERENCES BETWEEN PENSIONS AND ISAS
Contributions
Accumulation
Consumption
Contributions
Accumulation
Consumption
Pensions
ISAs
Tax Free
© MERCER 2015
Taxed
26
T H E G R E E N PAP E R – W H E R E AR E P E N S I O N S AN D S AV I N G S G O I N G ? C O N S U LTAT I O N O N P E N S I O N TA X R E L I E F
© MERCER 2015
27
S O W H E R E A R E P E N S I O N S A N D S AV I N G S G O I N G ?
?
© MERCER 2015
28
Section 4
Pensions and savings designs of the future
© MERCER 2015
29
W O R K P L A C E S AV I N G S : B R I D E S M A I D T O B R I D E ?
• Growing interest in Corporate ISAs and other workplace savings from employers • Drivers: Employees subject to the LTA, receiving cash supplements and wanting an alternative tax efficient savings vehicle; Desire to provide attractive benefits to wider generations; Desire to differentiate from competitors. • We expect take-up to increase
• Providers who offer pension and savings on the same platform will prosper
© MERCER 2015
30
P E N S I O N A N D S AV I N G S O F T H E F U T U R E A COMBINED APPROACH Define income needs
Savings at retirement
Maximise efficiency in the year
Reorganise savings each year
Maximise tax relief across all years
Save often and frequent, but maximise tax efficiency of savings
Use of tax free cash Look at all savings, and take income to minimise tax paid
Ordered use of savings
Maximise tax relief Minimise savings limit impact
© MERCER 2015
31
S P E N D I N G T H E S AV I N G S F U N D ?
© MERCER 2015
32
TA X E F F I C I E N T S AV I N G S C H O I C E S T H R O U G H O R GUIDED FROM THE WORKPLACE
Product
Available through a consolidated Workplace platform now?
DC Pension (Trust, Contract, Master Trust)
Yes
ISA (Cash and Stocks & Shares)
Yes
Help to Buy ISA (if they proceed)
Not yet
Junior ISA
Not yet
Unit trusts & OIECS
Yes
Save As You Earn
Not Yet
Share Incentive Plan
Not Yet
© MERCER 2015
33
CHARACTERISTICS OF AN IDEAL WORKPLACE S AV I N G S S O L U T I O N • Selected by the employer based on its needs and based on full market knowledge • Delivered by a robust provider committed to: A long-term presence in the UK market; Maintaining leading edge communications; Enabling access to the latest investment products and highly rated investment funds; • All products visible and transactions possible through one screen; • Offer tools to model income needs & tax ‘break-points’; • Close to institutional charges; • Clean & transparent fees; • Employee focused communications; • Links & data feed to Flex and Employee Financial Wellbeing Platforms; • Sound governance. © MERCER 2015
34
2 1 ST C E N T U R Y P L C : B E N E F I T S T R AT E G Y Most employees
Into DC Plan
Core DC contribution (via salary sacrifice?)
Prime role for Flex plan?
Autoenrolled
Workplace Savings
Savings allowance: • for those whose ‘adjusted income’ exceeds £150 K •
© MERCER 2015
Growth investment phase
Other employees wanting different savings
Short-term savings How much of the ‘Savings allowance’ to allocate to each savings vehicle?
Corporate ISA (also used for share roll over)
Other tax favoured savings vehicles
Engagement phase
Annuity selection process
GSIPP for drawdown/share plan rollover/wider investment choice
Cash
De-risking strategy for each 35 destination
Section 5
Other areas of interest
© MERCER 2015
36
OTHER AREAS OF INTEREST
• Consultation on EFRBS • Salary sacrifice schemes to be monitored • Secondary market for annuities – delayed until 2017 • Tax on lump sum death benefits on death after age 75 will change to marginal rate • New £5,000 Dividend Allowance
© MERCER 2015
37
Section 6
Conclusions
© MERCER 2015
38
QUESTIONS FOR YOU
• Will you do anything for your employees in response to the Summer Budget 2015 pension changes? • What will be the threshold for doing something? Salary above a certain level?
• What will you do? A salary supplement instead of pension? Company contribution to an ISA? • If so, how much will the salary supplement/contribution to the ISA be? QUESTIONS Please type your questions in the Q&A section of the toolbar and we will do our best to answer as many questions as we have time for. To submit a question while in full screen mode, use the Q&A button, on the floating panel, on the top of your screen. CLICK HERE TO ASK A QUESTION TO “ALL PANELISTS”
© MERCER 2015
FEEDBACK Please take the time to fill out the feedback form at the end of this webcast so we can continue to improve. The feedback form will pop-up in a new window when the session ends.
39
MEET THE TEAM
Nigel Roth
Gary Evans
Paul Enderby
Contact Details:
Nigel Roth Tel: 020 7178 3526
[email protected]
Gary Evans Tel: 020 8260 4997
[email protected]
Paul Enderby Tel: 01483 777055
[email protected]
© MERCER 2015
40
© MERCER 2015
41