LG Investment News
Welcome to our 2nd edition of Lyon Griffiths’ Investment News.
We aim to communicate the key current topics in the world of financial advice and highlight the up and coming issues in an understandable and digestible format. In this edition:
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Attention Employers - Pensions auto-enrolment is coming
The Department for Work and Pensions estimates seven million people are not saving enough, or saving at all, for their retirement. With this in mind the government are reforming workplace pensions with increased auto enrolment to address the savings gap.
The new regulations will have wide ranging effects on UK employers, fundamentally because they will have to make minimum pension payments in to qualifying pension schemes for all employees aged between 22 and state pension age starting at 1% of banded earnings and rising to 3% by 2018. Employee contributions are also compulsory and will start at 1% rising to 5% over the same timescale; it is a responsibility of the employer to provide a facility for this to be deducted from the employees pay through the payroll system.
The employer must assess which of their workers are ‘eligible jobholders’ to whom a pension scheme must be offered and the employer will be responsible for making the employee aware of the pension scheme and their associated rights. Employee circumstances may change over time and again it will be the responsibility of the employer to monitor these changes.
For most employers a decision will need to be made between two core options for providing a pension. Firstly there is the option of setting up a bespoke group pension scheme meeting workplace pensions reform requirements or secondly to enrol employees in to the government-backed National Employment Savings Trust (NEST). The requirements can also be met through individual pension plans for each employee however for larger employers this is likely to be cumbersome from an administrative point of view.
Employers will need to comply with the new legislation from their ‘staging date’. This could be as early as October 2012 however staging dates stretch as far as 2016 and 2017. Your precise staging date can be identified from a combination of the number of staff on your payroll at 1 April 2012 and your PAYE reference number.
An eligible employee must be enrolled in to a suitable pension scheme by their employer. Only once this enrolment has taken place can they opt out. On an ongoing basis they would then be re-enrolled back in to the scheme every three years unless again they specifically opted out. It is fundamental to the workplace pensions reform legislation that an employer cannot opt out of the system, nor can they suggest to employees that they opt out of the system.
In terms of taking action to address the challenges posed by workplace pensions reform an obvious starting point would be to obtain details of your staging date and obtain a copy of the helpful Pensions Regulator leaflet entitled ‘an introduction to workplace pension changes’. Both of these can be obtained from Lyon Griffiths if you provide details of the approximate number of staff on your payroll at 1 April 2012 and your PAYE reference number.
Lyon Griffiths will be advising firms, on request, on meeting their workplace pensions reform obligations. Depending on your chosen strategy we can provide advice on a bespoke group pension solution for your employees together with the required level of administrative support or alternatively can help with the administrative processes associated with enrolling relevant employees in to the government backed National Employment Savings Trust.
Market Commentary – Resilient Opening to 2012
Following a volatile 2011 a steady opening to 2012 had been welcomed by retail investors with the UK FTSE 100 peaking at just below 6,000 in March from around 5,600 at the turn of the year. Recent weeks however have seen markets stumble with positive US economic data released on Good Friday being offset by continued fear over Eurozone sovereign debt contagion.
It is interesting in such times to read how professional investors are currently positioned. Fidelity Asset Allocation Director Trevor Greetham has stated that the Fidelity Multi Asset model has turned positive on risk assets for the first time since July 2011. It is Greetham’s view that global growth is being led by a US recovery and supportive monetary conditions imposed by central banks. A word of caution however is the suggestion that a premature tightening of monetary policy could prompt another downswing in global growth and stock prices.
What then of defensive assets such as cash and bonds for those not willing or able to tolerate the equity market rollercoaster? Greetham is currently underweight in both sectors but the Skandia sentiment indicator which surveys twenty-four leading investment houses on their opinions is currently positive on corporate bonds with only one investment house expressing a negative view on the sector.
Budget Boost for EIS and VCT Investors
In the 2012 Chancellor’s Budget, which thankfully left pension and ISA saving unaffected, there was one big winner on the investment front, namely Enterprise Investment Schemes (EIS).
These have the same objective as Venture Capital Trusts (VCT), namely to encourage investment in small and unquoted companies.
Subject to minimum holding periods of three and five years respectively income tax relief of 30% continues to be available for both EIS and VCT investments but the range of companies available for investment via EIS will be increased by changes in the eligibility criteria. For 2011/12 the maximum number of employees was 50 and the maximum value of company assets was £7m. With effect from 6 April 2012 these figures have been increased to 250 employees and £15m of assets.
This will permit investment in more mature companies, which are less likely to fail. As one manager commented, it will be less about taking a calculated risk of helping a small company to survive, and more about providing backing for more developed companies to grow faster.
The recent drastic curtailment of relief on pension contributions will make EIS attractive to 40% and 50% taxpayers, and the maximum investment limit has been increased from £500k p.a. to £1m p.a.
In addition, Seed EIS, which was announced in the Autumn of 2011 as a means of financing smaller start-ups with fewer than 24 employees and less than £200k in assets, will be available for investment of up to £100k p.a., with 50% tax relief.
Flexible Drawdown - a less rigid way to access pension income
Traditionally taking income from a pension plan has been limited to the purchase of an annuity, taking a scheme pension or moving in to a capped drawdown arrangement. These all involve a fundamental capping of the income that can be taken from a pension plan, a capping that is noticeably absent from the new option of flexible drawdown.
The fundamental principal behind flexible drawdown is the treasury’s opinion that anyone with a secured income of £20,000 or more will never fall back on the state for support in retirement thus should be able to draw on pension funds in excess of this level with less restriction. Please note that this secured income must come from pension sources.
Given the flexibility afforded by this option measures have been taken to prevent individuals using flexible drawdown to empty their pension pot and fall back on to state support. As such the treasury define secured income as pension income for life which can’t go down, for example an annuity or a state pension. £20,000 per annum is the figure for 2011/12 and 2012/13, the threshold will be revised upwards annually in line with inflation but the assessment of income is only carried out once, in the year of entry.
Once this minimum income of £20,000 is obtained any further pension funds can be put in to flexible drawdown and drawn on with total flexibility. All drawings would be taxed under income tax rules in the year the income is received.
The clearest way to illustrate the principal of Flexible Drawdown is with a worked example.
John is 70 and has a pension pot valued at £500,000. He is in traditional capped drawdown and his maximum income is capped in the region of £33,000. He has a state pension of £8,000 per year and an occupational pension of £5,000 per year.
John can use £100,000 of his pension pot to purchase an annuity for £7,000 per annum. This means his secured income for life meets the £20,000 threshold for flexible drawdown.
John can then put his remaining £400,000 pension pot in to Flexible Drawdown and take income with total flexibility. This could even be taken to the extreme of drawing the full remaining £400,000 out in a single withdrawal.
The drawings are taxable as income however so it may be more tax efficient to take the withdrawals over a number of years. For example John could look to withdraw as much as possible each year without incurring higher rate tax.
Two additional restrictions for entering flexible drawdown apply. Firstly you cannot have any pension contributions paid in the year you enter flexible drawdown. Secondly any contributions made in later years would not receive any tax relief.
If you are in a position to meet the requirements of flexible drawdown the additional flexibility can be valuable and has raised significant interest amongst clients of Lyon Griffiths.
The above is not intended to be an exhaustive appraisal of the pros, cons and suitability of flexible drawdown. As such we are happy to discuss further the availability of flexible drawdown and the associated planning that can be undertaken. If this is of interest please do not hesitate to get in touch.
Charitable Gifting
With effect from 6 April 2012, estates which include charitable legacies equal to at least 10% of their net value will benefit from a 10% reduction in the rate of inheritance tax so the rate will be 36% instead of the normal 40%.
The value of the concession, however, is uncertain. Most estates are of insufficient value to generate a liability to inheritance tax, and for those thatcould benefit, the relief will be complicated to administer and therefore costly for the taxpayer. And those who already donate significantly to charity are likely to continue to do so regardless of any incentive. In short, the concession may be a damp squib.
Encashing Small Pensions
New rules are to be introduced this year which will permit people over 60 years of age to encash individual personal pension funds with a value not exceeding £2,000 even though their total pension savings are worth more than £18,000.
Currently, the encashment facility is open only to members of occupational pension schemes and those personal pension holders whose total pension savings are worth not more than £18,000. The apparent alternative to encashment is to apply the funds to purchase an annuity, but some personal pension holders who have been caught by the restriction have been prevented from annuitising because annuity providers will only accept pension pots valued at £5,000 or more.
There is, however, a proviso, namely that only two small pots can be encashed over a lifetime.
Dates for your Diary
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