Time running out to register for pension protection

November 6, 2008 | posted by Pam Atherton in Pensions | comments (0)

NEWS FLASH: Bank of England cuts base rate to 3 per cent 

Time is running out if you need to register your pension fund for protection against penal taxation when you come to retire.

 If you have a  pension fund worth £1.65m or more, you may need to register for the so-called ‘Lifetime Allowance,’  to protect savings over this amount from being taxed at 55 per cent.

Those likely to be affected are high earners, with many years of membership in  a final salary pension scheme, particularly if this started before 1989.

On April 6 2006 - known as ‘A-day’ - a new lifetime allowance was introduced, representing the limit at which pension savings can be taken  tax-free.

Those with assets over the lifetime allowance were allowed until April 5 2009 to register the excess with the taxman. The lifetime allowance increases each year and will  £1.8m in 2010-11.

There are two types of protection you can register for: primary and enhanced.

Primary protection
This applies if the value of your pension benefits on 5 April  2006 was greater than the lifetime allowance in force at that time, namely £1.5m.

This form of protection allows you to continue making pension contributions until retirement, when you will receive an uplift to the lifetime allowance as follows.

If, for example, your pension fund on 6 April 2006 (A day) was worth £3m, this was 200 per cent of the prevailing lifetime allowance of £1.5m in 2006-07.

If you  retire in 2010, your uplifted lifetime allowance will be 200 per cent of the prevailing lifetime allowance of £1.8m for tax year 2010-11,  giving you a protected fund of £3.6m - all tax free.

Any pension you draw over the £3.6m uplifted limit would be taxable at 55 per cent.

Enhanced protection
This is available to everyone irrespective of the value of their pension fund.

But,  if you opt for ‘enhanced protection,’ you are forbidden from making any further contributions or receiving accruals to any pension scheme whatsoever as from 5 April 2006, and including personal accounts from 2012.

Providing you stick to this rule, the value of your pension fund as at 6 April 2006, plus  all future growth is protected from taxation.

However, if you have put a penny into your pension since 6 April 2006, you will have destoyed your entitlement to enhanced protection.

So who is most likely to be affected by these rules?

The answer is largely individuals who have been members of  a final salary scheme since before 1989. As a rough rule of thumb, if you multiply your years of membership by your highest salary while a member, and the answer is £3m or more, you should register
 
This is a very complex area and it is advisable that you consult an independent financial adviser in order that you register for the appropriate type of protection.

To find an IFA, visit www.unbiased.co.uk
To download the forms, visit www.hmrc.gov.uk/pensionschemes/protection.htm

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Financial services news round up

November 5, 2008 | posted by Pam Atherton in Banking, Insurance, Pensions, Savings | comments (0)

Extreme economic turbulence  continued to dominate events in  October as concerns over the financial stability of banks, building societies and insurance companies intensified.
 
The FSA said it was keeping a wary eye on life companies, as life assurers suffered from a steep decline in the value of their portfolios of equities, bonds and commercial property.
 
Analysts, Fox Pitt Kelton, correctly predicted that Aegon and ING were among the most vulnerable and both received capital injections from the Dutch authorities to strengthen their balance sheets by the end of the month.
 
The FSA relaxed some of its capital requirements for life assurers to prevent them having to sell equities in a falling market. Some annuity advisers called for the  age 75 annuity purchase rule to be waived temporarily because of the financial crisis, but to no avail.
 
The UK Government increased compensation on savings accounts to £50,000 per person and per UK authorised institution, following the collapse of three Icelandic banks. However, it agreed to guarantee UK-based retail deposits in Icelandic bank accounts up to 100 per cent.
 
For investors in the Icelandic banks’ offshore accounts, such as in the Channel Islands and the Isle of Man, the situation was less clear. IFAs with clients in offshore bonds, Sipps and SSASs were frantically trying to establish what compensation, if any, was available at the time of writing.
 
There were also concerns about money held in AIG Life’s UK enhanced fund which is to close on 15 December. Investors have the choice of withdrawing their investment or transferring it to a protected recovery fund.
 
Market value reductions were imposed on with profit policies provided by Friends Provident, Scottish Widows (15-20 per cent) and Norwich Union (13-22 per cent).
 
Elsewhere, as the industry awaits the final version of the Retail Distribution Review, financial adviser firm, Lighthouse, called for the review to be delayed due to the current financial crisis.
 
The Association of Independent Financial Advisers attacked the ABI’s attempt to undermine the sales/advice split proposed in the latest version of the RDR and warned that, if successful, this would lead to more mis-selling. Instead, it called for tied and multi-tied agents to be placed  under the ’sales’ banner.
 
The Pensions Bill, which continues its tortuous journey through Parliament, included changes which will allow people to buy back 9 missing years of National Insurance Contributions if they retire before 2010, and 6 years if they retire after 2010.
 
However, potential entitlement to superior benefits via entitlement to the  pension credit or via a spouse’s basic state pension, mean that many individuals will need advice as to whether it is in their interests to pay for missing years’ contributions.

Scottish Life’s pension guru, Steve Bee, highlighted the fact that the State Second Pension ( S2P) will soon become a flat rate top-up and that the loss of the earnings-related second pension will be a big issue for many middle earning employees.
 
With the relaxation of the self-investment rules for protected rights funds on 1 October, the FSA warned advisers to ensure they give suitable advice when transferring protected rights into Sipps.
 
As part of the latest ministerial reshuffle, Rosie Winterton became Pensions Minister, replacing the highly regarded Mike O’Brien, while Paul Myners became City minister, requiring him to step down from his role at the  Personal Accounts Delivery Authority.

This led some commentators to predict the launch of personal accounts might have to be pushed back from 2012.
 
Elsewhere, the Financial Ombudsman Service announced plans to ‘name and shame’ financial firms with poor complaints handling statistics, while the FSA failed in its bid to use human rights legislation (which guarantees individual privacy) to block a freedom of information request about the ‘Lautro 12′ life offices. 
 
The FSA hit back saying that the Tribunal needs to consider its other arguments before the IFA Defence Union can claim victory.  But the IFADU said it was confident the information would be disclosed and that it would set up a fighting fund to investigate whether advisers can sue the regulator and the life offices.

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Adviser news round up

August 11, 2008 | posted by Pam Atherton in Investments, Pensions | comments (0)

 The debate over the Retail Distribution Review continued apace with Whitechurch chief executive, Kean Seager, predicting it could kill off up to 20 per cent of the intermediary market.
 
Skandia supported a split between advice and sales but that is should be applied across the whole of the financial services market.  Sesame called for advisers planning to retire in the next 10 years to be relieved of the requirement to achieve diploma equivalent qualifications.
 
Aegon chief executive, Otto Thoresen, branded the RDR as too complex and that the industry was trying to deal with too many things at once.
 
But change could be in the offing as new FSA chairman, Adair Turner, described the RDR as ‘ongoing,’ and that he would also scrutinise the TCF requirements when he takes up his new post in September.
 
Amanda Bowe is to step down from her role as FSA head of RDR after the feedback statement is published in October.
 
Elsewhere, HBOS claimed the FSA did not know what form ‘management information’ should take by the March deadline for firms to have Treating Customer Fairly procedures in place and AIFA said the FSA would have difficulty in proving the cost/benefit of the TCF initiative.
 
Meanwhile, the Government said the Personal Accounts Delivery Authority (PADA) would be given significant state funding, with only a long term objective to become self funding.  It said this was justifiable on the grounds that the scheme would have to accept workers whom commercial pension providers would find unviable.
 
But in a backdown on its original proposals, PADA said employers will be able to use their existing methods of calculating pay when working out whether they will be exempt from placing employees into personal accounts from 2012.
 
The row over delays by insurers in making annuity payments rumbled on, with some firms calling for the worst offenders to be named and shamed.
 
Living Time marketing director, Dave Harris, called for the open market option (OMO) to be the default option for people buying annuities nd urged IFAs to spurn annuity commission when clients purchased one from their existing provider without advice.
 
Retirement Partnership managing director, Steve Lewis, suggested that insurers should inform pension investors of the OMO facility five years before retirement. Meanwhile the ABI is considering cigarette packet style warnings on pension marketing material as a way to encourage greater uptake of the facility to shop around.
 
Elsewhere, AIFA said it believed the FSA was considering bringing in a 15-year long stop for customer complaints, despite the RDR interim report erring against it.
 
There was much excitement about the business opportunities presented by the easing of the protected rights self investment rules from 1 October, with industry experts predicting a boom in Sipp business.  There’s  an estimated £100bn sitting in personal pension protected rights and a further £250bn in contracted-out final salary schemes.
 
But the new rules will only apply to Sipps and not SSASs and Scottish Widows expressed concern that those in low cost pensions might be mis-advised to transfer into Sipps.
 
Elsewhere, Fitch Ratings predicted that early entrants to the variable annuity market could be the big winners as this new form of annuity could become a quasi-replacement for with profits.
 
The trade press unearthed past legal skirmishes that Dolly and Brian Pickering of IFA firm, Heather Moor & Edgecomb, have had with the FSA and the Appeal Court.  Only weeks ago, the couple were hailed as IFA champions for refusing to pay FOS fees for four customer complaints which were not upheld by the Ombudsman.
 
Meanwhile, Clerical Medical did a swift U-turn on its cancellation of trail commission where advisers were not offering ongoing service. Elsewhere, industry experts predicted a fall-off in mortgage procuration fees.
 
A survey by MetLife showed that two thirds of IFAs’ clients were seeking different ways of planning for retirement as a result of stock market volatility.
 
The Parliamentary Ombudsman at long last recommended that Equitable Life policyholders should receive compensation for losses, with late joiners expected to be the most likely to benefit from any lifeboat fund.
 
 

 

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Postcode annuities may penalise healthy pensioners

July 24, 2008 | posted by Pam Atherton in Pensions | comments (0)

It’s all change in the once sleepy world of annuities. And before you yawn with boredom, be aware that you may well have to buy one yourself, whether you like it or not.

This is because three quarters of final salary (defined benefit) schemes are now shut to new employees and more workers belong to group personal pensions or have some form of individual personal pension arrangement, such as a stakeholder or Sipp.

All these types of personal  pension require you to buy an annuity with your pension fund when you come to retire (unless you decide to do income drawdown instead, but that’s another story).

The cost of buying an annuity has soared over the last 15 years, as bond yields have fallen and longevity has increased.

In addition, whereas most insurers used to assess annuitants’ likely life expectancy based on gender, age and marital status, the business of rating how long someone is going to live is now a much more sophisticated.

This is because the difference in lifespans in different parts of the UK is quite stark. People living in Glasgow, for instance, have the shortest likely lifespans for anywhere in the UK, whereas men living in West Dorset have the longest.

Hence, the shift to what is known as ‘postcode annuities’ whereby insurers look at geographical, as well as health and socio-economic, factors when estimating life expectancy.

The idea is that if you live in an area with a history of people dying early, the insurer will pay you a higher annuity income because you are likely to die much sooner than someone living in a ‘long life’ hotspot,  such as Bridport in Dorset.

There are also strong correlations between blue collar workers living in the north of the UK and shorter life expectancy, and wealthy white collar employees in the south and longer life expectancy.

Norwich Union is to follow Legal & General and to start using postcode annuities from September this year. Annuitants will be divided into nine groups based on geographical life expectancy, with those with the shortest life expectancy receiving up to 2 per cent more than those with the longest expected lifespans.

NU admits that this will mean that around 30 per cent of ‘healthy annuitants’ will be worse off.

Defaqto pensions principal Matt Ward says: “This development is yet another sign that annuity rates are moving towards an individual pricing basis. The onus for consumers who view annuities as their preferred method for translating retirement savings into retirement income is to shop around to find the best annuity rate in the market for their individual circumstances, whether this be through their smoker status, health outlook or postcode.”   

Currently only one in three individuals approaching retirement bothers to seek out the best rate in the annuity market by using what is called “the open market option” - or the right to shop around, to you and me.

By doing so, you could obtain up to 16 per cent more than the standard rate if you are a smoker, and up to 30 per cent more if you have a life threatening illness or medical condition.

It is best to use an Independent Finacial Adviser when looking to purchase an annuity as it is a complex business and once you have bought an annuity you can’t change your mind afterwards. 

It really is a ’once-and-for-all’ decision which will affect your income for the rest of your life.

 You can get an idea of how much your pension fund might buy you  by using the Defaqto Annuity Calculator:http://www.defaqto.com/consumer/pensions.aspx

IFAs specialising in the annuity market include:
http://www.williamburrows.com/
http://www.retirement-partnership.co.uk/
http://www.annuitydirect.co.uk/
http://www.annuity-bureau.co.uk/

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IFA news round up

May 30, 2008 | posted by Pam Atherton in Banking, Investments, Uncategorized | comments (0)

The FSA’s  interim feedback report on the Retail Distribution Review published at the end of April received a cautious welcome for having listened to IFAs’ concerns and for making a clear distinction between advice and sales.

Other key points in the report were that advisers should achieve minimum qualifications, possibly diploma level, but not as high as chartered status.

‘Advisers’ offering independent advice, must be ‘whole of market,’ while ‘sales’ services  would have to be on a strictly non-advised execution only, or ‘guided sales’ basis.

This would mean that multi-tied andtied advisers would be likely to fall under the sales category.

Advisers would have to operate ‘customer agreed remuneration,’ without any influence from product providers, although the FSA suggests that providers can still advance payments to advisers and recover the costs from customers out of regular charges, in a similar way to front end commission.

The feedback document also mentions the potential for some form of maximum commission agreement. Less popular was the FSA’s proposal that there should be no 15-year time bar on customer complaints.

The Institute of Financial Planning attacked the FSA for dropping proposals to separate advisers into general advisers and financial planners, saying that the distinction between advice and sales needs to go further. 

AIFA deputy director general, Fay Goddard, said there was a danger that the mass market would be predominantly serviced by sales people.

Unsurprisingly, the banks and building societies are expected to fight a vigorous rearguard action to overturn the proposals which would effectively ban tied advisers in their branches from offering general advice on pensions and long term savings to the mass market.

But everything is still up for grabs and the FSA says it is up to the industry to provide ‘market-led solutions’ that will deliver better outcomes for customers. Its final report on retail distribution will be published in October 2008.

Elsewhere, there was uproar when the ABI ditched its 10 day turn- round target for processing open market annuities, replacing it with a requirement to pay out funds by the selected retirement date.

IFAs’ anger was compounded by the publication of a FSA report severely criticising the standard of insurers’ open market option (OMO) communications with customers six months before they retire, calling on annuity providers to improve their OMO correspondence by December this year.

Tom McPhail of IFA firm, Hargreaves Lansdown, accused the ABI of being “in real danger of becoming the Comical Ali of the finance industry” and called for the OMO to be the default option, with a requirement for fund transfers to be made within five days of the relevant paperwork being submitted to an insurer.

Meanwhile, Lord Hunt’s recommendation that the Financial Ombudsman Service ‘name and shame’ the worst performing companies with regard to their uphold rate, was attacked by a former FOS adjudicator on the grounds that firms might feel pressurised to settle unjustified complaints.

But FSA chief executive, Hector Sants, appears to be keen on the idea, saying that ’naming and shaming’ can be a more powerful deterrent than imposing fines.

Elsewhere, the European Commission confirmed that automatic enrolment of members into contract-based pension schemes is consistent with EU law which will greatly simplify enrolment into both GPPs and personal accounts  from 2012.

But pensions consultant, Ros Altmann, called on the industry to break the political consensus on personal accounts because she believes the scheme is doomed to fail, due to the disincentive to save posed by means testing.

Meanwhile, Friends Provident remains in talks with various bidders for its 52  per cent stake in F&C and its wealth management unit, Lombard and Prudential is eyeing up Equitable Life’s £7bn with profit fund, having already taken on £1.7bn of its with profit annuity book.

Lord Adair Turner, meanwhile, looks set to become the next chairman of the FSA, replacing Callum McCarthy who steps downin September.

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Building societies and regulator clash over future of mortgage distribution

May 7, 2008 | posted by Pam Atherton in Mortgages | comments (0)

The future of mortgage lending could change out of all proportion as more and more consumers opt to do DIY financing, according to the chief executive of the Norwich & Peterborough building society.

Speaking at the Building Societies Assocation Conference in Manchester, Mr Bulloch said that mortgages are already being priced for risk in line with the creditworthiness of the borrower and that the UK could see the introduction of individuals knowing their own credit score and shopping around accordingly, as happens in the US.
This disintermediation of the market place is already happening here with online services  such as Zopa, a financial equivalent of eBay, which marries up borrowers and lenders on line, without the intermediation of a broker.

Elsewhere at the conference, John Howard, a non executive director of the Financial Ombudsman Service welcomed the Retail Distribution Review’s call for a separation of advice from sales, a greater role for a basic money guidance service and a streamlining of the alphabet soup of adviser qualifications which currently total  27.

“A money guidance service could provide the equivalent of the first hour’s consultation with an IFA, where the client’s financial circumstances and needs could be established. This could lead to greater consumer confidence and more business for IFAs,” said Howard.

One of the main objectives of the RDR is to break the provider-distributor link on remuneration, with FSA director of retail policy division, Dan Waters, saying that it is untenable that an agent of the consumer is paid for by the provider.

But Mr Bulloch said the RDR proposals could lead to “a real risk of creating a backward looking construct which won’t be financially viable.”  Higher statutory qualifications  for his staff would lead to higher costs and the removal of commission would make a building society network uneconomic, he said.

“We are looking for a longer term relationship with our customers than a two year fixed rate churn,” he said.

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More uncertainty for financial advisers

April 29, 2008 | posted by Pam Atherton in Uncategorized | comments (0)

The Financial Services Authority today issued a feedback statement to the responses  received to the ‘Retail Distribution Review’ - a discussion paper first published in June last year on the future delivery of financial services in the UK.

The RDR discussion paper, for anyone who hasn’t read it, asked for proposals as to how the financial services industry could make “more consumers have sufficient confidence in the market to want to use its products and services more often. To achieve this, we need an industry that more clearly acts in the best interests of its customers and treats them fairly.”

It has been a complete mystery to most people as to why exactly the FSA needed to embark on this particular exercise just now, given that financial advisers have had to cope with endless regulatory change over the last 20 years, with little tangible benefit to the consumer - from the maximum commission agreement of the 1980s, to polarisation in the 1990s, and more recently depolarisation.

 The industry has also had to cope simultaneously with numerous EU directives - from the Distance Marketing Directive to Mifid and even one called MAD (yes, really) which I believe stands for the Market Abuse Directive.

Today’s feedback statement was underwhelming to say the least. Given that the FSA has received over 900 responses from an industry anxious to know its fate, it is dispppointing that the FSA could come up with nothing better than to effectively say: “Thanks, guys, but we need more time to consult and, by the way, it’s still up to you to find “market led solutions” on “professional standards, remuneration arrangements and the provision of simple services to consumers.”

The FSA’s press release continues to state the bleedingly obvious: “We think a simple landscape is important if consumers are to understand the industry and have trust and confidence in those they are dealing with….. However, we do not underestimate the significant difficulties that come from this simple picture and we need to deepen our understanding of the impacts on consumers and firms….”

So clearly, nothing has been decided and advisers (and their clients) will have to await clarification in October this year, when the FSA is due to issue its final proposals and a timetable for implementation.

Most IFAs I have spoken to think the whole exercise is a complete waste of time, as was depolarisation before it, which many people regarded as a retrograde step. Polarisation had worked reasonably well for around 10 years and the general public was starting to understand the difference between an IFA and a tied agent.

What the FSA has proposed in the RDR would simply add further confusion to an already confused public. The best thing the FSA could do would be to ditch the whole exercise and let advisers just get on with the job of advising their clients. 

Right now they need more regulatory upheaval like a whole in the head.

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IFA news round up

April 4, 2008 | posted by Pam Atherton in Investments, Pensions, Savings, Taxation | comments (1)

All eyes were on Alistair Darling in March to see whether he would backdown on any of his unpopular proposals for capital gains tax and broker bonds.

But the budget carried few surprises, with most of the changes having been announced in Gordon Brown’s 2007 budget. But crucially, there was no last minute U-turn on the taxation of broker bonds. Despite this, AIFA director general, Chris Cummings, urged advisers to be cautious on transferring clients out of insurance bonds.

There were small changes to pensions, such as allowing trivial pensions below £2,000 in occupational schemes to be commuted and for individual who emigrate to draw on their pension benefits abroad in line with local tax rules. There was also a welcome increase in the annual amount that can be invested in qualifying EISs to £500,000.
The RDR debate continued apace, with the chief executives of Bankhall, Sesame and Tenet warning that customer agreed remuneration (CAR) is a widely misunderstood term, dubbing it a “dressed up form of commission.”
 
Elsewhere, Morgan Stanley executive director, equity research division, Jonathan Hocking, predicted that CAR could trigger an increase in fund performance fees.
 
Research published by True Potential showed that nearly 80 per cent of adviser turnover still comes from initial commission, with only 5 per cent coming from fees. 
 
Norwich Union defended the payment of indemnity commission on lump sum GPP business, despite the fact that Friends Provident and Royal London refuse to do so on the grounds that it can take up to17 years for policies to become profitable. 
 
Elsewhere, Ernst & Young predicted that advisers will be split evenly between professional financial planners and primary advisers, with middle tier advisers squeezed out of the market by 2014. 

E&Y director of insurance, Malcolm Kerr, speaking at a Cicero Platform Forum, predicted a huge increase in direct-to-consumer wraps and the increasing use of wrap by retail banks.

Broker funds
At the same forum, FSA director of retail policy, Dan Waters, warned against a return to the “bad old days” of broker funds because of the increase in advisers launching their own fund ranges. Waters also raised the issue of the costs charged for re-registering  assets off platforms, describing current market practices as ‘Byzantine.’

March also saw the publication of Otto Thoresen’s proposals for a national money guidance service which would offer the public information on personal finance issues.

Royal London, executive director John Deane, said the problems surrounding means testing and auto enrolment into personal accounts could mean the service would be dead in the water.

In the run up to the 31 March deadline for firms to be able to measure TCF, the FSA warned that a third of firms were not complying.
 
Personal accounts
Elsewhere, Paul Myners, chairman of the Personal Accounts Delivery Authority, admitted that some people will be worse off with personal accounts because of means testing, but compared the new pension scheme to car seat belts -  occasionally detrimental, but worthwhile on balance because they save more lives than they lose.

Royal London head of communications, Alasdair Buchanan, warned that many employers would give up company pension provision and move to less generous personal accounts, due to  the majority of existing employer schemes being based on basic pay, whereas the Government wants the exemption test for personal accounts to be based on total band earnings.

FOS fees continued to attract much debate in the wake of the Trowbridge county court judgment in favour of two IFAs who refused to pay FOS fees because the cases were not upheld by the Ombudsman. Despite this, AIFA urged its members to continue paying FOS case fees even when complaints are unsuccessful.

On the Sipp front, Suffolk Life called on the Government to amend capital adequacy requirements for the self investment of protected rights to ensure  a level playing field between insurance and trust-based Sipps.

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