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

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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

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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

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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!

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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

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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

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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)

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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)

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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

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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 )

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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

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1 J U LY 2 0 1 5

1 JULY TO 8 JULY 2015

9 JULY 2015 – 5 APRIL 2016

8 days

272 days

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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

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PI P STARTED

1 JAN

2015

Post Alignment Tax Year

8 JULY 2015

9 JULY 2015 – 5 APRIL 2016

272 days

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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

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PI P STARTED

6 APRIL 2015

Post Alignment Tax Year

8 JULY 2015

9 JULY 2015 – 5 APRIL 2016

272 days

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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

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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

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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

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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

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Section 2

How can this all be implemented?

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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

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5 April 17

31 Dec 16 31 Jan 17

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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

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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

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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?

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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

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Section 3

The Green Paper - where are pensions and savings going?

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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

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Taxed

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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

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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 ?

?

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Section 4

Pensions and savings designs of the future

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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

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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

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S P E N D I N G T H E S AV I N G S F U N D ?

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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

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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

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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 •

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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

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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

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Section 6

Conclusions

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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”

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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.

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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

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© MERCER 2015

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