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My PFS - Technical news - 18/07/17

Personal Finance Society news update from 5th to 18th July 2017.

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Taxation and Trusts

Investment planning

Retirement planning

TAXATION AND TRUSTS

Rangers loses its tax battle with HMRC

(AF1, JO2, RO3)

HMRC has won its fight against the Glasgow Rangers Football Club over the club's use of Employee Benefit Trusts (EBTs) after the Supreme Court ruled in its favour.

It would appear that over £47 million was paid to players, managers and directors in tax-free loans between 2001 and 2010. HMRC argued that the loans were, in effect, player and staff wages and, therefore, would be liable to income tax and National Insurance.

According to the BBC, the Supreme Court's decision is not expected to have any impact on Rangers at the moment, as the club is owned by a different company.  That said, the ruling is a big victory for HMRC in its bid to recoup tax from several other firms which ran EBTs and other similar schemes.

The BBC also said HMRC could now issue follower notices to demand payment from other companies who ran similar schemes, with a number of football clubs in England falling into this category.

Student loans

The Institute for Fiscal Studies (IFS) has published a new paper looking at the system of student loans as it operates in England. It shows that Labour's election pledge to abolish future fees is, in truth, more an extension of current government policy.

Student loans were introduced in 1998, covering both tuition fees (at £1,000 a year) and maintenance (calculated on an income-related basis after maintenance grants were scrapped). Since then the system has been subject to regular reforms, with differing regimes now in place for the four constituent parts of the UK. In England, for the coming 2017/18 academic year:

  • The maximum tuition fee (and de facto minimum) will be £9,250;
  • Following the abolition (again) of maintenance grants in 2016, the maximum maintenance grant is £11,002 (for students studying away from home in London); and
  • The maximum rate of interest on loans has risen to 6.1% (RPI to March 2017 + 3%). This rate applies during the period at university and during the repayment period if annual income exceeds £41,000.

The IFS has just published a new briefing paper examining the impact of these financing levels. Amongst its findings are:

  • 'The combination of high fees and large maintenance loans contributes to English graduates having the highest student debts in the developed world.' The average US student debt is about $36,000 (just under £28,000).
  • Students from the poorest backgrounds, who are eligible for the largest maintenance loans, will accrue debts of £57,000 (including interest) at the end of a three-year degree course.
  • The reforms since 2012 have increased the repayments of almost all graduates, with the burden increasing the most for low and middle earners - driven largely by the freezing, from 2016 to 2021 at £21,000, of the repayment threshold (which the government had originally promised would be earnings-linked).
  • The pre-graduation RPI+3% interest rate 'results in students accruing £5,800 in interest on average during study'.  For high earners, the use of the RPI + 3% rate has increased lifetime repayments 'by almost £40,000 in today's money'. This is mainly due to lengthening the period of repayment - because more of each payment made is interest rather than capital.
  • Any outstanding student debt is written off after 30 years measured from the April following the course end. How much will be written off by the government 'is now heavily dependent on graduate earnings, early repayment behaviour and the government cost of borrowing'. The IFS's central estimate is that 31.3% of all outstanding loans and interest will be written off. By a quirk of government accounting, this write off - worth an average of £17,700 per borrower - does not appear on the Treasury balance sheet until the loan is finally written off. Thus, the projected £5.91bn cost of the 2017 cohort of students will not emerge until 2050/51.
  • The write off calculations are very sensitive to the assumptions made. For example, if graduate earnings growth is 0.3% above inflation, rather than the assumed 2.3%, then the cost rises from £5.91bn to £8.75bn, an increase of nearly half. Similarly, if loan take up by the highest 20% of graduate earners is 50%, rather than the 100% assumed, then the lack of high interest rate repayments from them will add £350m (6%) to the overall cost.

The mathematics of student loans are complex, to say the least. There is no easy answer to the question of whether it makes sense for parents to make payments on behalf of their children rather than let the debts accumulate. For high flying graduates - possibly paying RPI+ 3% throughout - it looks a wise move. However, for other graduates who end up in lowly paid occupations, the parental expenditure could be no more than a gift to the government of money that would otherwise disappear thanks to the 30 year loan write-off.

Stricter buy-to-let lending rules to apply from 30 September 2017

(AF2, AF4, FA7, JO3, LP2, RO2)

In September 2016 the Bank of England issued a press release which outlined that buy-to-let mortgage lenders (that are regulated by the Prudential Regulation Authority) will have to implement certain restrictions on lending criteria from 1 January 2017. These initial changes included stricter affordability tests, including interest cover ratios taking account of the impact of recent tax changes and a stress test on interest rate rises.

In addition, the Prudential Regulation Authority has made a proposal to impose additional rules on private landlords/buy-to-let investors which will be implemented from 30 September 2017.

The new rules basically mean that lenders will be forced to apply stringent rules against applications for buy-to-let mortgages, by private landlords, with four or more mortgaged properties.

  1. Lenders may be forced to review a landlord's entire portfolio when offering a mortgage on a single property.
  2. Lenders may require proof of rental income and a business plan to support a new application.
  3. Landlord borrowers could find the amount they can borrow will be restricted, if they fail a "stress test" across their portfolio.

The new rules are clearly part of the government's crackdown on the buy-to-let market. It will be interesting to see how the new rules apply in practice, especially in cases where properties are, for example, held directly by an individual or via a limited company because it is currently unclear whether all properties would be taken into account. And it may be advisable for those who are currently considering making a mortgage application to apply now before the new rules are implemented.

The Taylor Review

(AF1, RO3)

Matthew Taylor's long-awaited "Review of Modern Working Practices" has been published.  The Review takes a broad look at UK employment, covering not just the issue of the gig economy, which has garnered the headlines, but also a range of other matters, such as the basis of holiday pay calculations and corporate governance. It is noteworthy that in the introductory pages there is the statement that:

'The work of this Review is based on a single overriding ambition: All work in the UK economy should be fair and decent with realistic scope for development and fulfilment.'

The Review runs to 116 densely-typed pages. The contents most relevant to the financial services sector include:

  • The Review states that the current UK employment rate of 74.8% is the highest since records began. Full-time, permanent work as an employee accounts for 63% of all employment, a figure that has changed little since 2010. Almost 26.2% of employment is part-time work, while self-employment now accounts for around 15.1% of total employment. The best estimate of the gig economy is about 4% of the overall workforce, although more than half of those involved also have separate permanent employment.
  • Employment law effectively divides the working population into three: employer, worker and self-employed, whereas tax law has only two categories - employee or self-employed. Taylor wants to keep the employment law trio, but change the term "worker" to "dependent contractor". The rebadging would not alter the baseline employment protection (eg National Minimum Wage (NMW), holiday pay and auto enrolment) enjoyed by today's workers, but would move them all across to the employee category for tax purposes.
  • The test distinguishing between worker/dependent contractor and self-employed should be clearer in statute and place more emphasis on the principle of employer control. A right to substitution, often written into contracts with little intention of their use, should no longer be seen as crucial in drawing the self-employment line.
  • HMRC currently enforces both the NMW and the Statutory Sick Pay (SSP) rules and its responsibilities should be extended to include holiday pay.
  • Individuals should be able to obtain an authoritative determination of their employment status from an Employment Tribunal (ET) at an expedited preliminary hearing without paying any fee. This would result in many more challenges like those recently brought - at a cost - by Uber and Deliveroo operatives. The burden of proof in such ET hearings should be reversed so that the employer must prove that the individual is not entitled to the relevant employment rights, not the other way around, albeit this would have to be subject to safeguards discouraging vexatious claims. ET decisions should then be backed up with a stronger enforcement process, encouraging employers to apply the decision to similar groups of individuals rather than waiting for them to act.
  • Taylor believes that the principles underlying the proposed Budget 2017 changes to Class 4 NICs were correct, news that Mr Hammond will no doubt welcome. The Review says that the level of NICs paid by employees and the self- employed should 'be moved closer to parity while the Government should also address those remaining areas of entitlement - parental leave in particular - where self-employed people lose out.' Similarly, the Review calls for a 'move to a more consistent level of taxation on different forms of labour', echoing other work that has contrasted the differing tax treatment of employees, the self-employed and those working through companies. In something of an understatement, the Review comments that 'None of these measures would be easy or uncontroversial' and then says that '…this Review is only the latest in a series of studies to make the point about the differential taxing of employed and self-employed, and we would encourage the Government to raise public awareness of this issue and engage in debate with stakeholders about potential long term solutions.'
  • On the pension front, the Review notes that 'only 13.1% of self-employed people were participating in a pension in 2014/15, dropping to only 4.2% amongst 25-34 year olds.' Predictably it 'calls on Government to explore ways to improve pension provision amongst the self-employed', including the possibility of implementing a form of auto-enrolment (at 4% of income) via the self-assessment system. The Review also tentatively floats the idea that employer contribution in auto-enrolment could be mirrored when payments are made to self-employed contractors.

The Review has arrived at a time when the government is not in a good position to take much action. The focus on delivering Brexit legislation, the debacle of the last Budget and the thin majority all mean there will be little appetite for radical tax and NIC reform. We can probably expect the government to commission another report solely on employment taxation options, kicking the can down the road.

Corporate tax avoidance measures

(AF1, RO3)

Corporation tax has been in the news, on and off, over the last few years hasn't it?  We've had a clear strategy to reduce it to make the UK an attractive place to do business - especially given Brexit-related uncertainty. It seems to have worked to a degree but we've also had the furore over big multinationals avoiding it. Avoiding it all too easily and in large amounts it seems - coffee and tech companies being the most publicised exponents of the art.

We have also had the OECD-led   Base Erosion and Profit Shifting (BEPS) initiative driven by the G20 countries.  BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the inclusive framework, over 100 countries and jurisdictions are collaborating to implement the BEPS measures.  And the UK has led the way in this with its own version of BEPS in the shape of the diverted profits tax - the so-called "Google/Amazon" tax. 

More recently we've had Labour party proposals (in their manifesto) to reintroduce a small companies' rate but to universally and materially increase corporation tax rates for companies of all sizes. 

Of all these interactions there is no doubt that the public's interest, no, anger, was most ignited  by large corporates trading in the UK but seemingly not paying their "fair share".  Well, surprise! surprise!  That's a sentiment that is held internationally too.

Earlier this month some 70 countries signed a pact to crack down on international tax avoidance, with changes that backers say will increase the worldwide corporate tax take by up to 10%.

Countries, including the EU's 28 members, India, China and Australia - but not the US - signed an agreement in Paris that will make changes to thousands of treaties to halt abuse by companies and improve dispute resolution.

It has been reported that the agreement is part of an initiative launched by the G20 group of leading nations to tackle BEPS - as mentioned earlier, tax avoidance strategies that shift profits to low or no-tax jurisdictions - in the wake of a public backlash over avoidance by companies, such as Amazon, Apple and Google.

The agreement is intended to put a stop to "treaty shopping" - the practice of routing income to countries with attractive tax treaties via "brass plate" companies with little presence on the ground beyond a mailing address.  It is likely to have a particular impact on countries, such as Luxembourg and the Netherlands, where treaty shopping has raised the stock of foreign direct investment far beyond the size of the countries' economies.

The Organisation for Economic Co-operation and Development (OECD), a champion of the agreement, hailed what it said was a "turning point in tax treaty history".  Once ratified by its signatories - a process that may take until 2019 - the agreement will result in the simultaneous revision of 2,000 treaties, saving governments decades of negotiations. 

As stated above, the avowed intent of the initiative is to kill so-called "treaty shopping".

It is thought by some that the agreement will benefit developing countries forced to sign unfair treaties that often meant companies paid tax elsewhere.  The UN has estimated that poorer countries lose as much as $100bn a year in taxable profits diverted to other countries.

The treaty changes are also set to improve dispute resolution, addressing concerns by tax authorities and businesses about the growing number of disagreements between countries over taxing rights.

This important development represents another significant example of global co-operation to defeat tax avoidance that erodes the "global tax base".  It's a big subject with big implications but it is representative of firm national government legislation.

 The world is changing. What used to be acceptable as being within the "letter of the law" is no longer if it is outside of the spirit of the law and defeats the intention of national governments. The approach to tax avoidance by companies to a large extent mirrors that taken to thwart aggressive tax avoidance by individuals. It's the substance of tax planning arrangements in relation to the intent of Parliament that will determine whether they succeed or fail.  "Boring is the new exciting"…and that's great news for financial planners using "tried and tested" strategies.

The savings rate in the UK

(AF4, FA7, LP2, RO2)

Helping clients to make the right choices for regular savings and lump sum investment is one of the key roles of financial planners.  Making the wrong choices can cause serious financial detriment and this consequence, together with relative complexity over the choices and difficulty in "self-serving" the answers, are the three key components underpinning most needs for advice.

Self-evidently an understanding of the investor's attitude to risk, fear of loss and time-based financial goals (along with an understanding of all of their financial assets) will substantially underpin the choice of investment fund or funds appropriate for the client. As a result of this understanding an appropriate element of risk reduction will be baked into portfolio construction through the development of an asset allocation strategy.

A desire for tax efficiency will also usually be present, or at least it should be.  After all, reducing "tax outflow" will enable financial goals to be more easily reached. Tax efficiency will also allow a little more investment risk to be taken with the resulting possibility of more return.  Nothing being guaranteed of course - well, not without cost!

In the quest for tax efficiency for the portfolio selected, pensions and ISAs are the recognised "no-brainers". Once these are "filled up" though (limits reached) then (leaving aside VCTs/EISs for the moment) attention will turn to investment bonds and collectives.  The tax implications dependent on the underlying portfolio can be material.  The changes to dividend taxation, the taxation of interest and capital gains tax all have a role to play - along with charges and how and when they are deducted of course.

As well as advising on investment portfolio and product wrapper choice, though, it seems that we have a job to do to encourage some people to save a bit more in the first place.  According to new figures from the Office for National Statistics (ONS), UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years.  It seems that only 1.7% of income was left unspent in the first quarter of 2017.  This is the lowest savings ratio since comparable records began in 1963.

The UK consumer trend since Brexit seems to have been to borrow and spend - a powerful but worrying combination.  Powerful, as it has caused the economy to continue to grow.  But, worrying because, as the savings ratio falls, economists and policymakers are likely to be worried about how much consumer spending can contribute to growth in the months ahead.  Apparently, over the past 54 years the savings ratio has averaged 9.2% of disposable income.  The trend currently, though, is materially declining.  In the first quarter of 2016 the savings ratio was 6.1%, already below the long-term average, and it fell to 3.3% by the fourth quarter of the year.

The ONS said that the fall was mostly caused by a rise in taxes on incomes and wealth, which led to a fall in household disposable incomes that was not matched by a corresponding drop in spending.

Part of the rise in taxes was temporary, the ONS said, resulting from high tax payments in early 2017 on dividends paid a year earlier, but it added that not all of the drop was explained by temporary factors.

They say "the underlying trend is for a continued fall in the savings ratio".

It seems that the Bank of England had expected the savings ratio to rise in the first quarter of the year.  In its May inflation report, it thought the drop at the end of 2016 was due to volatile factors and "the headline saving ratio is expected to have risen slightly in the first quarter of 2017".

Now it may well be that this "low savings" malaise is less likely to be present in the clients of financial advisers with whom the adviser has a strong and influential relationship. In which case maybe the adviser has a strong role to play in helping the client(s) embed a regular savings habit in their children/grandchildren. To do so can, obviously, have really beneficial effects for individuals' long-term financial security.  Establishing the right habits early in life is undeniably a good thing - but eternally difficult in this day and age.

Giving a young individual the gift of financial discipline founded on an acceptance of deferred gratification is one of the greatest things a financial planner can do to enhance intergenerational financial wellbeing for their clients and, ultimately, for themselves by protecting and expanding their client relationships.

Provisions to be reinstated in the finance bill (no.2)

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

Following the April announcement of a General Election in June, several technical measures in the Finance Bill had to be dropped so that the Finance Act 2017 could be passed before Parliament was dissolved.

The three areas that were removed which are of most relevance to clients of advisers are:

  • the reduction of the MPAA from £10,000 to £4,000. 
  • the introduction of new rules dealing with the taxation of non-domiciliaries and offshore trusts established by them.  Intended changes here include the following:
    • 15 out of 20 year deemed-domicile rule
    • UK inheritance tax exposure on UK residential properties held via non-UK structures
    • Protected trust regime
    • The mixed fund cleanse and rebasing of foreign asset opportunities.
  • the reduction of the dividend tax allowance (DTA) from £5,000 to £2,000 with effect from 6 April 2018

Supporting documents for the second 2017 Finance Bill were published on 14 July 2017 and include the provisions that were removed from the earlier Finance Bill.  The government has confirmed its intention that all the MPAA and non-domicile rules will be effective from 6 April 2017. More can be read on this here.

Clients who are affected by the change in the non-domicile tax rules should take their own professional advice on how they might be affected and what action might now be appropriate.

Clients with shares and collective investment accounts that generate dividend income of more than £2,000 p.a. should plan for this future change.

The summer finance bill

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

The Treasury has made an announcement about the contents of the Summer Finance Bill.

The Queen's Speech indicated that there would be a Summer Finance Bill. On 13 July, a week before Parliament rises for the Summer recess, the Treasury has finally broken its silence on the subject.

In a written statement, the Financial Secretary to the Treasury (Mel Stride, if you are wondering) revealed that:

  • Despite all that has happened since the Finance (No.2) Bill shrank by 80% en route to becoming the Finance Act 2017, the forthcoming Finance Bill 'will legislate for policies that have already been announced'.
  • 'In the case of some provisions that will apply from a time before the Bill is introduced, technical adjustments and additions to the versions contained in the March Bill will be made on introduction to ensure that they function as intended.' In other words, to borrow from the Treasury press release, '..all policies originally announced to start from April 2017 will be effective from that date' (but see below regarding the exception for MTD). Updated draft provisions have been published for some legislation (but not the MPAA).
  • The Government 'expects to introduce a [summer] Finance Bill as soon as possible after the summer recess containing the withdrawn provisions'. However, while the recess ends on 5 September, Parliament then goes into recess again 9 days later for the conference season, not to return until 9 October. The passage of the summer (sic) Finance Bill may therefore start to impinge on the timing of the Autumn Statement.
  • There has been a major change on Making Tax Digital (MTD), probably reflecting the knock-on effect of the difficulties HMRC is having with self -assessment software.  Under a new timetable:
    • only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records andonlyfor VAT purposes;
    • they will only need to do so from 2019; and
    • businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020. 

MTD will be available on a voluntary basis for the smallest businesses, and for other taxes.

Given that Theresa May's agreement with the DUP covers Budget measures, in theory the Government should be able to push the new Finance Bill through the House of Commons. In practice - as we saw with Class 4 NICs - it can be dangerous to assume the Chancellor will have the support of all Conservative MPs.

INVESTMENT PLANNING

A dividend record

(AF4, FA7, LP2, RO2)

UK dividends in 2016 were boosted by the demise of sterling after the 23 June referendum. Capita's latest quarterly dividend monitor suggests that the rosy picture has continued into the second quarter of 2017, with a helping hand from some large one-off payments. According to Capita:

  • The second quarter of 2017 saw UK dividend payments rise to a quarterly record of £33.3bn, up 14.5% over the previous year.
  • Special dividends were up over 27% to £4.7bn. National Grid's was the main contributor, with a £3.2bn payout financed from the part disposal of its gas distribution business.
  • Capita reckons that growth in underlying dividends (ie excluding the one-off specials) was 12.6% year-on-year. Strip out the currency effect and underlying growth is still a healthy 7.8%.
  • 12 sectors raised dividends, while in 7 there was a fall. The mining sector bounced back, with dividends up 96% year-on-year, helped by a larger than expected pay out from one of the sector's behemoths, Rio Tinto, and the resumption of dividends from the likes of Glencore.
  • Financial companies remain the largest dividend payers, accounting for 31% of total payments. However, their dividend growth was only 4% in Q2. The next highest payers were oil, gas and energy companies, many of which declare dividends in US dollars.
  • Payouts from the Top 100 companies rose 12.8% year-on-year, very close to the more UK-focused Mid 250's 12.2% increase.
  • Concentration of dividend payments remains an issue, although it is less serious than it was. Capita says the top five companies account for 34% of all dividends (against 37% a year ago), while the top 15 covered 55% (cf 64%). The biggest payer was HSBC, which knocked Shell of its usual top spot because April marked the payment of HSBC's final dividend of $0.21, against its usual quarterly payout of £0.10.

The beneficial currency effect will largely disappear from the annual comparison in the next quarter as the pre-Brexit comparison will drop out. Consequently, Capita is expecting year-on-year dividend growth for 2017 as a whole to be 7%, with underlying dividend growth of 7.4%.

PENSIONS

Landmark case removes restrictions on pension death benefits

(AF3, FA2, JO5, RO4, RO8)

The Supreme Court has overturned the decision of the Court of Appeal in Walker (Appellant) v Innospec Limited and others (Respondents)

The case concerned Mr Walker who had entered into a Civil Partnership and then when legislation permitted, a marriage with his same sex partner. The death benefits payable on his death to his partner were significantly less that would have been payable to an opposite-sex spouse and he claimed that this was discrimination.

The Supreme Court concluded that although the Equality Act 2010 did extend rights to same sex couples, which included pension death benefits, there was an exemption within the Act that allowed Trustees to exclude pension benefits payable in respect of service accrued prior to December 2005, when the EU Directive (2000/78/EC) was originally incorporated into UK law. The Supreme Court decided that the exemption should be disapplied as was incompatible with EU law and that Mr Walker's husband is entitled on his death to a spouse's pension, provided they remain married.

The Government has will have to consider whether a change in law is appropriate. It does however raise the question of retrospective legislation. It's a case of one battle won, war not over yet.

Reduction in the MPAA applicable from 6 April 2017

(AF3, FA2, JO5, RO4, RO8)

In the written statement - HCWS47 made by Mel Stride, Financial Secretary to the Treasury and in a news story on Gov.uk it has been confirmed that where policies we announced to have started at the beginning of the 2017/18 tax year there will be no changes to these plans.

We read this to mean that policies such as the reduction in the money purchase annual allowance from £10,000 to £4,000 will be applicable from 6/4/2017 for those who have triggered the MPAA although it isn't specifically mentioned in the statement.

The statement says "The Government confirms that intention. It expects to introduce a Finance Bill as soon as possible after the summer recess containing the withdrawn provisions. Where policies have been announced as applying from the start of the 2017-18 tax year or other point before the introduction of the forthcoming Finance Bill, there is no change of policy and these dates of application will be retained. Those affected by the provisions should continue to assume that they will apply as originally announced."

The changes still need to make their way through Parliament so although this is the intention there is still a chance that the legislation could change.

FCA publishes retirement outcomes review interim report

(AF3, FA2, JO5, RO4, RO8)

The FCA have published the retirement outcomes review interim report which looks into how the retirement income market is evolving after the introductions of the pension freedoms.

The report concludes that consumers have welcomes the pension freedoms with accessing pensions early becoming the norm and over half of pots being accessed have been fully withdrawn, although many of these are small and the vast majority using this option (94%) had other sources of retirement income.

The market is still evolving and although providers have developed tools to help consumers understand the changes and have provided simpler flexi-access drawdown products, the market still have a lot to do. The defined contribution market will continue to grow and will become a greater proportion of benefits for those retiring in future years because of the decline of defined benefit schemes and the increase in auto enrolment.

Drawdown has become significantly more popular since the introduction of the pension freedoms with twice as many pots moving into drawdown compared to annuities. A significant change in comparison to before the freedoms.

Emerging issues

The FCA have identified five emerging issues:

  • Consumers who fully withdrew their pots did so partly because they do not trust pensions;
  • Most consumers choose the 'path of least resistance', accepting drawdown from their current pension provider without shopping around;
  • Many consumers buy drawdown without advice but may need further protection to manage their drawdown effectively;
  • Annuity providers are leaving the open annuity market; and
  • Product innovation has been limited.

Potential remedies

The FCA have said that to support pension freedoms and get this market on a good footing for the future, it is important that:

  • There are appropriate protections for those least able to engage
  • The market drives value and innovation
  • Consumers can get the right support when they take important and difficult decisions about their pension savings

The FCA have identified some potential remedies to help tackle all three areas, and have requested feedback on how urgent and appropriate they are by the 15th September 2017.

These proposals are:

  • Additional protections for consumers who buy drawdown without advice;
  • Measures to promote competition for consumers who buy drawdown without taking advice, including proposals to:
  • Allow consumers to take some of their savings early without having to put the rest into a drawdown product
  • Make it easier for consumers to compare and shop around for drawdown products
  • Tools and services to help consumers make good choices.

Proposed remedies in more detail.

Additional protections

There are three ways in which the FCA propose that additional protections could be implemented.

Default investment pathways is the first option and the way in which the FCA envisage this working would be for firms to be required to offer at least one default pathway for those choosing to use drawdown as a retirement option, this pathway would have a high level objective and set out the strategy used to achieve this aim. The strategy would need to take account of likely characteristics and needs of the target consumer group, which may mean that more than one pathway could be required for firms with diverse consumer groups. Firms would need to implement a process to ask the consumer about their chosen outcome and monitor pathways to make sure they stay appropriate for the consumers expressed choices. The firm would need to remind the consumer of their choices and how the pathway relates giving them the option to change.

The FCA suggest that a charge cap should be put in place for the default pathways to avoid those who don't fully engage with their investment decisions being subject to excessive charges.

Extension of the IGCS role from purely accumulation to include decumulation so they can scrutinise the value of decumulation products including drawdown and default investment pathways.

Promotion of competition

The FCA proposes to decouple the act of accessing the tax free cash from a scheme with the decision on what to do with the remainder of the pot. This means that consumers can choose to take their tax free cash whilst leaving the remainder of their fund in the existing scheme to decide what to do with later. This is hoped to avoid consumers entering inappropriate or high cost products just to access the cash.

The FCA also want to promote shopping around and are considering intervening to facilitate the introduction drawdown comparison tools and promoting the use of cost metrics.

The introduction of a drawdown comparison tool would be complex but the FCA believe that it would promote competition amongst providers which is good for the consumer. The cost associated with drawdown is also complex and in order to make it easier for consumers to understand the FCA propose a summary cost metric such as average cost or pension value after cost.

Tools and services

The FCA believe that tools and services could be improved to help consumers understand their options with regards to pension freedoms. This is because it is seen that the pension freedoms have made consumers retirement decisions more complex and they struggle to understand the options available. The FCA believes that this has led to many consumer taking what they deem the easiest option and withdrawing all their pension funds.

Some help is provided already, such as pension wise and provider tools but these have had a low take up from consumers so far. The proposals are not to increase the information and support as it is shown that these aren't used but to make the information more impactful and effective.

The proposed changes include change to wake up packs, or even scrapping them entirely because in their current form they are not deemed effective, especially for those who have already made up their minds. With regards to changes to the wake up packs three things are being considered.

  • Shorter packs at different intervals
  • Having wake up packs provided by an independent party such as pension wise or pas.
  • Building the wake up information into the pension dashboard

The FCA have concerns about the tools currently provided and consider introducing rules and guidance setting out their expectations of such tools and how the information should be presented. However, they don't have any evidence any harm is being done at present and don't want to stifle any innovation in this area.

The FCA are still concerned about the lack of awareness of enhanced annuities and are considering if there is a need to mandate providers to inform consumers of the options for enhanced annuities early on in the retirement process.

What next?

The FCA are continuing their work in this area and will develop their thinking further. They request feedback on the report and responses to the questions raised within it by 15 September 2017.

The final report is due in the first half of 2018 and will provide an update on the proposed or further remedies giving details on which they are going to pursue.

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