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My PFS - Technical news - 04/07/16

Personal Finance Society news update from 22 June to 4 July 2016 on taxation, retirement planning and investments.

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Taxation and Trusts

Investment planning



Insurance contract law reform - Insurable interest

(AF1, RO3, JO2)

The Law Commissions (LCs) published their last consultation paper on this on 27 March 2015 (having previously consulted on insurable interest in 2008 and 2011). The LCs' proposals were well received and the LCs published the responses to consultation last April. This was followed by a short consultation on the draft Bill which closed on 20 May. The LCs expect to publish their report and the final draft Bill later this year.

The LCs have stated that the proposals are intended to be relatively permissive to ensure that broadly speaking,  insurance products which insurers  want to sell and policyholders want to buy, could be made available without technical concerns about insurable interest due to the current narrow definitions.

The draft Bill introduces the concept of "life-related" insurance.  A contract of life-related insurance includes any contract of insurance under which the insured event is the "death, injury, ill-health or incapacity of an individual". Thus the same rules are to apply to life assurance and critical illness, personal accident etc. policies. It would also cover investment linked insurance products which have life insurance element and annuities.

Here are the key provisions of the current draft Bill:

  • The requirement for insurable interest to exist at the outset is to remain.
  • The Bill confirms the current law about automatic insurable interest in one's life and the life of a spouse and civil partner but extends this to cover co-habitants as well as the children and grandchildren.
  • However there is to be no automatic right to insure parents and grandparents.
  • Trustees of pension schemes and other group schemes will have automatic insurable interest in the lives of the scheme members.
  • Where a person takes out a contract for the benefit of others, there will be automatic insurable interest in the lives of those beneficiaries. This will allow an employer to take out a policy for the benefit of an employee of their family without having to prove the existence of insurable interest.
  • The concept of "pecuniary and recognised by law" interest which currently applies to situations where there is no automatic insurable interest is to be replaced by a broader "economic interest" test. Insurable interest will exist in such cases when there is a "reasonable prospect of suffering economic loss".

There are slightly different provisions proposed for non-life insurance, as well as a set of provisions on the consequences of the lack of insurable interest which we will cover in a separate bulletin.

It is promising to see the progress being made on this. It is hoped that the final draft Bill when produced will be suitable for the special parliamentary procedure for uncontroversial Law Commission Bills and that finally the 1772 Act will be repealed and the law brought up to the 21st century standard.

Trusts and residence nil rate bad

(AF1, RO3, JO2)

The Chartered Institute of Taxation (CIOT) is urging the government to amend clause 82 of the Finance Bill 2016 which deals with downsizing provisions on the grounds that it does not deal adequately with properties held in trusts. This is, unfortunately, not the only problem with the residence nil rate band provisions.

The problem highlighted by CIOT relates to the situation where the home is held as a trust interest (typically an IPDI). While IPDIs are treated as residential interests for the purpose of the residence (RNRB), for the purpose of the downsizing provisions, on the current wording a disposal by trustees of the dwelling-house in which the person has an interest in possession is not a disposal by "the person", and so cannot qualify for downsizing relief. This is clearly inconsistent with the purpose of these provisions and so we hope the Finance Bill will be amended.

While the subject of the RNRB has been covered in a number of bulletins in the past, here we specifically consider how the RNRB provisions interact with trusts.

Which Will trusts will allow the RNRB to apply?

Where Will trusts are concerned, the RNRB will only be available in the following cases:

  • a bare trust for a lineal descendant (or their spouse/civil partner)
  • an IPDI trust for a lineal descendant (or their spouse/civil partner)
  • a disabled person's trust for a lineal descendant (or their spouse/civil partner)
  • an 18-to-25 trust
  • a bereaved minor's trust (BMT).

Clearly, for those who wish to maximise the use of the RNRB it is important that the Will provisions ensure that the relevant legacies qualify and the scope is clearly limited. For example, if the property is left to a discretionary trust, the RNRB will not be available, even if the only beneficiaries of the trust are the testator's children.

A typical grandparental settlement, "to such of my grandchildren as reach 21", also will not qualify if the grandchildren are minors at the date of the testator's death because it is a relevant property trust. To secure the RNRB the grandparents would need to opt for a bare trust or at least an IPDI trust. Remember that 18-to-25 trusts and BMTs can only be created by parents.

What about existing trust interests?

A RNRB will be available if the deceased is treated as owning the property which means that the residence may be held in trust for the deceased (i.e. the relevant trust must either be an IPDI or disabled trust) and on his death a lineal descendant inherits the property under the terms of the trust.

What if the property is given away during lifetime?

The RNRB is only relevant to the estate on death.  However, certain lifetime gifts are relevant to its availability on death.

For example, if a property is given to children (or to a trust) during lifetime but the donor/settlor remains in rent-free occupation and the new owners do not move in, this will be a gift with reservation.

Interestingly, new section 8J(6) IHTA 1984 (inserted into IHTA 1984 by Finance (No.2) Act 2015) effectively provides that, where property which has been gifted during lifetime remains in the donor's estate as property subject to a reservation, that property is capable of qualifying for the RNRB. However, the RNRB will be available in such cases only where the original gift was an outright gift made to lineal descendants (or their spouses) as in such cases the property is deemed to be inherited by the donee(s). A gift to a trust would not qualify for this treatment.

Of course, if the property has been given away outright, the "downsizing" provisions may still save the day.

Reinstating the RNRB after death

So what if a Will provision is such that the disposition fails the RNRB requirements? Well, post-death variations passing a residential interest to lineal descendants will attract the RNRB (assuming all the other requirements are satisfied) because under section 142 IHTA 1984, the change in distribution of the deceased's estate can be 'read back' and take effect for IHT purposes as if effected by the deceased.

In addition, section 144 IHTA 1984 may also be of assistance. As indicated above, a discretionary settlement will not qualify for the RNRB even if all the beneficiaries are lineal descendants. However, an appointment made within 2 years of death to the lineal descendants will be read back into the Will under section 144 IHTA 1984, which means the trustees can retrospectively secure the RNRB for the estate.

Whilst the RNRB legislation has been described by a leading practitioner as nothing short of a "shambles", advisers nevertheless have to get to grips with it. A calculation of  a potential  IHT liability on  an estate, having regard to all the assets of an individual and the relevant Will provisions, must be the necessary first step in any estate planning exercise and maximising the use of the available nil rate bands, including the RNRB, a close second.

Transfer of marriage allowance and bond gain

(AF4, RO2, FA7, CF2)

A  recent enquiry raised an interesting question of  the impact of a chargeable event gain arising on encashment of an investment bond (technically speaking a  non-qualifying life assurance policy)  on the transfer of the personal allowance between spouses (a transfer of the so-called marriage allowance). 

Whilst for most income tax purposes it is the total income that is relevant and for the purpose of "total income" you need to include the entire chargeable event gain (i.e. without top slicing relief), the legislation dealing with this particular allowance is drafted in a different way.

The HMRC website includes a warning that, to qualify for the allowance this tax year, the recipient spouse's "annual income must be between £11,001 and £43,000".

This figure would seem to refer to the total income which would include the entire chargeable gain.

However, the actual legislation (Ch 3A ITA 2007, ss 55A-55E inserted by FA2014) specifically refers to recipients being liable to tax at "a rate other than the basic rate, the dividend ordinary rate or the staring rate for savings". So, if the gain after top-slicing does not take the recipient into the higher rate bracket, then on the words of the legislation they should be eligible.

We therefore wrote to HMRC to clarify the position. We used the following example to illustrate the issue.

The husband has total income of £24,000 and the wife has total income of £8,000 so they are eligible to transfer £1,100 personal allowance from wife to husband.  The couple invested jointly in a non-qualifying UK life assurance policy which they surrender for a chargeable event gain of £40,000, i.e. £20,000 each. The bond has been in force for 15 years and so neither of the couple would become higher rate taxpayers taking account of top-slicing relief.  Given that for the purposes of calculating total income one would normally take account of the entire chargeable event gain (see above), the husband's total income of £44,000 would take him over the higher rate tax threshold of £43,000.

Based on these figures, it seemed that the individuals in this example would not be able to make a claim for this allowance via the HMRC website as husband's total income is £44,000. 

However, based on the wording of the legislation, they should be eligible. Furthermore, presumably other reliefs, such as gift aid or pensions contributions, could also lift the annual income threshold above £43,000.

HMRC confirmed to Technical Connection that the guidance on the Marriage Allowance online service is simplified to explain eligibility in a way that is applicable to the majority of customers, and is therefore based on the monetary threshold. However, there are a minority of customers (such as in the example above) that will be eligible and for whom the monetary amount is not relevant and that such customers are still able to make their application using the online service.

The clarification is very useful even though the scenario outlined above may not be that common. It also confirms that there are still ways to save tax by arranging property affairs between spouses/civil partners in a most efficient way.


Another volatile quarter

(AF4, RO2, FA7, CF2)

The first half of 2016 is over, with the post-Brexit volatility adding a final twist in the last few days of June. There second quarter was largely dominated by the Brexit poll and then its aftermath - even US interest rates were put on hold until the result was clear. Perhaps surprisingly the main UK indices are up over the quarter and the half year. Elsewhere, the picture is more mixed, at least in pure market terms, as the table below shows:




Change in

H1 2016

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 Markets £




UK Bank base rate




US Fed funds rate




ECB base rate




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 ($)




A few points to note from this table are:

  • The FTSE 100 staged a remarkable recovery from a 500+ point fall early on 24 June to just above 5,800. The Footsie's bias towards multinationals has helped - the UK accounts for only about 20% of the revenues of the average FTSE 100 company according to J P Morgan.
  • The FTSE 250, regarded as a better yardstick for UK plc, was less resilient, but still managed a strong end of month rally. The fact remains that some sectors, like housebuilders, have been hit very hard. The end result has been that the FTSE All-Share (roughly 80/20 FTSE 100/FTSE 250) has underperformed the FTSE 100. 
  • The US market reacted to the UK Brexit result, but also bounced back quickly. Over the quarter the S&P 500 was up 1.9%, but as the dollar strengthened by 7.5% against sterling over the three months, US shares gave a useful return for UK-based investors.
  • The Eurozone's continued monetary stimulus did not stop the continental stock markets falling again over the quarter, for which the Brexit vote must take some blame. However, the euro also strengthened by nearly 5% against sterling, mitigating some of the losses for unhedged UK investors.
  • Bond yields all headed downwards over the quarter, in spite of initial expectations that by now the Federal Reserve would have put through another rate rise. That now looks highly unlikely to happen before 2017. In the meantime, Mark Carney has given a strong hint that the UK will cut rates very soon, probably to 0%. As we have said before, "Lower for longer" just seems to keep getting longer.
  • Commodities staged a further recovery over the last three months - helping to give a boost to those mining shares that remain in the FTSE 100.  However, despite its continued rally, Brent Crude is still more than 20% down over the past 12 months.

Volatility has once again been the theme of the quarter. The next three summer months look to be a calmer period, but that may just be wishful thinking....


Bring a client's staging date forward

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

It is possible for an employer to bring forward their staging date.

The Pensions Regulator (TPR) has made a change to help simplify the process. The requirement for employers to give TPR a month's notice if they want to bring forward their staging date has now been removed. They will still need to let TPR know they're doing it, but it can now be at any point on or before their new staging date.

It is worth noting though, that employers who do have staff to automatically enrol need to agree the new date with the pension provider first, and the staging date will still need to be the first of the month.

However, employers without anyone to automatically enrol can now bring forward their staging date to any date they choose. They can also declare their compliance at the same time, so their duties are completed.

These employers no longer have to set up a pension scheme; unless a worker asks to join one, or if they subsequently have staff to automatically enrol.

More detail can be found on TPR's site; Bringing your client's staging date forward.

Transfers and a protected pension age

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

The Pensions Tax Manual page PTM108000 sets out the requirements for an individual who has a protected pension to retain this upon a transfer to another registered pension scheme. In simple terms, so long as the transfer meets the conditions for it to be treated as a block (aka buddy) transfer, then the new pension scheme can honour the protected pension age.

We were recently asked a question in respect of a potential block transfer for an individual who was a deferred member of an occupational pension scheme and, had the right to take benefits from the OPS from age 50, provided they were no longer employed by the sponsoring employer.

If a block transfer is made to a new PPP/SIPP then that facility to take pension benefits from age 50, will be retained. However, that ability will still be contingent on the individual no longer being employed by the sponsoring employer of the original occupational pension scheme.

It will therefore be necessary to ensure that the new PPP/SIPP carries out the necessary checks if benefits are crystallised prior to the normal minimum pension age of 55, to ensure that the individual is no longer employed by the former sponsoring employer. If benefits are paid, prior to age 55, and the individual is still employed by the sponsoring employer, then we believe HMRC would treat the payment of benefits as an unauthorised member payment.

This means (as taking benefits under these rules, mean all the member benefits under the scheme must be taken at the same time) the unauthorised member payment will exceed the 25% surcharge threshold. This in turn means the actual penalty will be:

  • The 40% unauthorised payment charge, plus
  • The 15% unauthorised payments surcharge, plus
  • The 15% scheme sanction charge.

Making a total penalty of 70%.

Creating a Pensions Dashboard

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

Creating a Pensions Dashboard Whitepaper has recently been published which reports on the progress of the project 'creating a pensions dashboard' which is set to be available to consumers by 2019.

The white paper looks at progress so far and discusses the key challenges that have been identified, explores some solutions and provides recommendations for the next phase of the project.


In 2015 a discovery project (OIX, 2015) with participants from industry, consumer bodies and government was undertaken to address the problem of 'lost pension pots'.

Previous modelling commissioned by the Department for Work and Pensions (DWP) in 2010 shows that on average, individuals will work for 11 employers during their working life, meaning that going forward many individuals will acquire multiple pension pots.

That earlier project tested the hypothesis that "consumers will take action and make informed choices when they are provided with information and data about their pension savings." The findings demonstrated that matching people with their defined-contribution pension pots and presenting the results in a dashboard were important to consumers and could lead to changed behaviour when engaging with pensions.

Out of this work was born the next phase of the project or the 'Alpha Phase' as it has become known.

Alpha Phase

The Alpha Phase officially started in February 2016 with 14 organisations representing the views of consumers, the financial services industry and the government. This phase concentrated on aggregating a comprehensive picture of people's accumulated pension savings including defined-benefit pensions and defined-contribution pensions alongside the State Pension. The core project focused on the following areas: consumer journeys; consumer research; architecture and data standards; and policy and governance.

The Pensions Dashboard Model

One of foundation blocks of the project was creating a definition for a Pensions Dashboard. The Pensions Dashboard is a free-to-consumer online resource that enables people to find and check their pension savings. The resource comprises three core components:

Digital Identity (ID): The identification technology that verifies the user's identity before they can access their data.

Dashboard User Interface (UI): the set of screens, menus and commands through which the user views their information and may carry out tasks based on it.

Pension Finder Service (PFS): The technology that facilitates finding an individual's pension savings, collects information from pension providers (and DWP for State Pension) and delivers it to the User Interface.

There are three options for the way a Dashboard User Interface can be provided to consumers. The identified options are:

Option 1: single destination model. There would be a single Dashboard User Interface and this would be accessed through one source which could be a consumer guidance brand.

Option 2: white-labelled model. Again, there would be a single Dashboard User Interface, but this could be white-labelled and accessed through multiple financial services brands (such as banks, pension providers, financial advisers, fintech startups and not-for-profit organisations).

Option 3: federated model. This would allow for multiple Dashboard User Interfaces, so that each provider could customise the interface and user experience to suit its own customers.

Recommendations and Next Steps

Consumer research has suggested that consumers value the option of a single destination dashboard above the others for reasons of trust, assurance with their data and simplicity in a complex subject area. Building a single-destination dashboard also offers the benefits of a more controlled environment in which to develop and test a high profile product containing sensitive data, allowing risks to be managed and reputational damage (particularly in terms of data protection issues) to be avoided.

At the same time, the benefits of making the Pensions Dashboard available through other financial organisations where consumers are already engaging in financial matters cannot be ignored, especially as this could have greater reach when trying to engage the population in their retirement planning. With this in mind, the recommended approach is initially to build a single-destination dashboard that is, nevertheless, capable of, and technically ready to, be white-labelled through approved industry websites (such as pension providers), once the complete Pensions Dashboard service has been fully tested from a security and quality assurance perspective.

In terms of the Pension Finder Service, the practicalities of starting with a single Pension Finder Service outweigh the potential innovation benefits of multiple Pension Finder Services. However, the architecture will be future-proofed to enable evolution to support other models, including multiple dashboards, should demand arise.

The Project is now moving into a second phase of Alpha to build an end-to-end prototype of a Pensions Dashboard service and to develop the cross-organisational governance structure. The intention is to maintain and build momentum, delivering a first alpha service which is iterated and improved through a private and then public beta in 2017 before becoming a 'live' service.

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