My PFS - Technical news - 10/10/16

Personal Finance Society news update from 27 September to 10 October 2016 on taxation, retirement planning and investments.

Quick Links

Taxation and Trusts

• HMT Consults On Amending The Definition Of Financial Advice
• The Future Of Retirement
• Utilising The Normal Expenditure Out Of Income Exemption
• Client Notification Regulations Now In Force For Offshore Advice
• Post Conservative Party Conference Planning

Investment planning

• Not The Expected Third Quarter
• August IA Statistics
• A May-Day For Sterling?

Pensions

• TPR Declares Rule Change Void To Enable PPF Protection
• HMRC Publishes Pension Scheme Newsletter 81
• NEST: Pension Savers With Small Pots Want Flexibility Too

TAXATION AND TRUSTS

HMT Consults On Amending The Definition Of Financial Advice

(AF1, AF2, RO3, JO3)

HM Treasury has published a consultation document relating to proposals to amend the definition of financial advice.

As announced at Budget 2016, the government is consulting on amending the UK definition of financial advice. This will give firms the confidence to develop better and more tailored guidance services to help consumers make informed financial decisions. Some consumers have relatively straightforward financial needs or small amounts to invest. For such consumers, the cost of full regulated advice may outweigh the benefits, or it may be uneconomic for firms to provide them with regulated advice.

Currently, firms are reluctant to offer guidance services to these consumers, increasing the risk of them making poor investment decisions on their own. A key reason for this reluctance is uncertainty around what constitutes regulated advice and what does not.

The main reason for the uncertainty is the fact that UK firms face two definitions of financial advice. The UK currently defines regulated financial advice as 'advising on investments' which is set out in the Regulated Activities Order (RAO). This definition is broader and less specific than the definition used in the Markets in Financial Instruments Directive (MiFID), which is based upon a firm giving a customer a personal recommendation. FAMR found that the MiFID definition is clearer for firms and consumers and is also much easier for firms to build into their compliance processes.

The consultation proposes to amend the wording in article 53 of the RAO to reflect the text set out in the MiFID, so that consumers only receive "regulated advice" when they are offered a personal recommendation for a specific product.

The consultation closes on 15 November 2016.

The Future Of Retirement

We all have enough evidence (from friends, family and clients) that the way many of us work, live and retire these days is radically different from the way we used to. In the words of the Cockney musical comedy by Lionel Bart "Fings ain't wot they used to be."

A recent report in the FT on the 'future of retirement' made the observation (which many of us can no doubt corroborate from anecdotal evidence founded in our own experience and that of our friends and colleagues) that the number of people working into their sixties and beyond has grown rapidly over the past two decades - partly driven by financial necessity, but also by new opportunities for fulfilling, flexible work i.e. choosing to work rather than having to. This is something that appears to be pretty relevant to those working in the financial services sector.

Even though it may not seem it, it can be justifiably observed that the notion of retirement as "a significant period of leisure" in the latter part of life is a relatively recent phenomenon, only becoming widespread after the Second World War.  But growing financial pressures - caused by rising longevity and the ageing of the baby boom cohort - have pushed governments across the developed world to implement reforms.

Some of these - such as anti-age discrimination legislation and flexible working provisions - remove barriers.  Others - like increasing the state pension age - push older people to keep working. And these implemented reforms are underpinned and, in effect, aided and abetted by longevity, economic necessity and/or increased opportunity often afforded by technology.

Apparently there are nearly 10m UK workers aged 50 and over.  This represents almost a third of the workforce.  More than a million of them are aged 65 and over.

Many older workers, it seems, look for the opportunity to work shorter, more flexible hours.  Working men in their late 60s work, on average, 10 fewer hours each week than those in their late 50s.

Many who continue working out of choice also have pension arrangements than can yield income and this allows the "continuing workers" to be more demanding in relation to the flexibility they need (and want) in their continued employment.  In effect, maximising the return on the "investment" of work is not the sole driver. Regardless of this, as for all aspects of working, investing and drawing down, paying attention to ensuring that tax efficiency is "baked into " the planning can have a seriously positive effect on the bottom line.

A balance between decent pay and desired flexibility has to be struck.  And it's not just employment that these continuing workers select.

The importance of greater flexibility could go some way to explaining the prevalence of self-employment among older workers.  Large numbers of older people now work for themselves, often part time.  This self-employment is increasingly made up of higher skilled occupations, in the finance and business services sectors, in London and the south-east.

Over the past few years Barclays Wealth have identified through research that increasing numbers of high net worth investors (over 60% of those surveyed) say they have no plans to retire causing Barclays to coin the term "neverretirees" to describe this group.  And further recent research finds that just 12% of workers aged 65-74 say they work because they "need to earn money".  In contrast, more than a third say it is because they "enjoy the work" and a further one in five because it gives them "a sense of purpose".

By continuing to work individuals are, in effect, continuing to exploit their so-called "human capital".  Human capital is likely to be an increasingly important asset class.  Its continued deployment reduces the strain on financial assets and maybe even allows a little more risk to be taken with them which could lead to a little more reward.

And for those who are still working full time, explicitly addressing the extent to which they expect to continue to exploit their human capital should be "hard wired" into the retirement planning process.  It can have a significant impact on goal setting and detailed savings plans.  Whilst we should not over rely on a single asset class (human capital being one) it needs to be factored in.

And if human capital is to be part of the asset mix then it makes sense to take time to take care of this important source of income and consequent required strain/demand on financial capital.  Right, where's the gym, blueberries and green tea?

Utilising The Normal Expenditure Out Of Income Exemption

(AF1, RO3, JO2)

Inheritance tax is becoming a concern to more and more people.  A simple yet effective way of planning is to use exemptions and reliefs.  Use of the normal expenditure out of income exemption can be particularly useful.

It is a fact that inheritance tax receipts are increasing.  The number of families paying inheritance tax is now at a 35 year high.  In 2009/10 2.6% of deaths gave rise to IHT.  In 2015/16 this was 7.1%.   And the expectation is that the tax receipts will increase still further with a prediction of £5.6 billion from tax year 2020/21.

Inheritance tax is obviously affecting more estates and will continue to do so.

Many people will be keen to take practical action that can reduce the impact of the tax without materially affecting their standard of living or financial security.

One of the accepted forms of inheritance tax (IHT) planning is to make lifetime gifts.  Provided these are potentially exempt transfers (PETs) and the donor lives seven years these will be totally free of inheritance tax.

The drawback with PETs is that, in general, they need to be outright gifts and so ongoing control is lost.  This can be overcome by making the gift to a trust (usually a discretionary trust) where the donor can be a trustee and decide who should benefit in the future.  The drawback with discretionary trusts is the need to not exceed the donor's nil rate band taking account of what has been gifted in the preceding 7 years.

Many people may not however have assets that they can easily gift to the next generation but do have substantial levels of income - some of which may be surplus to their requirements.

Income in this respect means earned income and investment income (including buy-to-let income).

Such people can therefore make regular gifts of income. 

Provided such gifts are

• regular; and
• made out of income; and
• do not affect the donor's usual standard of living

they will be exempt when made.

This means that there is no requirement that the donor need to survive them by 7 years as with other gifts. And that applies if the gifts are outright (PETs) or to a discretionary trust (chargeable lifetime transfers).

How can an individual utilise such a gifting strategy if they have surplus income?

There are a number of opportunities and here are a few to ponder over:

• a grandparent (or parent) makes regular payments into a Child Trust Fund/JISA for the benefit of a grandchild;
• parents paying premiums into a joint lives last survivor whole of life policy in trust for children to provide a lump sum fund to meet IHT on the second death; or
• parents making a regular (annual) contribution to a single premium bond held in trust for their family.

The key issue is that the payments must be made regularly.

Finally, another important point. On an individual's death, HMRC may want evidence that the payments did not affect the deceased's standard of living and this may prove difficult for the executor to demonstrate - given that they will now be unable to discuss it with the deceased!

To avoid this problem, the donor should keep records of their regular gifts and their associated financial circumstances as and when they make gifts.  This can be recorded on Form IHT 403 - the normal expenditure form that needs to be completed as part of the estate return on a person's death.

Client Notification Regulations Now In Force For Offshore Advice

(AF1, RO3, AF2, JO3)

Since 30 September 2016 tax advisers must issue any client to whom they provide financial advice, or services about overseas income or assets, with an HMRC-branded notification letter warning them of the levels of information that HMRC now has access to in order to be able to check that the right amount of tax has been paid. A copy of the letter can now be downloaded from the HMRC website.

The UK's International Tax Compliance (Client Notification) Regulations (the Regulations), which came into force on 30 September 2016, create an obligation on financial institutions and professionals that offer tax or financial advice or services to notify their clients about the tax information that HMRC will receive about their offshore affairs under international agreements.

The notification must consist of:

• a document under HMRC branding providing information and links to guidance and
• a covering letter from the business sending the notification, with certain set wording in it.

The HMRC-branded document warns taxpayers that HMRC is now receiving personal financial information on overseas accounts, structures, trusts and investments from more than 100 jurisdictions; advises that there opportunities to voluntarily disclose information; and warns that there are likely to be sanctions for those who do not come forward. The wording and format of the HMRC-branded document is set out in the Regulations, and a copy of it can be downloaded from the HMRC website. The financial institution or adviser is free to decide the content of the covering letter but it must include certain set paragraphs, also set out in the Regulations.

HMRC has also updated its International Exchange of Information Manual to provide guidance on obligations under the now in force Regulations.

Yet more ammunition to aid HMRC in collecting tax properly due but it may also help prevent investors inadvertently overlooking the requirement to pay tax.

Post Conservative Party Conference Planning

The just passed conservative party conference may lead some to conclude that the new government is quite different from the immediate past one. Fundamentally different.

The world it's operating in is different. Thanks to the vote for Brexit, it's an even more uncertain one despite what some may strive to tell you based on economic performance since the vote.

On the big questions, like "what sort of Brexit will we get?", there is uncertainty. And on the questions that the financial planning and financial sector services will have a direct interest in …there is uncertainty.

Most will accept, as pretty much ever was the case, that fiscal (broadly, tax) policy will be influenced, if not heavily determined by, (self -evidently), the political views of the ruling party and also the performance and predicted future performance of the economy.

Politically, the Prime Minister has made a big play for the centre ground. This was clear before the party conference (actually from her first day in office when she made her maiden speech as PM outside Downing Street). At the conference she put her position beyond doubt.

Here are some extracts from her conference speech:

"Our economy should work for everyone, but if your pay has stagnated for several years in a row and fixed items of spending keep going up, it doesn't feel like it's working for you.

"Our democracy should work for everyone, but if you've been trying to say things need to change for years and your complaints fall on deaf ears, it doesn't feel like it's working for you.

"And the roots of the revolution run deep. Because it wasn't the wealthy who made the biggest sacrifices after the financial crash, but ordinary, working class families." 

"If you're well off and comfortable, Britain is a different country and these concerns are not your concerns. It's easy to dismiss them - easy to say that all you want from government is for it to get out of the way. But a change has got to come.

"It's time to remember the good that government can do. Time for a new approach that says while government does not have all the answers, government can and should be a force for good; that the state exists to provide what individual people, communities and markets cannot."

"People with assets have got richer," Mrs May said. "People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come. And we are going to deliver it."

It couldn't be much clearer, could it?

Inclusiveness. And thus, over the course of the parliament, to the extent that it doesn't damage the economy, you could expect to see some redistributive tax measures.

So what of the economy? Well, most seem to accept that after a pretty stellar post-Brexit vote performance, the forecasts going forward are pretty much uniformly pessimistic. There are exceptions and, given the inherent uncertainties, no one can truly know.

We do know that even before officially becoming Prime Minister, Theresa May had said that the government would no longer seek to reach a surplus by 2020. This was, as you will recall, a key target of the previous Chancellor.

The current Chancellor is accepted as being less "showy" than the last one and his policies, aligned to the general overriding narrative, are likely to reflect that. As for the Bank of England, the Chancellor seems committed to "doing whatever is necessary to keep growth from suffering too much".

Monetary and fiscal policy have both been considered. The former in the shape of QE and low interest rates. Detail on the latter will be clearer on 23^rd November - the date of the Autumn Statement.

Early in his time as Chancellor Mr Hammond said the following,

"Over the medium term we will have the opportunity with our Autumn Statement, our regular late year fiscal event, to reset fiscal policy if we deem it necessary to do so in the light of the data that will emerge over the coming months."

INVESTMENT PLANNING

Not The Expected Third Quarter

(RO2, AF4, FA7, LP2)

A few points to note from this table are:

• The FTSE 100 is now over 1,000 points above the intra-day low that it hit immediately after the Brexit vote and more than 10% up on the year. The Footsie's bias towards multinationals has helped - all those dollar denominated dividends (HSBC, Shell, BP…) look that much more attractive when converted back into sterling.

• The FTSE 250, often regarded as a better yardstick for UK plc, outpaced the FTSE 100 in this quarter. This may have been due to a slow realisation that even the "domestically orientated" FTSE 250 has roughly 50% of its earnings coming from overseas.

• The US market has continued to bounce around in a narrow band between 2,100 and 2,200 on the S&P 500. The US economy continues to grow, but only slowly (the Q2 annual figure was +1.3%), helping to stay the Federal Reserve's hand on interest rate increases. Whereas at the start of 2016 four such increases were predicted, now the betting is on just one in December, repeating the 2015 pattern.

• The Eurozone, like the UK, seems to have put Brexit concerns to one side for the moment. Q2 growth of 1.6% and inflation of 0.4% mean the European Central Bank is continuing its loose monetary policy, with an extension of its QE programme beyond March 2017 widely expected to be announced soon.

• Outside the US, bond yields have bounced around a little and mostly ended barely changed over the quarter. One exception is the UK 10 year gilt, which has seen its yield virtually halve since 23 June, although it is off its August lows of near 0.5%. As we have said before, "Lower for longer" starts to look like "Lower forever".

• Commodities were mostly flat.  The end of quarter rally in oil, inspired by talk of an OPEC agreement on limiting production, served only to bring Brent Crude back close to its level at the beginning of July. Since early April the price has been oscillating in the $40-$50 range.

The third quarter was another reminder of the dangers of trying to time the market. The post- Referendum environment may have looked dangerous, but it still proved generally rewarding. 

August IA Statistics

(RO2, AF4, FA7, LP2)

The Investment Association (IA) has just published its monthly statistics for August 2016. After three months of Brexit-driven net retail outflows totalling over £4.9bn, August witnessed a £1.738bn inflow in the month. The inflow means that in the first eight months of 2016 there has been an overall net retail outflow of close to £1bn.

This month's highlights include:

• Net retail sales for the month were +£1.738bn, while the July outflow was revised upwards slightly to £1.073bn. Gross retail sales were marginally higher than July's figure, at £16.439bn, but there were £14.701bn of redemptions, £2.5bn less than in July. Net institutional sales were £1.082bn, a big jump on the £0.382bn of July. 

• The inflow combined with buoyant markets saw total funds under management reach a new record high, crossing the £1 trillion barrier (to £1,005.4bn).

• Fixed interest funds were the best-selling asset class in August, with a net retail inflow of £1.205bn. Equity funds saw an outflow of £0.629bn, against a total of over £5bn in the previous two months. 

• For only the second month in 2016, there was no net retail outflow from the property sector. That said, the net inflow was just £1m, an amount that could easily be revised away next month. The probable end of the outflows - amounting to nearly £3bn since January - supports the decision of most funds to resume trading. 

• Targeted Absolute Return was the most popular sector in terms of net retail sales for the third month running (and sixth this year). Global (equity) took second place, while fixed income funds filled the remaining three of the top five sectors for August retail inflows.

• The total value of tracker funds edged up to £135.9bn, meaning that they account for 12.2% of the industry total. The corresponding figure from August 2015 was 10.4%. 

These figures and the breaking of the £1 trillion barrier will be welcome news for IA members after three months of retail outflows.

A May-Day For Sterling?

(RO2, AF4, FA7, LP2)

The Great British Pound had a less than great week last week, culminating in a Friday crash-flash. Investment returns look very different once you start taking sterling's demise into account.

Last week was one of those weeks when the investment markets could look downright strange to the casual observer. The pound fell by 4.1% against the US dollar, helped by a Friday morning flash-crash in Asian markets, but the FTSE 100 Index rose by 2.1%. The reason, as many commentators said, was simple: the FTSE 100 is not a measure of the UK economy or its post-Brexit prospects. The Index has constituents that do virtually no business in the UK, while the overall estimate is that 75% of Footsie earnings come from overseas.

That set us thinking just what investment performance looks like so far in 2016 if you start thinking in terms of currencies other than sterling. The results are shown below:

A few points to note from this table are:

• Sterling is down 16% against the dollar, 18% against the euro and 28.2% against the Yen since the start of the year. 

• The FTSE 250, often regarded as a better yardstick for UK plc, may have hit an all-time high last week, but for dollar investors it is showing a 13%+ loss.

• Euro stock markets are down in local currency terms, but healthily positive from a sterling viewpoint.

The returns from overseas markets against the UK are a reminder of the benefits of diversification - in currencies as well as markets. 

PENSIONS

TPR Declares Rule Change Void To Enable PPF Protection

(AF3, RO4, JO5, FA2, RO8)

The Pensions Regulator has used its powers to ensure members of a closed defined benefit (DB) scheme receive Pension Protection Fund (PPF) compensation after the scheme's rules were changed.

Former trustees of the DCT Civil Engineering Staff Pension Fund mistakenly executed a change to the scheme's rules which resulted in accrued benefits being calculated on a defined contribution (DC), rather than a DB basis. This was a material change to their benefits, and it meant some members would not have been eligible for PPF compensation.

Following an investigation, TPR declared the rule change void, and today issued a Regulatory Intervention report on the case.

DCT Civil Engineering went into administration in January 2014 and was subsequently dissolved. As a result of its investigation, TPR issued a Determination Notice recommending its Determinations Panel declare the relevant Deed void. The Panel's order had the effect of confirming the scheme as a DB one.

This was not challenged by the directly affected parties and enabled the PPF to take on the scheme and its 11 members.

Nicola Parish, Executive Director for Frontline Regulation at TPR, said: "This case shows that we will use our powers to protect schemes in appropriate cases, regardless of the number of members. The modification of the scheme rules had a serious impact on reducing members' accrued benefits, and so we considered it appropriate to act to protect them.

"By using our power to declare changes to the scheme rules void, we've enabled members to benefit from PPF protection, which will be higher than they would have received if the amended DC scheme rules had been allowed to stand."

It's important to remember the authority that the PPF has in modifying rules and scheme decisions. Advisers should tread with care when advising on DB schemes where there is a potential for insolvency. 

HMRC Publishes Pension Scheme Newsletter 81

(AF3, RO4, JO5, FA2, RO8)

HMRC has recently published Newsletter 81 which covers:

• Tax treatment of serious ill health lump sums
• Event Report
• RAS annual returns 2015/16
• Secondary annuities
• Lifetime Allowance
• Annual Allowance calculator
• Pension Flexibility & Scams

In summary:

Serious ill health lump sums

From 16 September 2016, the day after the date of Royal Assent to Finance Bill 2016, the 45% tax charge on serious ill-health lump sums paid to individuals who have reached age 75 is replaced with tax at the individual's marginal rate.

From this date administrators should stop reporting these payments on the accounting for tax return (AFT) (the last AFT that you should report these on is 1 July to 30 September 2016 - due to be submitted by 14 November 2016) and report them through real time information (RTI).

Event reporting

Inaccuracies in the Event Report can lead individuals to under or overestimate any tax penalties.

RAS 2015/16

Earlier this year HMRC issued notices requiring pension schemes operating relief at source to submit the annual return of individual information for 2015 to 2016 (also known as the RPSCOM100(Z)) to HMRC by 5 October 2016. Failure to make the return by this date will result in a delay to any interim payments.

Secondary Annuities

Details of the new RTI fields to report the surrender or assignment of annuities from 6 April 2017 will be available in December 2016.

The government is extending the Pension Wise service to include guidance for annuitants who want to sell their annuity from April 2017. Pension Wise are looking for annuitants who are considering selling their annuity when the new market opens, to participate in a series of pilot appointments for both face-to-face and telephone contacts. Annuitants who are interested in selling their annuity can pre-register to take part in the pilot exercise by completing a form on the Pension Wise website.

Lifetime Allowance online

A reminder that the online application system for FP & IP 14/16 is now up and running.

On 15 Sept 2016 the Personal Tax Account was also updated to allow customers to view their protection details from their Personal Tax Account.

To make it easier for individuals and scheme administrators, the protection summary page has been updated to include the individual's name and national insurance number in addition to the lifetime allowance protection reference number and the pension scheme administrator's reference number already shown.

Annual Allowance calculator

Calculator now launched and updated to take into account the 2015/16 pre/post alignment input periods.

Pension Flexibility & Scams

The pension freedoms introduced in April 2015 mean that scheme members of defined contribution schemes have a lot more choice about how they access their pension. HMRC want savers to make the right decisions about investments and to understand the consequences of not seeking proper advice.

Pension scammers are continually looking for new ways to target individuals and their pension savings. Whilst the action taken to prevent these sorts of arrangements from operating goes some way to help protect pension savings, the responsibility for getting the right advice lies with the pension scheme member.

Please remind your scheme members that they can find lots of information on GOV.UK about the pension tax rules and how they can access their pension savings.

Keeping up to date with HMRC updates is key in planning. The newsletters contains some key information such as the rate change of serious ill health lump sums post age 75.

NEST: Pension Savers With Small Pots Want Flexibility Too

(AF3, RO4, JO5, FA2, RO8)

New research into savers' attitudes towards retirement income options reveals significant support for the development of new retirement products that combine flexibility, security, and 'rainy day' cash, even for those with smaller pots.

However, the research also shows that savers worry about doing the 'right thing', and don't feel confident about taking on the responsibility of making complex decisions throughout their retirement.

Ignition House, on behalf of NEST, conducted in-depth qualitative research with savers from across the country who are approaching retirement to discover what retirement income options they were looking for.

The participants had similar characteristics to the new automatically enrolled generation. The research specifically focused on basic rate tax payers with defined contribution (DC) pots between £20,000 to £50,000; as well as those with larger pots.

Key findings from the research are:

• Respondents welcome the new pension freedoms, but lack confidence about navigating the more complex choices now open to them.

• While people value flexibility highly many are worried about making the 'right' decision and worry about having to keep making complex decisions throughout their retirement.

• They want access to products that combine the flexibility of drawdown, the security of annuities, and the accessibility of additional 'rainy day' cash. This was true even for those with the smallest pots.

• They liked the concept of 'lifetime income' strategies that 'do the hard work for them' along the lines of NEST's Blueprint, which incorporates flexibility, security and 'rainy day' cash with expert management of investment and governance around delivering a steady and sustainable income.

• Making a decision on insured later life income protection at the age of 75 was much more appealing than at the age of 65 as this felt like a more appropriate stage of life.

Recent quantitative survey research from among NEST members supports these findings; when NEST members were asked what they valued most from their pensions savings: 

• 92% said a regular income for life was important, very important or essential.
• 95% thought flexibility was important, very important or essential.

This desire was shared across genders, with women being slightly more insistent that a lifelong income is essential, as well as across income deciles and a wide range of pot sizes including those with less than £5,000.

Otto Thoresen, Chair of NEST Corporation, commented:

"Many people being brought into pension saving through auto enrolment will typically have small pots when they come to take their money out, but it's clear that many want to take full advantage of the flexibilities and options. And why shouldn't they?

However, working out what to do with your retirement pot requires a complex set of decisions and an in-depth knowledge of the options available to you.

There's clearly an appetite for products that will provide flexibility but don't require lots of complex decisions by consumers. The challenge is how to provide this at low cost to people with small pots."

NEST is sometimes forgotten in the great scheme of planning. It's a scheme to keep an eye on for positive feature changes.