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My PFS - Technical news - 02/02/2016

Personal Finance Society news update from 20th January to 2nd February 2016 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning


Legal Entity Identification - The issues facing trusts

(AF1, RO3, JO2)

With effect from January 2017, non-natural persons investing in financial markets will be required to obtain a Legal Entity Identifier before they can trade.  What does this mean for trusts?

The Global Legal Entity Identity Foundation (GLEIF), based in Switzerland, is introducing a system whereby every 'legal entity' will need to register and obtain a unique 20-character, alpha-numeric identification number - a Legal Entity Identifier (LEI) - before it can engage in financial transactions.

LEIs are already being issued but the new regulations will come into force in January 2017, and after that date a LEI will be required by all non-natural persons who invest in financial markets.

In the UK, acquiring a LEI will involve paying a fee of £115 plus VAT (renewable annually at a cost of around £70 per year) to the London Stock Exchange (LSE). LEIs issued by the London Stock Exchange (LSE) will be known as International Entity Identifiers (IEIs).

Problematically, while trusts are within the definition of a 'legal entity' for these purposes, the process for acquiring a LEI or IEI does not lend itself readily to trust applications. Not only must the applying entity provide the address of its 'headquarters' (a nonsense as far as trusts are concerned), the issuing body is required to validate the details of the entity against available public records and resources before a LEI can be issued. While this is fairly straightforward where the entity is a company, trusts will not usually have publicly available records and information against which their application can be validated - and if the entity cannot be issued with a LEI it will be left unable to trade in financial markets (even if acting through a third party fund manager).

Fortunately, the Financial Conduct Authority and the Wealth Management Association have recognised that some modification is needed to take account of the 'quirky nature' of trusts and both bodies are working closely with the LSE to ensure that the application process for trusts will be as smooth and  straightforward as possible. In the meantime, the LSE appears to be taking a pragmatic approach to this problem and has confirmed that it has already issued IEIs to a number of trusts, having 'partially corroborated' the trust details from the trust documents or deeds.

The requirement for a LEI or IEI only exists where the trust or other entity is investing in investments that have to be 'transactionally reported' (such as stocks, shares, derivatives and similar) and it is expected that investment firms (such as discretionary fund managers) will apply for LEIs on behalf of trusts where they are required 

The requirement for a LEI would not apply where the trust or other entity is investing in collective investments such as bonds, unit trusts or pooled funds.

Another record breaking year for self assessment returns

(AF1, AF2, JO3, JO2, RO3) 

HMRC has revealed that 10.39 million self assessment tax returns were completed ahead of the 31 January deadline; that's over 92% of the total returns expected, and 150,000 more than last year. 

Over 89% of customers, 9.24 million, opted to use HMRC's online self assessment service to calculate and pay the tax they owe, continuing the growing trend of dealing with the tax authorities electronically. 

This year HMRC's online self assessment service saw some changes together with more up-to-date online tools and the launch of the Personal Tax Account which was accessed by more than 825,000 customers as they completed their tax returns. These changes have made the process simpler and easier than ever before. 

And, by using new technology, HMRC has successfully checked 3.4 million returns and intercepted more than £96 million worth of fraudulent or incorrect repayment claims. This technology prevents criminal attacks and ensures that customers with legitimate claims are protected. 

Late filing of the return incurs an immediate penalty of £100 even if there is no tax to pay so for anyone who still has not filed their return, help and advice is available on GOV.UK or from the self assessment helpline on 0300 200 3310. 


December inflation numbers

(RO2, AF4, CF2, FA7)

December saw a rise in inflation to the highest since last January.

Annual inflation on the CPI measure rose marginally in December, with the rate reaching +0.2%. Market expectations were that the December inflation numbers would be unchanged and the small rise has taken the CPI out of the 0% ±0.1% band it had been wedged in since February 2015. 

The CPI showed prices up 0.1% over the month, whereas between November and December 2014 they were unchanged. The CPI/RPI gap remained unaltered this month at 1%, with the RPI also rising by 0.1% on an annual basis (to 1.2%). Over the month, the RPI rose 0.3%. 

The rise in the CPI annual rate was due to 'only one substantial upward contribution', which was offset by two (less substantial) downward contributions, according to the ONS: 


Transport:Overall prices increased by 1.8% between November and December 2015, compared with a fall of 0.2% between the same 2 months in 2014. The sector 1.8% rise was worth an extra 0.3% on the annual CPI. 

The push up came principally from air fares and, to a lesser extent, motor fuels. Air fares increased by 46% between November and December 2015 compared with 19% between the same 2 months a year earlier. The ONS says this was the largest November-December air fare hike since 2002. It is an interesting reflection on how oil price falls do not always feed through to consumer prices. On the ground, November to December 2015 saw road fuel prices fall by less than they did a year ago, which in statistical terms creates a year-on-year rise. 


Food and non-alcoholic beverages: Overall prices fell by 0.2% between November and December 2015, compared with a rise of 0.3% between the same two months a year ago. 

Alcoholic beverages and tobacco:Overall prices fell by 1.3%, compared with a smaller fall of 0.2% between the same two months a year earlier. Wine and spirits were the main contributors to the change in the 12-month rate, with both showing larger price drops than in the same period a year ago. 

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose 0.2% to an annual 1.4%. Despite inflation rising slightly, five of the twelve components of the CPI index are now in negative annual territory, two more than last month. 

Mark Carney's "Turn of the Year" speech comment that "now is not yet the time to raise interest rates" will come as no surprise against these inflation numbers. In any case he needs only to see how his counterparts at the Federal Reserve are now being criticised for pulling their interest rate trigger too soon.

However, "the unreliable boyfriend" has to watch the impact of the recent falls in sterling on those benign inflation numbers. In 2015, services inflation (mostly UK internally produced) was +2.9%, while goods (largely imports) was -2.1%, thanks to a strong (at least until December) pound and falling commodity prices. If the benefit of cheapening imports reverses, the inflation picture becomes rather different…

The longest January on record?

(RO2, AF4, CF2, FA7)

 Investment markets got off to a miserable start in 2016 but, as ever, the headlines for the falls were bigger than the ones for the rallies... 




Change in January 2016

Sterling-adjusted change

FTSE 100





FTSE 250





FTSE 350 Higher Yield





FTSE 350 Lower Yield





FTSE All-Share





S&P 500





Euro Stoxx 50 (€)





Nikkei 225





Shanghai Composite










MSCI Emerg Mkts ($)





2 yr UK Gilt yield





10 yr UK Gilt yield





2 yr US T-bond yield





10 yr US T-bond yield





2 yr German Bund Yield





10 yr German Bund Yield




















Brent Crude ($)





Gold ($)





Iron Ore ($)





Copper ($)





January saw much turbulence in world stock markets, with many entering bear market territory (defined as a fall of 20% from the previous peak). In the traditional hindsight exercise of pinning the tail on the donkey, the shake-out has been variously blamed on:

  • Concerns about China, in terms of future growth, the currency, the equity market and bad debts. None of these are new issues, but January seemed to bring a re-focusing on the negatives.
  • The fall in the price of oil. Usually a falling oil price is greeted as good news, akin to a tax cut for consuming countries, but this time the attention has not been on the sub-£1 litre. Instead, there have been worries about the sovereign wealth funds of oil-rich nations being forced to liquidate holdings in an effort to replace lost oil revenues. Japan's dismal performance has been blamed on its stock market being liquid and a place for the Saudis to take profits after a relatively good performance in 2015.
  • Worries that the US Federal Reserve has started raising rates too soon. The surprise move at the end of the month by the central bank of Japan to apply negative interest rates on reserves underlined how the Fed is facing in a different direction from the other central banks. In the UK, Mark Carney as good as acknowledged a rate rise is now unlikely before 2017.
  • Brexit worries are beginning to appear. As the table shows, sterling had a lousy month, with substantial declines against the dollar, yen and euro. The pound's trade-weighted index was down 2.6%. This helped dampen overseas market drops for UK investors. In particular, all the noise from across the Atlantic ended up with a sterling-adjusted decline of less than 1%.

Lost in all the attention given to the equity markets was the fact that government bond markets benefited from the turbulence, witness the declining yields in the table. According to Trustnet, the best performing IA sector in January was UK index-linked gilts, followed by UK gilts and then (with some currency help) Global Bonds. 

January was a see-saw month, but it was also a reminder of the benefits of diversification both in terms of currencies and spread of assets. 


Pension benefits with a guarantee and the advice requirement

(RO4, AF3, CF4, JO5, FA2, RO8)

Between 23 November 2015 and 15 January 2016, the Government held a call for evidence on the valuation process for pensions with a guaranteed annuity rate (GAR) for the purposes of the advice requirement. This call for evidence was held in response to concerns that pension providers and pension scheme members were finding it difficult to understand when members were required to take advice before transferring such benefits, or accessing them flexibly.

The DWP also noted that the majority of consultation respondents were in favour of a change to the current valuation method and the Government is now considering how best to simplify the current valuation process, and is planning to consult on draft regulations later in 2016. The DWP broadly welcomed comments on these lines. 

In connection with this, the Department of Work and Pensions (DWP) has now published a consultation on valuation process for pensions with guaranteed Annuity Rates (GAR) for the purposes of the advice requirement a factsheet has been published. 

The DWP has also published a factsheet entitled " Pension benefits with a guarantee and the advice requirement". 

The DWP factsheet is intended to help pension scheme providers determine whether certain types of pension benefits which contain a promise, including those with a GAR, are safeguarded benefits for the purposes of the new advice requirement and when the exception to the requirement to take independent advice for those with safeguarded benefits worth £30,000 or less applies.

The factsheet is intended to help pension scheme providers determine:

  • whether certain types of pension benefits which contain a promise, including those with a guaranteed annuity rate (GAR), are safeguarded benefits for the purposes of the new advice requirement.
  • when the exception to the requirement to take independent advice for those with safeguarded benefits worth £30,000 or less applies.

Is it worth paying an annual allowance charge - Part 1

(RO4, AF3, CF4, JO5, FA2, RO8)

The issue of planning options for those individuals potentially caught by the annual allowance charge (AAC) and/or the lifetime allowance charge remains one on which Technical Connection are being regularly questioned, so they have decided to look more closely at the AAC.

This is the first of two articles on the subject:

  • Part 1 (this article) looks at the broad principles and considers the situation where contributions are all being madepersonally(ie there is no employer contribution).
  • Part 2 looks at those circumstances where employer contributions (with or without employee contributions) trigger the AAC.

Let us start by considering the maths, based purely on an AAC, assuming that the charge applies to the full contribution involved and is deducted immediately under scheme pays rules. There is assumed to be no lifetime allowance charge (but if the AAC is being triggered, this may not be the case). 

As we are considering purely personal contributions, NICs are irrelevant. For a £10,000 gross contribution (paid as £8,000 with relief at source), the 40% taxpayer receives £4,000 in total income tax relief (and the 45% taxpayer £4,500), leaving a net contribution cost of £6,000 (£5,500). As the table below shows, the impact of the AAC is to reduce their pension fund to the same amount as their net outlay, ie to nullify the tax relief. 

One way to consider the immediate value of what remains in the pension arrangement after the AAC is notionally to convert the residual fund into a UFPLS, ie 75% taxable, 25% non-taxable. It is at this point that the questionable wisdom of paying an AAC onpersonalcontributions becomes clear. In effect the individual has the choice of either not making the contribution and retaining the net £6,000/£5,500 for investment or making the contribution and exposing 75% of that sum to further income tax.  


40% taxpayer

45% taxpayer

Annual Allowance Charge


Annual Allowance Charge












Residual fund










Income tax





Net benefit





At this point, there are many alternatives investments that look more attractive:

  • There are the usual suspects - ISAs, VCTs and EISs for a start;
  • An offshore bond can offer gross roll up similar to a pension with no tax charge on any of the original investment. However, anonshorebond will often be more tax-efficient overall;
  • A QNUPS could offer similar benefits to the pension, but with more investment flexibility, none of the reporting issues and no breeching lifetime allowance risks;
  • In the world of a £5,000 dividend allowance and an £11,100 CGT exemption, direct investment has plenty of appeal; and 
  • For married couples and civil partners, investing or funding pensions in the spouse's/partner's name is a possibility - again enhanced by next tax year's dividend allowance. Funding pensions for the spouse is also a possibility.

It is hard to envisage many circumstances which would justify a stand-alone personal contribution subject to an AAC. Probably the most obvious is if continued contributions are linked to availability of guaranteed annuity rates. Even as a pure estate planning exercise, there would normally be better alternatives - like traditional life assurance.

The personal contribution attracting an AAC is a non-starter in nearly every situation.

Is it worth paying an annual allowance charge - Part 2

(RO4, AF3, CF4, JO5, FA2, RO8) 

In this article we consider the situation where an employer contribution is involved. This is a less straightforward situation, not just because NICs become involved.

If we look at the maths on a similar basis to the first part of the bulletin and consider that £10,000 is made as an employer contribution or used to provide extra salary, the picture is as follows: 


40% taxpayer

45% taxpayer

Annual Allowance Charge

Paid as Income

Annual Allowance Charge

Paid as Income

Gross profit










Employer NI















Residual fund





Income Tax





Employee NI





Net benefit





The immediate net benefit figure again favours taking the cash rather than making the contributions, although the gap is smaller because of the effective NICs relief which the AAC does not capture. However, there are several other factors which need to be considered before abandoning the extra contribution for more pay:

  • The option of receiving pay instead of pension may not be available. Some employers (eg US multinationals, the public sector) are not willing to mix and match. In such cases the choice is between a net pension benefit (taking advantage of what annual allowance is available) or nothing;
  • The employer contribution may be contingent upon an employee contribution also being made. This will increase the overall gap between pension and pay benefits because the individual contribution is less efficient, as Part 1 showed. For example, if a £10,000 marginal contribution is split 50/50, then the net benefit figures stay the same for the pension, but the income alternatives become £5,548 (40% taxpayer) and £5,079 (45% taxpayer);
  • For a defined benefit scheme, the amount of the pension input is, broadly speaking:
  • 16 times the increase in accrued pension benefits after adjustment for CPI inflation to the September of the tax year before that to which the calculation relates; plus
  • A similarly inflation adjusted increase (with no multiplier) where there is a separate lump sum (as in many public sector schemes). 

With pension input periods now aligned with tax years, the 2016/17 inflation adjustment to existing benefits as at 6 April 2016 will be zero (CPI to September 2015 was -0.1%). Thus the value ofanyincrease in benefits over next tax year will count as pension input. 

However, a 16 times multiplier may understate the true value of the increase in pension entitlement, particularly as retirement nears. For somebody about to retire, £1 of extra pension may be worth much more than £16, which implies an equivalent pension annuity rate of 6.25% (1/16). The current single life level annuity rate for age 65 equates an 18:1 factor, whereas for an RPI-linked annuity, 30:1 would be more realistic. 

  • To complicate matters further on the defined benefit front, if the AAC is met under scheme pays rules, the factor for converting the charge to reduced pension is unlikely to be 16:1. Indeed it can be difficult to work out what the true deduction is, given that there are different approaches. A good example of the complexity is the NHS scheme, which calculates a notional reduction in today's terms using a factor table and then rolls that amount forward to retirement at CPI+3% compound until benefits are drawn and the deduction is applied.
  • Becoming a deferred rather than active member occupational schemes, while remaining in employment, may impact on entitlement to other non-pension benefits.

When employer's contributions are involved, particularly to defined benefit schemes, there will usually be no easy answer to whether the AAC hit is worth accepting. The starting point is to check whether the employer offers any non-pension alternative. If it does, then a detailed examination (with number crunching) is the way to go. 

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