Transcript PFS Gapfill 1 - The Personal Finance Society

PFS – Pensions and
Retirement Planning Gap Fill
Malcolm Tyrrell
Business Development Manager
Financial Services Skills Council
RDR Standards – Pensions and retirement planning apex standards
Attainment Level
• To demonstrate an understanding of
Outcome
• The political, economic and social environment factors which
provide the context for pensions planning
Indicative Content
• Role of government, policy direction, challenges and proposed
reforms
• Corporate responsibilities, challenges and impact on pension
provision
• Demographic trends, longevity and ageing population
• Incentives, disincentives and attitudes to saving
Financial Services Skills Council
RDR Standards – Pensions and retirement planning apex standards
Attainment Level
• To demonstrate an ability to analyse:
Outcome
• The options and factors to consider for drawing pension benefits
Indicative Content
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DC schemes:
Secured pensions, types of annuities and main features
Unsecured pensions
Compliance requirements
Timing of decisions and implementation
Triviality rules
PFS Gap Fill
Agenda
• Role of government
• Policy direction
• Challenges and proposed reform
• Corporate responsibilities
• Demographic trends, longevity and ageing population
• Incentives, disincentives and attitudes to saving
• DC schemes
• Timing
• Triviality rules
Role of Government
The Coalition
Review
policy
Role of the
government
Draft laws
Implement
policy
Policy Direction
Current UK pension system – where has it come from?
1900-1950
1908
Old Age Pension Act
1921
Finance Act
1925
Contributory Pensions Act
1935
National Spinsters’ Pension Association
1946
National Insurance Act
1947
Finance Act
Policy Direction
Current UK Pension System
1950’s - 2000
1959
National Insurance Act
1975
Social Security Pensions Act
1980
Social Security Act
1986
Financial Services Act
1991/1992 Maxwell Scandal
1995
Pensions Act
1997
Removal of tax credits on company
dividends
1999
Minimum Income Guarantee (MIG)
The new millennium
Policy Direction
Current UK Pension System
2001 - present
2001
Stakeholder pensions
2001
FRS 17
2002
State Second Pension
2003
State Pension Credit
2004
Government pension commission report
2004
Pension Act
2006
A day
Policy Direction
Current UK Pension System - 2010
• Number of years to qualify for
Basic State Pension
• Gradual increase in the female state pension age begins from
to
• Minimum age at which pension benefits can be taken is increased from
to
Policy Direction
Where are we now?
Coalition Government’s Emergency Budget June 2010
• Reducing the annual allowance
• Removing the effective requirement to annuitise by age 75
• Increasing the Basic State Pension by the greater of the increase in
prices, the increase in national average earnings and 2.5% per
annum
• Review the timescale of increases in the State Pension Age
• Removal of default retirement age of 65 from April 2011
• Review of public service pension schemes
Challenges and proposed reforms
Challenges
• Individuals – not planning for retirement
• Company’s – changing their retirement offering
• Pension scandals
– transfers from occupational to personal pensions
– Robert Maxwell
– Equitable Life
.
Challenges and proposed reforms
Annuity Rates
Annuity rates, gilt yields and FTSE 100, 1990 to 2010
18
8000
FTSE 100 (right hand scale)
16
Male, single life, aged
65
14
7000
6000
12
5000
10
4000
Annuity Rate
Left Hand Axis
gilt yields
Left Hand Axis
8
3000
6
2000
4
2
Gilt yields
(left hand scale)
0
Oct-90
May-91
Dec-91
Jul-92
Feb-93
Sep-93
Apr-94
Nov-94
Jun-95
Jan-96
Aug-96
Mar-97
Oct-97
May-98
Dec-98
Jul-99
Feb-00
Sep-00
Apr-01
Nov-01
Jun-02
Jan-03
Aug-03
Mar-04
Oct-04
May-05
Dec-05
Jul-06
Feb-07
Sep-07
Apr-08
Nov-08
Jun-09
Jan-10
Aug-10
0
1000
FTSE 100
Right Hand
Axis
Challenges and proposed reforms
Pension complexity
• Understanding pension types
• Understanding state provision
Ageing population
• number of people paying tax and NI is falling
• more burden on state provision
• working population is not saving
Challenges and proposed reforms
Reforms
Review of
state
pension
age
NEST
Adequate
standard
of living
Calculation
of state
second
pension
Eligibility
for basic
state
pension
Escalation
rates for
basic state
pension
Corporate Responsibilities
Corporate Responsibilities
National
EStakeholder
mployment
Savings
Trust
Corporate Responsibilities
Auto-enrolment and NEST
• Auto-enrolment commences October 2012 to February 2016, depending on size
of employer
• Implementation of NEST 1st October 2012
• Employees
– aged 22 – State Pension Age
• Contributions
– Minimum: 8% of qualifying earnings, of which minimum 3% employer
– Maximum: £3,600 per year
• Charges
– 1.8% Contribution Charge
– 0.3% Annual Management Charge
• Decumulation: OMO Lifetime Annuity through online panel
• Employers can offer alternative schemes
Population ageing
•
The population of the UK is ageing
•
Over last 25 years, size of population over 65 increased by 1.7m
•
Population under 16 decreased from 21% to 19%
•
By 2034, 23% of population will be over 65
•
Fastest increase in those aged over 85
– 660,000 to 1.4 million
– By 2034 – 3.5 million
Source: National Statistics
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Population ageing
•
Median age: 35 (1984) -> 39 -> 42
(2034)
•
Women 36 -> 40
•
Men 33 -> 38
•
Ratio of women to men over 65:
– 1984: 156 to 100
– 2009: 129 to 100
– 2034: 118 to 100
•
The prevalence of dementia also
increases significantly with age:
– 75-79 5.1%
– 85-89 16.7%
Source – Dementia UK
Number of pensioners in UK 2008-09
19Source: Pensioners’ Income Series
Household sizes
Source: ONS, Labour Force Survey: Households by size, Great Britain
20
Increasing life expectancy
•
Life expectancy at birth in 1900
– Male: 48.5
– Female: 52.4
Source: Govt Actuary’s Dept
Increasing life expectancy
•
In 1926: 34% of men and 40% of women lived to 65
•
In 2010: 78% of men and 85% of women lived to 65
•
Since 1930, the number of years over State Pension Age as a proportion of
adult life has risen from 23% to 42% for women
•
Infant mortality rate in 2009 was the lowest ever recorded in England and Wales
at 4.7 deaths per 1,000 live births
– In 1960 it was 22.8!
Source: *DWP **ONS
Influences on health
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•
•
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BUT
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•
•
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Purer water
Cleaner air
Better food
Better housing
More leisure time
More green space
Immunisation
New infectious diseases
Re-emerging diseases
Smoking and drinking
Lack of activity
Obesity
So….
24
•
We are all living longer
•
Women are living longer still
•
But a larger proportion of retirement may be spent in ill health
Poor old men – all sorts of theories
•
Why women live longer
– Flexibility
– Resilience
•
Why men don’t
– More often wiped out by
– Rigidity
– Aggression
– Denial of feelings
– Smoke more
– Drink more
– More accidents
– More murders
•
But is this true?
Source: http://www.scientificamerican.com/article.cfm?id=why-women-live-longer
Professor Tom Kirkwood -
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‘‘It is important for the species for females to have healthy bodies since they
bear and nurture the next generation
•
Leading to a tendency to live longer
•
Males are more disposable
•
Although it’s difficult to say these things with absolute assurance’’
The impact
•
State spending on retirement pensions has risen
– £33 billion in 1980
– £69.5 billion in 2010 (£100 billion on pension age benefits)
– This generation of pensioners is the wealthiest ever in history
•
1.3 million people working beyond State Pension Age
– Median earnings:
– £381 p.w. for couples
– £210 p.w. for single pensioners
Source: DWP
Incentives/Disincentives
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Incentives:
•
Tax reliefs for individuals and employers on contributions
•
Tax exemptions on investment profits
•
PCLS
•
Disincentives:
•
Limits on max PCLS and eligible contributions
•
Min age 55 (unless in ill-health)
•
Dramatic reduction in number of DC schemes
•
Costs
•
Mistrust and pensions misselling
Attitudes to Saving
29
•
No compulsion (yet!)
•
Affordability
•
‘State will provide’
•
‘It’s years ‘till I retire’
Proportion of population with no
private pension wealth
Source: ONS: Wealth in Great Britain 2009
30
Median assets in pensions
Source: ONS: Wealth in Great Britain 2009
31
Impact of Demographic Trends
•
At the beginning of the 1990s rates for Male 65 were
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Single life annuity – 15%
•
£100,000 fund would buy £15,000pa
By 2000
•
Single life annuity – 9%
By 2009
•
Single life annuity – 6%
£100,000 fund would buy £6,000pa
Source: CII RO4 workbook.
State Pension Age and other pension ages
33
•
State Pension Age for women will be 65 in 2018
•
State Pension for all will rise to 66 between December 2018 and April 2020
•
Affected if you were born after 6th April 1953
•
The “default retirement age” will be abolished from April 2011
•
Engineering Employers’ Federation survey*
– 47% of 65 year olds asked to continue working in previous 12 months
•
Prudential survey**
– 1 in 4 businesses expect staff to delay retirement
•
*Source: Engineering Employers Federation **Prudential survey
Summary
34
•
Living longer has to be a good thing
•
Retirement can be a wonderful time
•
But it has to be paid for
– Working longer
– Saving more
•
But:
– More single people
– More single women (some widowed)
– Greater responsibility
Drawing Retirement Benefits
• Analyse the options and factors to consider for drawing pension
benefits:
• Defined Contribution unsecured pensions
• Compliance requirements for DC schemes
• Triviality rules
Retirement Options
Client Choices…
• Buy an Annuity
• USP/ASP
• Variable Annuities
• Fixed Term Annuities
• Timing
• Compliance
• Triviality
Retirement Options
Client Choices…
• Buy an Annuity
• USP/ASP
• Variable Annuities
• Fixed Term Annuities
• Timing
• Compliance
• Triviality
Retirement Options
Buy an Annuity
Single
Level
Joint
Increasing
Fixed
RPI
Enhanced Impaired
Guaranteed
Protected
Asset Backed
Retirement Options
Annuities – the risks
• What are the biggest risks regarding Annuities?
Inflation
Death
Retirement Options
Annuity Death Benefits
• Guarantee Periods
• Value Protection
Retirement Options
Annuity Death Benefits
• Guarantee Periods
• Value Protection
Retirement Options
Guarantee Periods
• Annuity payments may be guaranteed for up to 10 years
• The Guaranteed payments are taxable under PAYE for the recipient(s) and
cannot normally be commuted
Retirement Options
Guarantee Periods
• Joint life cases
• Without Overlap
• With Overlap
Retirement Options
Annuity Death Benefits
• Guarantee Periods
• Value Protection
Retirement Options
Value Protection – A ‘Money-back’ Facility (current rules)
• In the event of death before age 75
• Purchase price minus gross income payments to date
• Subject to 35% tax
• Single or joint life
• Any % of fund can be covered
Retirement Options
Value Protection – From April 2011
• In the event of death at any age
• Purchase price minus gross income payments to date
• Subject to 55% tax if death occurs on or after 6 April 2011
• Single or joint life
• Any % of fund can be covered
Underwriting
Essential filtering questions
Health
Are you taking
prescription medication?
Have you ever received
hospital treatment for a
Medical Condition?
Do you Smoke?
Alcohol Consumption?
Lifestyle
Height / Weight?
Postcode?
Occupation?
Retirement Options
Client Choices…
• Buy an Annuity
• USP/ASP
• Variable Annuities
• Fixed Term Annuities
• Timing
• Compliance
• Triviality
Drawdown
Current rules
Annuity
Unsecured
Pension
Alternatively
Secured Pension
PCLS
25% if crystallised before age 75
Age
From age 55
Ages 55- 75
(up to 77 since
June 2010)
From age 75
Income
Guaranteed
income for life
Income up to
120% of GAD
rates
Income between
55% and 90% of
GAD rates
Reviews
None
Every 5 years
Every year
Death benefits
Value Protection
up to age 75,
taxed at 35%
Return of
remaining funds,
taxed at 35%
Return of
remaining funds,
taxed at 82%
Drawdown
New rules from April 2011
Annuity
Capped
Drawdown
Flexible
Drawdown
PCLS
25% from age 55
Age
From age 55
From age 55
From age 55
Income
Guaranteed
income for life
Income up to
100% of GAD
rates
Unlimited income,
provided MIR is
met
Reviews
None
Every 3 years
None
(Annually from age 75)
Death benefits
Value Protection at Return of
any age, taxed at
remaining funds,
55%
taxed at 55%
Return of
remaining funds,
taxed at 55%
Uncrystallised funds lump sum free of tax if death before age
75
Drawdown
Minimum Income Requirement
• £20,000 p.a.
• Only pension income will be considered
– State Pension (BSP, SERPS, S2P)
– Scheme Pensions and Lifetime Annuities (no escalation required)
• Must be satisfied when individual first moves to flexible drawdown
• Any subsequent contributions subject to annual allowance charge
• Aim is to ensure individuals don’t fall back on the state
• Level reviewed at least every five years
Unsecured Pension Process
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Determine Income Level
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titleCalculate
styleCritical Yield
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Assess Risk Profile
Construct Investment Portfolio
Unsecured Pension Process
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Determine Income Level
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titleCalculate
styleCritical Yield
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Assess Risk Profile
Construct Investment Portfolio
Unsecured Pension Process
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Determine Income Level
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titleEnhanced
style Annuity?
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Assess Risk Profile
Construct Investment Portfolio
Critical yields to match annuity at age 60
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Source: The Exchange & Just Retirement – August 2010. Based on Male, 60
Critical yields at 65
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Critical yields are higher from 65
Volatility/timing have greater effect
Source: Just Retirement & The Exchange – August 2010
Retirement Options
The Income Drawdown Review Process
• Past Investment Performance
• Outlook
• Current Investment strategy
• Gilt Yields
• Income requirements
• Attitude to risk
• Changes in circumstances (health)
Enhanced annuity rate?
Income
Requirements
Critical Yield
Assess
Risk Profile
Construct
Investment
Portfolio
Retirement Options
Alternatively Secured Pension
• Minimum 55%, maximum 90% GAD Rate
• Annual reviews
• Starts at age 75
• Drawdown only
• Death benefit may be subject to
– Unauthorised payment charges
– IHT
Retirement Options
Client Choices…
• Buy an Annuity
• USP/ASP
• Variable Annuities
• Fixed Term Annuities
• Timing
• Compliance
• Triviality
Retirement Options
In the UK…..
• What are variable annuities?
• They are not really variable
• They are not really annuities
• They are.. Unit-linked savings contracts with attached guarantees
Retirement Options
In the USA….
• They work as a tax-deferred Investment vehicle that comes with an insurance
contract (usually designed to protect you from capital loss), the account is not
subject to annual contribution limits (as other products are)
• You can choose to annuitise when the time comes or withdraw money as you see
fit
• Variable annuities are notorious for the fees they charge average annual
expenses currently stand at 2.44% *
• The death benefit was triggered in only 1% of all policies from 2002 to 2004 **
Source * SmartMoney article ‘What is wrong with Variable Annuities’
Retirement Options
In the UK….
• Guarantee may be triggered at review when GAD Maximum falls below
Guaranteed Income
• Guaranteed Income may increase at review if fund performance is sufficient
• Guaranteed Income may be reduced if actual income taken is greater than
Guaranteed Income
• Guarantee may be effected by provision of Lifetime Annuity (no flexibility)
Retirement Options
Client Choices…
• Buy an Annuity
• USP/ASP
• Variable Annuities
• Fixed Term Annuities
• Timing
• Compliance
• Triviality
Retirement Options
Fixed Term Annuities
• What are they?
• Unsecured Pension
• Fixed Term Annuity – 3 Years or to age 75
• Income Guaranteed
• Guaranteed Maturity Value
Retirement Options
Fixed Term Annuities – Case Study
Male Aged 65 - £50,000
Income
Maturity
Value
Income At
Maturity
(Healthy)
Income At
Maturity
(Enhanced)
FTA
5 Years
£ 3,110
£39,383
£ 2,985
£ 3,648
Healthy
Rate
£ 3,292
N/A
Enhanced
Rate
£ 4,088
N/A
Source: The Exchange – June 2010. Figures are for illustrative purposes only.
Retirement Options
Fixed Term Annuities
• What Happens on Death
• Maturity value dies with you!
• Annuity has same options as Lifetime annuity
– Spouses annuity
– Guarantees
– Value Protection
Retirement Options
Client Choices…
• Buy an Annuity
• USP/ASP
• Variable Annuities
• Fixed Term Annuities
• Timing
• Compliance
• Triviality
Retirement Options
Timing of decision
• Wealth
• Health
• Spouse’s employment status/age
• Current economic situation
– Pension fund fallen in value?
– Redundancy?
– Stay invested?
– View that annuity rates will improve if markets pick up
Retirement Options
Client Choices…
• Buy an Annuity
• USP/ASP
• Variable Annuities
• Fixed Term Annuities
• Timing
• Compliance
• Triviality
Retirement Options
Compliance Requirement for Defined Contribution
• FSA Handbook - COBS 9.3.3 – factors to consider
• Investment Objectives/Tax Free Cash/State of Health
• Current and future income requirements/existing pension assets
• Attitude to risk
• FSA Handbook - COBS 9.4.10 – risks to be explained in suitability report
• Capital erosion of fund
• Investment returns may be less than illustrated
• Annuity or scheme pension rates may worsen
• High levels of income may not be sustainable (drawdown or FTA)
Triviality
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Benefits
can text
be styles
commuted
in the following
situations:
-The
Member or receiving dependant or the paying
scheme elects if benefits are small enough
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Triviality
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Commutation
by styles
Member:
• Between ages 60-75
• Value of all pension rights must not exceed 1% of Lifetime Allowance
(£18k)
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• Lump sum extinguishes members’ rights under the paying scheme
25% of lump sum is tax-free, the rest is taxed as earned income
(provided benefit is not already in payment)
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• When the LTA reduces in 2012 the triviality limit will remain at £18k
Triviality
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Commutation
of styles
a Dependant’s pension:
• If Member died before age 75
• Payment must be made before the Member’s 75th birthday
• Commutation extinguishes all entitlements
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to
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•
Taxed as earned income
If any amount exceeds 1% of the Lifetime Allowance it will be taxed
as anto
unauthorised
payment
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text (40%)
styles
Triviality
Commutation
wind-up:
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textscheme
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• Must be before the Member’s 75th birthday and they must have
sufficient Lifetime Allowance
• If contributions have been made for that Member within the last 5
years employer cannot contribute for the next 12 months. If member
left the scheme over 5 years ago they can take a lump sum
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£18k triviality commutation limit applies
• Click
25% can be paid tax-free, balance taxed as earned income
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• A winding-up lump sum can be taken at any age
Triviality
Finance
2008
Supplementary rules;
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Occupational or Public Service pension schemes can
opt to pay a commuted lump sum of up to £2000 if
• Member is not a Controlling Director (or a family member of)
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• Total lump sum of all Member’s benefits is less than £2k
No transfers out in the last 3 years
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All benefits
to the
schemetext
will be
extinguished
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Any Questions?
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Important
Information
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It is our intention that the information contained within this presentation is accurate. We have taken all reasonable steps to ensure
that it is up-to-date and where relevant, reflects the current views of our experts. However, we do not acceptant liability for errors
or omissions in the information supplied and if you require clarification on anything, our recommendation is that you contact us at
the address below for verification, or call 0845 302 2287.
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Our Registered Address
Just Retirement Limited
Vale House, Roebuck Close,
Bancroft Road,
Reigate,
Surrey RH2 7RU.
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Regulatory Information
Just Retirement Limited. Registered Office: Vale House, Roebuck Close, Bancroft Road, Reigate Surrey, RH2 7RU.
Registered in England Number 05017193.
Just Retirement Ltd is authorised and regulated by the Financial Services Authority.