Personal Finance Society news update from 5th to 18th July
Taxation and Trusts
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
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.
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
- 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
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
Stricter buy-to-let lending rules to apply from 30
(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
- Lenders may be forced to review a landlord's entire portfolio
when offering a mortgage on a single property.
- Lenders may require proof of rental income and a business plan
to support a new application.
- Landlord borrowers could find the amount they can borrow will
be restricted, if they fail a "stress test" across their
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
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
- 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
- HMRC currently enforces both the NMW and the Statutory Sick Pay
(SSP) rules and its responsibilities should be extended to include
- 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
- 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
- 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
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'
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
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
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"
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
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
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
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
They say "the underlying trend is for a continued fall in the
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
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
Provisions to be reinstated in the finance bill
(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
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
- The mixed fund cleanse and rebasing of foreign asset
- 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
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
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
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
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
- 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
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.
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
- 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
- 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%.
Landmark case removes restrictions on pension death
(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
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
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
(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
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
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
(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.
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
- 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.
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
- 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
- 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
- Tools and services to help consumers make good choices.
Proposed remedies in more detail.
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
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
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
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.
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
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.