February 2017 - Newsletter
Pensions advice allowance gives tax break
… The move is designed to enhance the accessibility and affordability of financial advice associated with retirement by making advice more affordable due to the tax relief measure.
The tax-free move means that individuals will no longer risk a potential 55% tax liability over advice taken. Under the current tax rules, using this method to pay for holistic retirement advice on all of an individual’s pension products is treated as an unauthorised payment and can incur a tax charge of at least 55%. This is because, currently, the advice given must only be related to the pension product the advice fee is taken from.
Following an eight-week consultation on the plans, first proposed in the FCA’s Financial Advice Market Review and outlined in Autumn Statement 2016, the Treasury has confirmed the details for use of the £500 allowance:
- It can be used up to three times, but only once in a tax year, allowing people to access retirement advice at different stages of their lives, for example when first choosing pension or just prior to retirement.
- It can be redeemed against the cost of regulated financial advice, as well as traditional face-to-face advice.
- It will be available to holders of ‘defined contribution’ pensions and hybrid pensions with a defined contribution element.
- It is not eligible for holders of ‘defined benefit’ or final salary type schemes.
- There will be no maximum or minimum age limit on the allowance.
- There is no limit on use of the allowance, regardless of individual’s income for that tax year.
The allowance will exclude advice that is not ‘strictly related to retirement’, for example inheritance tax planning or advice linked to investment funds that will not be used for retirement income.
Pension providers will be able to offer the allowance to their members from April 2017.
There will be no statutory obligation for pension providers to inform their customers about the entitlement, although the Government says it will 'encourage providers and trustees to make clients aware of the allowance, but is not intending to place a statutory requirement on providers'.
Despite noises for an increase to the £500 figure from a number of stakeholder responses, the Government will not raise the one-off limit, although it ‘acknowledges respondents’ concerns that £500 is not likely to be sufficient to cover the costs of a full, face-to-face holistic retirement advice process,' stating that 'it would be counterproductive to adopt a higher limit for the Pensions Advice Allowance which may discourage advice providers from offering their services for less than £500’.
The Government will keep this figure under review as the advice market responds to the new advisory requirements.
Although there will not be any official VAT exemption for the advice provided since this is set at EU level, it is worth observing that the financial advice is exempt from VAT if it forms part of the ‘intermediation’ by the adviser between their client and the provider of a VAT exempt financial product.
To qualify for exemption from VAT, the adviser needs to evidence that there has been interaction between the adviser and the product provider in relation to the sale of VAT exempt products on behalf of the customer.
Pension battle won for unmarried lady
…The case was closely monitored by pension schemes because as a result, rules could be changed.
A spokesman for the Treasury said: “We will need to examine the implications carefully.”
Ms Brewster, a lifeguard from Coleraine, and Lenny McMullan resided together for 10 years and owned their own home. She told the BBC: “This was about so many other families.”
She said that losing a loved one was “horrendous” and that others – especially cohabiting parents – were being “thrust into hardship” as a result of losing a partner, their income or their pension.
“Lenny would have been happy that so many other people are going to benefit as a result of this [decision], “she said.
Mr McMullan died suddenly at Christmas in 2009, aged 43, two days after the couple had confirmed their engagement.
At the time of his death he had worked for the Northern Ireland public transport service, Translink, for 15 years. He was paying into an occupational pension scheme administered by the Northern Ireland Local Government Officers’ Superannuation Committee (NILGOSC).
If the pair were already married, then Ms Brewster would have automatically shared the pension that he had built up.
Instead, co-habiting partners were only eligible for survivor’s allowances in the same way if she had been nominated on a form. However, this form had not been completed, although Ms Brewster thought that it had been.
The eight-year battle for justice could benefit large numbers of public sector workers.
Nurses, teachers, civil servants, police and fire officers all have to fill in a nomination form if they want their partners to share their pension if they die.
In this case, the form has been condemned as “unlawful discrimination” by the Supreme Court because you do not have to fill it in if you are married. Ms Brewster, who is aged 42 and so is fighting for a future pension, argued in court that the system of nomination forms discriminated against her and breaches her human rights. She initially won her case in the High Court in Northern Ireland, where a judge said that it was "irrational and disproportionate to impose a disqualifying hurdle of this kind". She had used crowd-funding to raise the money to bring that case.
However, that decision was then overturned in the Court of Appeal in Northern Ireland before the case headed to the UK Supreme Court for a final decision. Five Supreme Court justices unanimously ruled she is entitled to receive payments under the pension scheme, saying that the nomination form was "unlawful discrimination". The result could have implications for the rights of co-habiting couples working in the public sector - including NHS staff, teachers, civil servants and police, although the local government schemes in England, Wales and in Scotland has already been changed. Other public sector schemes could change their rules, so that unmarried couples automatically benefit from survivor's pensions without being opted in. They would still have to prove that, as a couple, they had been together for two years and were financially interdependent - for example, having a joint bank account. It will also be open to other pension schemes to argue that discrimination is justified in some circumstances, prompting some legal experts to suggest the impact could be limited.
See more below:
FS schemes ‘killed off’ by undue regulation
…The Government is facing calls to strengthen the Pension Regulator’s powers following the high-profile collapse of BHS last year, which left the majority of the 20,00 members of the retail group’s pension facing cuts to their retirement income.
Like most members of defined benefit pension schemes. BHS staff had been promised a secure income for life, typically inflation proofed, and based on a percentage of their final salary at retirement.
Now some face cuts of up to 10% to their pension schemes, BHS staff had been promised a secure income for life, typically inflation proofed, and based on a percentage of their final salary pension.
In the wake of BHS, a powerful parliamentary committee has called on the Government to force firms to seek clearance from the watchdog before undertaking corporate deals.
However, this would come on top of a projected 160,000 pages of UK pensions legislation including rules, regulations, codes, case law and guidance notes, according to a joint report by law firm Pinsent Masons.
Carolyn Saunders, The Head of Pensions at the firm said; “Failings of the pension system over the years have led to calls for more legislation and regulation, to prevent scandals being repeated, while rules might indeed be a good thing, too many might be bad for us.”
She added; “Despite the major increase in pensions rules over the last 10 years, aimed at protecting the consumer and encouraging better retirement saving, there has been a significant drop in the membership of defined benefit pension schemes, with many people on course for inadequate incomes in retirement.”
Ms Saunders said she believed the rules were currently strong enough to prevent “another BHS” if the regulator used its existing powers more effectively and improved its skill mix.
The call came with the pace of closures of the UK’s 6,000 remaining private sector defined benefit schemes quickening. Last year, 35% of schemes were closed to future accrual, up from 12% in 2006.
Some experts did not agree that legislation was the reason why schemes were shutting their doors.
“It is fanciful to claim that ‘excessive regulation’ has killed off UK defined benefit schemes,” said John Ralfe, an independent pensions consultant.
“These schemes have closed because their cost has increased dramatically in the last 20 years — people are living longer, and real interest rates have fallen — so more money must be put aside today to pay the pension promise.”
Mr Ralfe said the forthcoming pensions green paper on the topic should make funding requirements “crystal-clear, with no wriggle-room” for companies.
“We should be clear that pension regulation is designed to ensure members get their pensions paid and to prevent companies walking away from their pension promises,” said Mr Ralfe.
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