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My PFS - Technical news - 4/07/17

Personal Finance Society news update from 21st June to 4th July 2017.

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Taxation and Trusts

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TAXATION AND TRUSTS

Guardianship of the property and affairs of missing persons

The Guardianship (Missing Persons) Act 2017 has now received Royal Assent and will be brought fully into force in 2018. The Act allows for the appointment of a guardian to manage the affairs of a person who has been missing for more than 90 days when certain conditions are met.

Where an adult has been missing for months, or even years, without known cause, families are often left with no means of administering that person's financial affairs.

Under the current law, (The Presumption of Death Act 2013), the missing person's spouse, civil partner, parent, sibling or child is required to wait at least 7 years or provide proof that the missing person 'is thought to have died' before they can apply for a 'Declaration of presumed dead'. In the meantime, there is no mechanism which enables the dependants of the missing person to deal with their property and financial affairs and this can lead to serious practical problems.

Following calls for reform, the Coalition Government consulted on whether there ought to be a new legal process by which a person ("a guardian") could be appointed to act on behalf of, and in the best interests of, a missing person. The government then issued a response paper which outlined the key features of the proposed scheme.

The outcomes of the consultation have now been enacted in the form of The Guardianship (Missing Persons) Act 2017 (the Act) which received Royal Assent in late April. However, the commencement date of the Act has been postponed due to the recent General Election and the Act is expected to be brought into force by regulations in 2018.

Below is a summary of the main provisions of the Act:

(i) The Act defines "missing persons" as persons who are absent from their "usual place of residence" and "usual day-to-day activities" in circumstances where either their whereabouts is unknown (or not known with sufficient precision) or the person is unable to make and/or communicate decisions about his or her property or financial affairs for reasons beyond their control (other than illness, injury or lack of mental capacity).

(ii) An application for a guardianship order will be possible once the person has been missing for 90 days. The order will last for up to 4 years and can be renewed on expiry.

(iii) Guardians must be over the age of 18 or a trust corporation, and must consent to the appointment. In addition, the guardian must be 'suitable' having regard to the proposed guardian's skills and knowledge and their relationship with the missing person. Note it will be possible to appoint two or more guardians at the same time or at different times.

(iii) The order may confer either a general power on the guardian in relation to the missing person's property and financial affairs, or may be limited to specific rights and powers. These may include powers to sell property and make investments, resign from trusteeships held by the missing person and/or make a gift out of the missing person's property. However, a guardian will be subject to certain restrictions, for example, they cannot make a will on behalf of a missing person or exercise powers conferred on the missing person as trustee.

(iv) A guardian will be required to act in the best interests of the missing person and in this respect will be subject to duties similar to those of a trustee - the guardian will be supervised by the Office of the Public Guardian and will be required to file accounts in much the same way as a Deputy appointed under the Mental Capacity Act 2005.

(vi) A guardian appointed under the Act will only be able to make gifts "for the maintenance of, or otherwise for the benefit of, a dependant of the missing person" or where the guardianship order expressly authorises the making of the gift - either specifically or generally.

(vii) The Act offers protection for banks and financial institutions who deal with a person in possession of a guardianship order unknowingly after the missing person has been found (i.e. where the guardianship order has been varied or revoked). This is likely to be a source of reassurance to banks, who might otherwise be concerned about exposing themselves to liability in relying on the instructions of a guardian.

The new Act, which applies in England and Wales, will help to alleviate the practical problems currently faced by those who are missing a relative and enable banks and other financial institutions to act with greater legal certainty when dealing with the financial affairs of vulnerable or missing customers.

The Queens speech and beyond - consolidated latest position

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8)

The Queen's Speech was significant as much for what it didnotcontain as for its predictable (and weighty) Brexit content.

The Queen's Speech, delivered on 21 June, was not the grand event that might have been expected. To quote the Parliament website, the State Opening of Parliament took place with 'reduced ceremonial elements…due to the unique circumstances of the general election'.

The Speech lasted just nine minutes, yet was designed to cover the next two years of legislation - if the government survives that long. The doubled (theoretical) length of the parliamentary session is a direct consequence of the raft of Brexit-related legislation that needs to be in force by 29 March 2019 (EU exit date). Meeting this timetable promises to be extremely challenging.

As far as legislation relevant to the financial services industry is concerned, you will hunt in vain in the Queen's Speech for any of the proposals contained in the Conservative Manifesto:

  • The word 'pension' did not pass the Queen's lips, so we can assume the Triple Lock and Winter Fuel Allowance stay in place. There was no mention of (BHS-inspired) legislation protecting pensions during company sales or mergers.
  • The statement that the government "will seek to enhance rights and protections in the modern workplace" is little more than an acknowledgement that there will be a response to the Taylor Report. However, press reports suggest its publication has been put on hold while the government considers its position.
  • On social care, the Speech offered only a promise to "bring forward proposals for consultation." As the Dilnot capped regime for care costs is not due to begin until April 2020, there is still time for it to be culled.

There was no comment about Budget timing in the Speech, although the Chancellor had used the Andrew Marr Show to confirm that there will be no summer Budget. Mr Hammond said "…there's not going to be a sort of summer budget or anything like that, there will be a regular budget in November as we had always planned, and in that budget we will set out our future plans for public spending, for taxation, for fiscal balance and everything else that needs to be clear."  

The Chancellor's promise that there would not be "anything like that" was subsequently contradicted by a few lines in the 82 pages of background notes issued by No 10 to accompany the two pages of Queen's Speech. Hidden on page 16 of these copious notes under the heading of "Other Measures" is the following:

'The [two-year parliamentary] programme will also includethree[our italics] Finance Bills to implement budget decisions. Summer Finance Bill 2017 will include a range of tax measures including those to tackle avoidance.'

The prospect of a Summer Finance Bill raises two questions:

1. When does Summer end? Governments are prone to elasticate seasons to suit their circumstances, witness the timings of some Autumn Statements.  The parliamentary timetable announced before the House of Commons dissolved has the [genuinely seasonal] Summer recess running from 20 July to 5 September 2017. In past years the post-Summer sitting has lasted only ten calendar days before the House shuts up shop for nearly four weeks because Conference Season has arrived. In 2016, that meant the House rose on 15 September and business did not resume until 10 October.

On the face of it a new Summer Finance Bill introduced before the Summer recess would have very limited time to debate if the aim was for it to reach Royal Assent by 20 July. Thanks to the recesses, it would not have much more debating time if the Royal Assent goal was mid-October.

2. What would be in the Summer Finance Bill? The material culled from the Finance (No. 2) Bill 2017 was the contentious content. In theory, a Summer Finance Bill could run to over 600 pages, based on the difference between the Finance (No. 2) Bill 2017 (776 pages) and the eventual Finance Act 2017 (155 pages). Would the government try to reinstate all the abandoned legislation and, if Royal Assent by July 20 is the goal, rush it through? In the current political climate trying to push through Making Tax Digital (to mention just one of the dropped items) without detailed parliamentary scrutiny might well be difficult.

The legislative situation remains unclear on the "lost" Finance Bill measures. Alas, the promise of a Summer Finance Bill does little to clarify matters for now.

HMRC online trusts registration service delayed

(AF1, JO2, RO3)

HMRC has announced that its online Trusts Registration Service will not be ready for launch this June as originally intended. The online Trusts Registration Service replaces the paper 41G(Trust) form and the ad hoc process for trustees to notify changes in their circumstances, and will be relevant to any trust that generates 'tax consequences'.

The launch was intended to coincide with the beneficial owner registration requirements of the EU's Fourth Money Laundering Directive (4MLD) - transposed into UK law at the end of June.

The Register will allow HMRC to collect and hold adequate and up-to-date trust information centrally in line with the specific requirements of the 4MLD, and will require any new or existing trust that generates a 'tax consequence' to provide information on the identity of the settlor, the trustee(s), the protector (if any), the beneficiaries (or class of beneficiaries if the trust is a discretionary trust) and any other persons exercising control over the trust; as well as a detailed picture of the assets held. This imposes a more onerous reporting obligation on many trustees who have until now been exempted from the requirement to complete a form 41G(Trust) if there was 'no income arising, and no likelihood of income or gains in the future'.  In contrast, the new requirement to register or update trust details online applies in any year that the trust generates a UK tax consequence of any kind - this could be an income tax, CGT, IHT or SDLT implication.

Trusts that hold collectives will have needed to register under the previous system and for these trusts little more will change other than when and how the information is provided. For trusts that hold no assets other than onshore or offshore single premium investment bonds, the new rules will presumably mean that online registration will not be required unless either a chargeable event occurs or a chargeable occasion for IHT occurs.  However, the position is not yet entirely clear.

The requirement to register will apply to both onshore and offshore trusts.  However, bare trusts, where any tax liability arises to the beneficiary rather than to the trust, are excluded from reporting.

Until the Trusts Registration Service is available, HMRC has asked customers to delay notification of new trusts. In the meantime, those completing Trust and Estate Tax Returns have been instructed by HMRC to leave the box that asks for confirmation that 'changes to the trust have been updated on the Trust Register' blank, with a view to ensuring that correct details are recorded on the register when it is up and running. Once the service is operational, trustees will have until October 5 this year to register new taxable trusts, and until January 31 2018 to provide information on existing trusts.

A heartfelt plea

(AF1, AF2, JO3, RO3)

The Chartered Institute of Taxation (CIOT), the Institute for Fiscal Studies (IFS) and the Institute for Government (IFG) have published a joint letter to the Chancellor congratulating him on his reappointment and restating the need to improve tax policy.

The letter notes that 'The tax system itself is immensely complex and the length of the code has continued to increase, leaving taxpayers confused and increasing business uncertainty. The original Finance Bill published in March was the longest on record.' The organisations make four main suggestions for improvement:

  1. A more strategic approachTax policy would benefit from a more strategic approach being taken, with clear principles established and objectives set for the Parliament. As a priority, the CIOT, IFS and IFG want a roadmap for the tax treatment of savings and pensions where, in what might be regarded as an understatement, they comment that 'frequent changes have undermined incentives and left a confusing landscape'.
  2. Consulting earlierThe organisations argue for earlier consultation and ensuring that implementation challenges are considered before decisions are set in stone. The need 'to ensure that the ground for reform is well prepared' is something Mr Hammond would find hard to dispute after the Spring Budget's U-turn on Class 4 NICs. The letter proposes that the UK should consider independent reviews of tax measures before their implementation.
  3. Reducing the proliferation of new measuresThis is a plea to slim down the ever-growing Finance Bills, each containing fresh tweaks or additions to the existing outsized structure. One interesting idea is that variants of the public-spending value-for-money tests are applied to new tax reliefs.
  4. Systematic evaluation of effectivenessLate last year the Public Accounts Committee reiterated the findings of the National Audit Office on poor HMRC understanding of the effectiveness of tax reliefs. An apparent lack of sufficient information on which to base assessments was blamed. The three groups want to see 'a commitment to systematic evaluation of the effectiveness of existing reliefs and incentives'.

Few outside government would argue with these suggestions. However, as the letter acknowledges, 'Making tax policy over the next five years presents exceptionally severe challenges. Brexit will consume time, expertise and resources (not least IT resources)…' 

INVESTMENT PLANNING

China and MSCI finally get together

(AF4, FA7, LP2, RO2)

After several years of saying no, the emerging markets indices leading provider, MSCI, has now decided to include some Chinese mainland shares in its leading Emerging Markets indices. However, the process remains gradual.

Companies incorporated in China often have two classes of share:

  • A Sharesare the main share category and are denominated in renminbi (sometimes known as the yuan), the Chinese currency. A shares are listed on the Chinese stock exchanges, the main two of which (in Shanghai and Shenzhen) were established in December 1990. Until 2002, A shares could only be purchased by mainland China investors.
  • H Sharesare Hong Kong listed shares of Chinese incorporated companies. These first appeared in 1993 and are listed in Hong Kong dollars (which is pegged to the US dollar). H shares have traditionally been the main route for foreign investors to gain access to shares in Chinese companies.

China has gradually relaxed restrictions on the ownership of A shares, first through the Qualified Foreign Institutional Investor (QFII) scheme and then, in 2011, through the Renminbi Qualified Foreign Institutional Investor (RQFII) programme. The RQFII allowed the Hong Kong subsidiaries of Chinese fund management and securities companies to recycle offshore renminbi deposits into A shares. In November 2014, a further relaxation took place with the launch of the Shanghai-Hong Kong Stock Connect program ('Stock Connect') which permitted investors in Hong Kong to trade in A shares listed in Shanghai (and vice versa), albeit again subject to a daily (and, initially, aggregate) quota. Thirteen months later the Stock Connect arrangement was extended to the Shenzhen exchange, which offers greater access to the Chinese technology sector than its Shanghai counterpart.

The increasing international availability of China A shares has created growing problems for global equity index providers. China has grown to become the second largest global equity market by market capitalisation, but less than 2% of Chinese listed shares are held by non-Chinese investors. Some of that disparity is due to how index providers have treated China.

Each year MSCI, the leading provider of emerging market indices, has reviewed whether to include A shares in its global indices. In both 2015 and 2016 there was some expectation that China would be added, but the final the answer was no. Last year, when MSCI's Market Classification Review once again left China in the cold, MSCI blamed concerns about capital controls and the practice of suspending shares when prices become volatile. There was also investor unease about broad pre-approval restrictions imposed by Chinese stock exchanges on launching financial products byanyfinancial institution on any international stock exchange if these products were linked to indices that include China A shares - a clear potential problem for exchange traded funds providers. Since last June all three issues have been partially addressed by the Chinese authorities.

MSCI's 2017 Market Classification Review was published two weeks ago and this time around China received the green light:

  • From June 2018, MSCI will include China A shares in the its Emerging Markets Index and the MSCI All Cap World Index.
  • 222 China A Large Cap stocks will be added to the MSCI Emerging Markets Index.
  • Initially MSCI will apply a 5% "partial Inclusion Factor", meaning that China is not being given the full index weighting its market capitalisation would justify.  Thus the 222 shares will only represent 0.73% of the Index's value, rather than the roughly 15% that full inclusion would imply.
  • The choice of 5% - and the year's deferral - are both designed to smooth the path of transition. This is a major consideration given that it is estimated $2trn ($2,000bn) is benchmarked against the MSCI Emerging Markets Index. MSCI is coy about when that 5% weighting might start to rise and smaller Chinese company shares be included. It says "When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index". In other words, MSCI will retain full discretion and there is no pre-set rollout of weighting increases.

It is worth remembering that this staged reform is all about shares of Chinese companies listed in China. The MSCI Emerging Markets Index already has a 28% exposure to China, but this is via shares listed in Hong Kong and the US (a good example being Alibaba).

Half way point

The first half of 2017 is over, ending with a final week when uncertainty about the future of interest rates in the UK and Eurozone reemerged. 

The end of the first half marks the end of another politically turbulent period in the UK. The view across the six months belies the upheaval that took place: the most widely quoted yardstick of the UK stock market, the FTSE 100, nudged up a little under 2.5%. Elsewhere, there were some sharper movements, as the table below shows:

 

30/12/2016

30/06/2017

Change in H1 2017

FTSE 100

7,142.84

7,312.72

2.38%

FTSE 250

18,077.27

19,340.15

6.99%

FTSE 350 Higher Yield

3,753.53

3,768.50

0.40%

FTSE 350 Lower Yield

3,709.13

3,953.53

6.59%

FTSE All-Share

3,873.22

4,002.18

3.33%

S&P 500

2,238.83

2,423.41

8.24%

Euro Stoxx 50 (€)

3,290.52

3,441.88

4.60%

Nikkei 225

19,114.37

18,909.26

-1.07%

Shanghai Composite

3,103.64

3,222.60

3.83%

MSCI Emerg Markets (£)

1,305.65

1,455.96

11.51%

UK Bank base rate

0.25%

0.25%

 

US Fed funds rate

0.50%-0.75%

1.00%-1.25%

 

ECB base rate

0.00%

0.00%

 

2 yr UK Gilt yield

0.11%

0.37%

 

10 yr UK Gilt yield

1.24%

1.33%

 

2 yr US T-bond yield

1.16%

1.38%

 

10 yr US T-bond yield

2.46%

2.28%

 

2 yr German Bund Yield

-0.79%

-0.57%

 

10 yr German Bund Yield

0.11%

0.47%

 

£/$

1.2357

1.2990

5.12%

£/€

1.1715

1.1389

-2.78%

£/¥

144.1202

145.9505

1.27%

Brent Crude ($)

56.75

48.99

-13.67%

Gold ($)

1,156.40

1,242.25

7.42%

Iron Ore ($)

79.65

63.00

-20.90%

Copper ($)

5,500.00

5,954.50

8.26%

A few points to note from this table are:

  • The FTSE 100 has been on a rollercoaster, peaking at 7,377 in mid-January, dropping to 7,099 by the end of the month, then rallying back up to 7,430 by mid-March before diving to 7,114 in mid-April (on the Election announcement). Thereafter it rose again to 7,548 in early June on opinion poll optimism, with an inter-day high almost breaching 7,600 before descending in the wake of the voting reality.
  • The FTSE 250, regarded as a better yardstick for UK plc (although still with a significant weighting of overseas revenues), was more resilient and it breached 20,000 for the first time in May. However, it too succumbed after the Election. With the FTSE 250 achieving almost 7% growth in the six months, the result has been that the FTSE All-Share (roughly 80/20 FTSE 100/FTSE 250) outperformed the FTSE 100 by almost 1%. 
  • The US market performed better than the UK market, helped by the continued strength in a small number of big cap technology stocks.  However, for UK investors, on this occasion the dollar worked against them as it fell 4.9% against sterling over the period. The demise of the dollar can be blamed partly on fading expectations that a Trump bump would lead to a rapid rise in US interest rates.
  • Against the backdrop of the Eurozone's continued monetary stimulus, the euro strengthened and continental stock markets posted a positive return. Some of that was down to political clouds clearing in the Netherlands and France as populists failed to gain power.
  • Bond yields headed upwards over the first half, except for 10 year US Treasuries. The Federal Reserve put through two rate rises, with a third likely after Summer. In the UK, the June vote of the Monetary Policy Committee suggested that a UK interest rate rise may be nearer than had been expected. Statements from Mark Carney and Andy Haldane, the Bank of England's chief economist, have spread uncertainty. For now, the notion that there will be no move in the UK until 2019 has been largely abandoned.
  • Commodities had a mixed first half, with gold responding to the dollar's weakness. The most notable change was in the price of Brent Crude, which sunk back below $50 despite OPEC's decision to continue production limits.

A look at these six-month figures is a reminder of just how much day-to-day noise can hide what is - or is not - happening to investment returns.

PENSIONS

DCA consultation paper: DB transfers

(AF3, FA2, JO5, RO4, RO8)

The FCA has issued a Consultation Paper proposing changes to how advice is provided on pension transfers involving defined benefit schemes and other safeguarded rights.

"the government recognises that the attractiveness of transferring from defined benefit to defined contribution may increase as a result of the changes to the tax framework for how defined contribution pension savings can be accessed." So said page 33 of "Freedom and choice in pensions", the original consultation paper that accompanied George Osborne's surprise announcement on pension flexibility on 19 March 2014. The remark has proved something of an understatement, with Mercer estimating that £50bn has been transferred out of final salary pension schemes by 210,000 members since April 2015, when full flexibility came into being.

The Pensions Regulator has given credence to Mercer's figures, saying in response to an FoI request that "For the period of 1 April 2016 to 31 March 2017 defined benefit pension schemes have, in total, reported 67,700 transfers out of the scheme. However, not all of these schemes have reported how many transfers they carried out. Our estimate is that there were around 80,000 transfers made."

Now, just over three and a quarter years after Mr Osborne's bombshell and the subsequent transfer market boom, the FCA has issued a consultation paper (CP17/16) entitled "Advising on Pension Transfers". The proposals represent a significant overhaul of the current regime, which has its roots in the compulsory Transfer Value Analysis System (TVAS) introduced in 1 January 1995 by LAUTRO as a response to the pensions mis-selling saga.

The FCA's suggested reforms are taking aim at two separate areas:

1. Giving advice and assessing suitability

  • The FCA wants "all advice on the transfer and conversion of safeguarded benefits to include a personal recommendation", including where the safeguarded right is a guaranteed annuity rate. The regulator says it has seen only a "few cases" of advisers claiming they are not giving a personal recommendation. In those instances, the FCA discovered "the advice did not comply with the existing analysis requirements and in many cases [was] actually a personal recommendation". The main reason for the insistence on a personal recommendation is to stop FAMR applying to safeguarded transfers.
  • The current FCA guidance is that an adviser should start from the assumption that a transfer will be unsuitable. Pension flexibility and rising transfer values has made this stance look increasingly outdated and the FCA is now suggesting that it be replaced with "a statement in the Handbook that for most people retaining safeguarded benefits will likely be in their best interests and guidance that advisers should have regard to this". This wording echoes that of TPR in its Regulatory Guidance: DB to DC transfers and conversions.
  • Alongside this watering down of the default view, the regulator is proposing to strengthen the assessment process by making it clear in making a personal recommendation an adviser "should consider the following elements:
    • the client's income needs and expectations and how these can be achieved, the role safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made;
    • the specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client;
    • the way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements;
    • alternative ways of achieving the client's objectives. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk; and
    • the relevant wider circumstances of the individual."

This final point is a piece of back covering, which the FCA says is individual-dependant, but will incorporate such issues as tax, death benefits, state of health and interaction with means tested benefits.

  • Where the adviser does not fulfil the role of the pension transfer specialist and instead uses internal or external support, the responsibilities of that third party are also being more sharply defined. The FCA wants the specialist to be more than a mere TVAS number-checker. It proposes that the specialist must review the reasonableness of the personal recommendation made by the adviser, implying "an independent assessment of the soundness of the basis for the advice". This would "take into account the client's wider circumstances, including their appetite and capacity for risk and the nature of the scheme being transferred to". The greater scrutiny by the pensions specialist will not move the ultimate responsibility for advice from the adviser dealing with the client, although it potentially increases the liability of the specialist to the adviser.

Where an external pension transfer specialist firm takes on the complete role of giving transfer advice to the client and the referring adviser's firm focuses on investment of the transferred funds, the FCA says both firms must be able to demonstrate the advice they give is suitable for the client.

2. Transfer value analysis (TVA)

The FCA acknowledges that "The current form of TVA has essentially stayed unchanged since additional requirements for pension transfers were introduced", although it avoids saying just how old it is. The regulator also accepts several of the criticisms that have long been made about TVAs, such as the annuity focus, the unsuitability for those close to retirement and the poor public understanding of the critical yield concept, despite its 20+ year existence.

The proposed solution starts by rebranding TVA as APTA - appropriate pension transfer analysis - a curious phrase which suggests that the FCA might now consider the TVA as an IPTA -inappropriate transfer value analysis.

  • The APTA will include, "as a minimum:
    • an assessment of the client's outgoings and therefore potential income needs throughout retirement;
    • the role of the ceding and receiving scheme in meeting those income needs, in addition to any other means available to the client - effectively obtaining an understanding of the client's potential cashflows;
    • consideration of death benefits on a fair basis, for example where the death benefit in the receiving scheme will take the form of a lump sum, then the death benefits in the ceding scheme should also be assessed on a capitalised basis, and both should take account of expected differences over time; and
    • 'the prescribed comparator'."

Except for the prescribed comparator (see below), many existing TVAS systems already produce a detailed analysis which would more than satisfy the FCA's proposed minimum requirements. It is virtually impossible otherwise to demonstrate and compare the use of pensions flexibility.

The FCA wants the APTA to take account of the client's risk appetite and ability to manage investments when assessing the possible benefits from a potentially suitable receiving scheme. This is to include scenarios where the plan is to withdraw transferred funds for reinvestment outside the pension environment. 

The prescribed comparator is likely to prove the most controversial part of the FCA's proposals. It starts by following the current TVAS approach in valuing the transferring scheme's projected benefits at the chosen retirement date on an annuity basis. However, whereas the TVA uses an interest rate that is averaged over 12 months, the APTA will take a current rate. The removal of the 12 month averaging will mean sharp index-linked gilt market movements show through immediately, rather than get smothered, as happened in the second half of last year.

Once the annuitised value of benefits has been calculated, this must be discounted back to the present day if the retirement date is 12 months or more distant. The current TVAS system effectively calculates a discount rate using the CETV, and that rate becomes the critical yield.

Under APTA the calculation becomes reversed and the adviser "must determine an appropriate discount rate to value the amount needed to reproduce the safeguarded benefits, after appropriate charges". The FCA wants this rate to be appropriate to the client, "based on their attitude to risk, irrespective of whether the proposed receiving scheme will involve flexi-access drawdown or an annuity". There is a clear guidance that the FCA does not expect the rate (before charges) to exceed the intermediate rate of growth shown on a corresponding KFI for the receiving scheme (normally 5%).

The difference between the calculated value using the adviser selected discount rate and the actual transfer value must be shown in a prescribed format with a block graph and a framed statement:

It could cost you £X to obtain a comparable level of income on the open market. This means the same retirement income could cost you £(X - CETV) more by transferring. 

In CP17/16 an example is given where X is £140,000 and the CETV is £120,000, implying a £20,000 shortfall. This is not unrealistic given the differing assumptions that will apply between the largely gilt-driven FCA calculation basis and the "best estimate" CETV principle required by SI 2006/33

Under the heading of "Areas for discussion", the FCA also address overseas transfers, although it does not make specific proposals. It notes that the APTA requirements "are likely to result in a more complex analysis having to be undertaken for an overseas transfer than for a transfer to a UK DC arrangement". For example, the FCA says that "…firms must ensure that the APTA contains sufficient information in order to be able to compare financial and tax regimes in two countries", a requirement which may result in the involvement of advisers in each country concerned or even two stage transfers (ie DB to PPP, then PPP to QROPS).

The consultation period will run for three months, with the FCA currently saying final rules will emerge "by early 2018".

In many respects, the FCA's proposals are no more than bringing the regulatory environment up to match what the market is already largely doing. Advisers that already have a robust transfer process in place will generally have no major concerns about the FCA proposals. The one key initiative that will have greater ramifications for all advisers is the transfer comparator. Explaining the shortfall between discounted value and transfer value will be a challenge.

State pension & carers allowance

(AF3, FA2, JO5, RO4, RO8)

Carer's Allowance is an "income replacement" benefit for people who are unable to work because they are caring full-time for a disabled person. Since 2002, Carer's Allowance has been payable to people aged 65 or over, but it cannot be paid in addition to the Retirement Pension. This is because of the "overlapping benefits" rule. Although an entitlement to both benefits can mean that Carer's Allowance is not payable, for lower income pensioners an "underlying entitlement" to Carer's Allowance can give access to carer additions to means tested benefits such as Pension Credit. For other pensioners however, a claim for Carer's Allowance may result in them receiving no additional financial support.

Cash benefits for carers consist of:

  • Carer's Allowance, currently worth £62.70 a week (2017-18 rates)
  • The carer premium/additionpayable with means-tested benefits such as Income Support, Pension Credit, and Housing Benefit. It is payable to those who satisfy the conditions for Carer's Allowance, and is currently £34.95 a week.

People who make a claim for Carer's Allowance are often unhappy to find that it is withdrawn if they are also entitled to a state pension. This is due to the "overlapping benefits rule". In 2017-18, around 367,000 people over State Pension in Great Britain are expected to satisfy the care conditions for Carer's Allowance, but only around 18,000 will actually receive the benefit.

The overlapping benefits rule does not only apply to people eligible for both Carer's Allowance and the Retirement Pension. Carer's Allowance cannot be paid in full if an individual could also get any of the following benefits:

  • Retirement Pension
  • Incapacity Benefit
  • Contributory Employment and Support Allowance
  • Severe Disablement Allowance
  • Contribution-based Jobseeker's Allowance
  • Widow's Pension/Bereavement Allowance
  • Widowed Mother's/Parent's Allowance
  • Maternity Allowance
  • Unemployability Supplement paid with Industrial Injuries Disablement Benefit or War Pension
  • Training allowances.

If the amount of the above benefits is less than the amount of Carer's Allowance, then the difference is made up.

The rationale for these provisions is that Carer's Allowance is paid to provide income for a person unable to work because of their caring responsibilities. It cannot therefore be paid in addition to any of the other income maintenance benefits listed above. To do so would be against the long-standing feature of the social security system that "double provision should not be made for the same contingency".

Although there has not been a change to the overlapping benefits principle, it worth remembering what benefits are impacted on receipt of the state pension.

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