YOUR CHOICES IN A WORLD

OF PENSION FREEDOM

Lee Coles

YOUR CHOICES IN A WORLD OF

PENSION FREEDOM

• Welcome from CABA – Wendy Saunders

• Recent service development in Australia

caba.org.uk/australia

• Interactive webinar

• Importance of evaluation

WHAT ARE WE DOING TODAY?

• Considering the planning process

• Examining UK pensions and income tax

• Exploring changes to the UK State Pension

• Exploring the concept of pension freedom

• Looking at pension transfers to Australia

• Identifying the key issues to consider

• Summarising actions and next steps

WHAT AREN’T WE DOING?

• Providing advice – I’m not allowed

• Looking at wider tax and financial considerations

outside of pensions

• Telling you how much tax you’ll pay. Please note

the amount of income tax you pay in any tax

year will depend on your income, your individual

circumstances and the governing tax rules

THE PLANNING PROCESS

PLANNING ESSENTIALS

Dream Money

Gift Money

Freedom Money

Safety Money

Survival Money

Source: Retirement Income Redesigned

HOW TO PLAN

Dream Money

Gift Money

Freedom Money

Safety Money

Survival Money Start with what

you have

Start with what

you want How far can it get

you?

How do

you get

there?

• What are your objectives?

• What form does your money need to be in?

• Key point is around the alternatives we consider

• Change what we need/want – or change what we have

NEED VS HAVE = GAP/SURPLUS

Certainty of position

Review working plans

Review spending

plans

Use money differently

Save more / save less

Get help or advice

TAXATION

THE DOUBLE TAXATION

CONVENTION

• Agreement between UK and Australia

• Income sources can, however, still be:

Taxable only in Australia

Taxable only in the UK

Taxable in both but Australian tax law allows credit for tax paid in UK

Taxable in both but UK tax law allows credit for tax paid in Australia

Taxed in both, but this will usually be in error

RELIEF AT SOURCE/RECLAIMING TAX

• Form Australia

– Individual 2003

Personal allowance £11,000

Income above personal allowance

Any income up to a further £32,000 taxed at 20 %

Any income from £32,000 - £150,000 taxed at 40%

Any income above £150,000 taxed at 45%

• Loss of Personal allowance on income between £100,000 and

£122,000, at which point no allowance would exist

UK INCOME TAX IN 2016/2017

PAYE FOR PAYMENTS UNDER PENSION

FREEDOM

Applying Emergency

Month 1 code

Tax deducted Actual amount taken

from £30,000

Tax free lump (25% = £7,500) 0% Nil

1/12th of £11,000 = £916.67 0% Nil

1/12th of £32,000 = £2,666.67 20% £533.33

1/12th of £118,000 = £9833.33 40% £3,933.33

Any excess over £13,416.67 45% £4,087.50

• Total tax deducted on £30,000 would be £8,554.16

STATE PENSION CHANGES

WHAT TYPE OF PENSION DO YOU HAVE?

• Are you clear on whether each pension is:

State Pension

Defined Benefit (or Final Salary), or

Defined Contribution (of Money Purchase)?

• Are you clear on the rules relating to each?

STATE PENSION AGE

Born Male – State Pension Age Female – State Pension Age

6 April 1950 – 5 April 1953 65 60 – 63

6 April 1953 – 5 December 1953 65 63 – 65

6 December 1953 – 5 April 1960 65 – 66 65 – 66

6 April 1960 – 5 April 1961 66 – 67 66 – 67

6 April 1961 – 5 April 1977 67 67

6 April 1977 – 5 April 1978 67 – 68 67 – 68

6 April 1978 onwards 68 68

In March 2016, the Government announced an additional review of the State Pension Age. This

review will submit its recommendations to Government by May 2017 and will consider life

expectancy, the sustainability of the State Pension and wider changes in society. The review won’t

cover the existing State Pension Age timetable to April 2028.

THE NEW STATE PENSION

• If an individual reaches State Pension Age before 6 April 2016 their State Pension is calculated under the old rules

• The full new State Pension for 2016/17 is £155.65 per week. The amount the individual receives can be higher or lower than £155.65 depending on their National Insurance record

• The new State Pension is available to:

• Men born on or after 6 April 1951 and Women born on or after 6 April 1953

• An individual needs at least 10 Qualifying Years on their National Insurance record (previously only one year was needed) – these years do not need to be consecutive

• The "triple lock" system ensures the state pension goes up by whichever is higher - inflation, wages or 2.5%. No increases, however, if resident in Australia

Overview and eligibility

IN OR OUT

Contracted-in

Building up additional SP

Contracted-out

No additional SP built up, but additional external DB / DC

DB contracting out open from 1978-2016, for DC 1988-2012

Start work

PENSION FREEDOM

From April 2015

• From age 55, you may access your DC pension pot and take it

any way you choose, subject to:

• Up to 25% as a tax free cash lump sum

• The remainder being taxed at your normal rate of tax for that

year

• Please note that schemes aren’t obliged to offer all or any of

the new freedoms allowed so you may need to transfer

benefits into a different plan to gain greater flexibility

• If you do use any of the new flexibilities your annual allowance

drops from £40,000 per annum to £10,000 per annum

WHAT IS PENSION FREEDOM?

GUIDANCE THROUGH PENSION WISE

• Entitles everyone with a DC pension to access free, impartial guidance

about options at retirement, on line, over the phone or face to face

KEY PENSION ACCESS QUESTIONS • What are your income and capital needs?

• When do you want to take your benefits?

• What type of pensions do you have and what are your

choices?

Would you prefer certainty or flexibility?

What are the tax implications of your options?

Will your savings last as long as you do?

How is your money going to be invested?

(NOW and in the FUTURE)

What happens if you were to die?

YOUR DEFINED BENEFIT PENSIONS

Service x Accrual Rate x Salary Definition e.g. 20/60ths x £30,000 = £10,000 pa

Taking your pension benefits

• Early/late retirement e.g. payable at 65 or 5% pa reduction/enhancement

• Tax free cash sum commutation e.g. £1 of pension = £12 tax free lump sum

Cash equivalent transfer value e.g. £10,000 pa could = £300,000 or more

• A transfer to a Defined Contribution scheme to secure the new flexibilities would mean you lose the security of a defined income. You’d need to take advice from a financial adviser before such a transfer can be transacted

• Where the transfer value is below £30,000, this can be accessed as a lump sum from age 55, 25% of which will be tax-free with the remainder taxable. No advice is required here

• DB scheme trustees will also have new powers to delay transfers and take account of scheme funding levels when deciding on transfer values

Options can be used in whole or in part

• A tax free lump sum only

• Encashment – also known as UFPLS

• Flexible access – also known as drawdown

• Annuity purchase – conventional / investment-linked

WHAT COULD YOUR DC POT

PROVIDE?

SCENARIO 1 - ACCESSING TAX FREE CASH Dave has a pension pot of £100,000

Dave has £25,000 left outstanding on his mortgage charged at 2.5% costing him £448 pm

Dave is 60 and works full time earning £30,000 per annum

Dave wants to know if he should take his tax free cash sum to repay his mortgage?

TFC

£25,000

£100,000

Pension

Pot

Mortgage

£25,000 5 years

remaining

Monthly

Payment

£448

Before

£75,000

Pension

Pot

Extra

Income

£448

After

SALARY

£30,000

*(£3,800

TAX)

£75,000

PENSION

POT

TOTAL

TAXABLE

INCOME

OF

£105,000

What about Dave’s remaining pension pot? What if he cashes this in,

remembering that he earns £30,000?

Income Tax bill

Personal Allowance £8,500 £0

20% Income Tax £8,500 - £40,500 £6,400

40% Income Tax £40,500- £105,000 £25,800

TOTAL TAX £32,200

ENCASHMENT AFTER THE TAX FREE ELEMENT

+ =

*Please note National Insurance is also payable on salary

SCENARIO 2 – TAKING THE POT GRADUALLY

Mike is 60 and his State Pension will commence when he’s 66, but he wants to stop working

this year. Mike wants to cash in his pension pot of £100,000 but avoid a large tax bill. He

doesn’t need to take his tax free cash all at once. Mike initially cashes in £14,000 in April 2016.

£21,500

£64,500

TAKING THE POT GRADUALLY

State Pension expressed in today’s terms

SCENARIO 3 – GUARANTEED INCOME FOR LIFE

Sarah has a taxable pension pot of £50,000. To top up her State Pension and widow’s

pension from her late husband’s occupational pension, she’d like to generate an

inflation-proofed income of £2,000 per annum. Sarah smokes and is diabetic.

£0.00

£500.00

£1,000.00

£1,500.00

£2,000.00

£2,500.00

£3,000.00

Level Esc RPI Joint

50%, EscRPI

Smoker,

Esc RPI

Smoker &

Diabetic,Esc RPI

Income

Hodge Life

Legal & General

Prudential

LV=LV=

Source: The Exchange from IRESS 1/2/16, gross annual figures with 5 year guarantee periods

RETIREMENT OPTIONS

SUMMARY Description Annuity Drawdown Full cash

withdrawal

Flexibility / Certainty C F F

Tax implications ? ? ?

Will savings last? ? ?

Investment decision ? ?

Death benefits ? ? ?

Ongoing advice required ?

• Take care regarding your investment position prior to taking benefits

WHERE ARE YOUR DC PENSIONS

INVESTED?

Access option Risks to cover How is this covered?

Encashment - Volatility Move towards cash assets

Annuity - Volatility

- Falling annuity rates Move towards government bonds

Drawdown

- Time out of the

market

- Taking too much

income in early

years

Staying in growth assets with

lower risk assets for any income

to be taken in early years

• If you haven’t selected your own funds, you may be in a default strategy

• Most default strategies try to grow your pot when you’re younger but

then changes where you’re invested as you approach retirement

PENSION OPTION TASKS FOR

YOUR ‘TO DO’ LIST

• Clarify which types of pension you have and what your options are

• Get an up to date projection of what you’ll get back and make sure you understand what this is telling you

• Is your selected retirement date correct?

• Consider your needs in terms of certainty vs flexibility, tax efficiency, longevity, investment and legacy

• If you are invested in a ‘lifestyle’ investment option, has this kicked in and are you clear which major ‘pension pot’ conversion option you will be using? Watch this space for changes

• What about transferring?

TRANSFERRING YOUR

PENSIONS TO AUSTRALIA

QUALIFYING RECOGNISED OVERSEAS

PENSION SCHEMES OR QROPS

• A Qualifying Recognised Overseas Pension Scheme, or QROPS, is an overseas

pension scheme that meets certain requirements set by Her Majesty's Revenue and

Customs (HMRC). A QROPS can receive transfers of UK Pension Benefits without

incurring an unauthorised payment and scheme sanction charge (typically of 55%)

• To become a QROPS, a pension scheme must apply to and be approved by HMRC.

A list of QROPS that have consented to have their names published is available on

the HMRC website and is regularly updated

• HM Revenue and Customs (HMRC) can’t guarantee these are Recognised Overseas

Pension Schemes (ROPS) or that any transfers to them will be free of UK tax. It is

your responsibility to find out if you have to pay tax on any transfer of pension

savings

• https://www.gov.uk/government/publications/list-of-qualifying-recognised-overseas-

pension-schemes-qrops/list-of-recognised-overseas-pension-schemes-

notifications#australia

IS THE LAW LIKELY TO CHANGE

HERE?

ISSUES TO CONSIDER

WHAT TO THINK ABOUT

• Where you’ll be taking your pension –

Residency status

• Consider wider savings/assets

• Wider tax implications – e.g. capital gains and

IHT

• Do you need to change product and/or provider?

• Do you have further questions?

• Do you need an initial clinic?

• Do you need financial advice?

WRAPPING UP

• FAQ document will be circulated

• Register for a free 30 minute 1-1 consultation by emailing

australia@caba.org.uk by 25 November

• Evaluation survey

• caba.org.uk/australia to find out more about CABA’s services

Wendy Saunders, International Development Manager

Wendy.Saunders@caba.org.uk