Friday 20 January 2012

TP - No conflict of interest for Green Financial

Green Financial have been offered shares in a piece of software we use as a wealth platform and back office for clients.
We have rejected the offer and elected not to participate in order to avoid any suggestion of conflict of interest. Green Financial place independence and doing the best possible job for our clients at the heart of everything we do.

The shares were offered in return for placing business on the wealth platform element. It has nothing to do with the back office or client facing site. As you can read below, technically it appears there would be no legal conflict of interest. Green Financial recognise that TP is a great piece of software as a back office and client site system and the wealth platform element has much to recommend it to many clients. But not all clients. We will continue to only recommend TP as a wealth platform if we believe that is the best solution for a client.
We will NOT receive any shares or inducement for placing business on it.

We asked TP if they thought this represented a conflict of interest. Their response included:

“…whether a conflict actually exists when the units being offered represent no current or real value and are issued within a trust of a non-authorised entity, True Potential LLP, which is a completely separate legal entity and has no bearing or influence over the regulated Platform nor over the advisers giving advice to their clients.


The actual rules state that for the purposes of identifying the types of conflict of interest that arise, or may arise, in the course of providing a service and whose existence may entail a material risk of damage to the interests of a client, a firm must take into account, as a minimum, whether the firm or relevant person directly or indirectly linked by control to the firm:


1. Is likely to make a financial gain, or avoid a financial loss, at the expense of the client


2. Receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission or fee for that service


What is important here is identifying the risk, loss or damage to your client – if the platform is suitable for your client then there is no loss or disadvantage and in turn no conflict.


Furthermore the FSA guidance states that the circumstances which should be treated as giving rise to a conflict of interest covers cases where there is a conflict between the interests of the firm and the duty the firm owes to a client or between the differing interests of two or more clients to whom the firm owes in each case a duty. It is not enough that a firm may gain a benefit if there is not also a possible disadvantage to a client or that one client to whom the firm owes a duty may gain or avoid a loss without there being an associated possible loss to another such client - this guidance means that if there is no loss to a client or no client loses out as a result of another client being placed on the platform then there is no conflict."

It is worth noting another wrap platform we used recognised our excellent quality and volume of business by offering a 0.05% benefit. Rather than take this money we passed it on to all client accounts as a discount and it is disclosed on literature when it benefits a client.

Green Financial continue to believe that our remuneration should be based on the agreements between you the client and us for the work that we do for you.


We will remain independent and will not accept money or shares for placing volumes of client business with a provider.

Monday 16 January 2012

Retirement + 2 children = 49%

New research among 45-65 year olds by Standard Life reveals having children living in your household can have a big impact on your retirement decisions.
Almost half of respondents (49 per cent) with two children in the household have no financial plans to provide for the future, compared to just over a third (35 per cent) without children. Children also impact decisions on when to stop working and retire. You are more likely to retire later if you have children in the household with 10 per cent of adults who aren’t retired not planning to retire until 71-75 compared to only 2 per cent who don’t have children living with them.



Price inflation

Taking a career break or deciding to work part time can have a significant impact on your pension fund at retirement. A female saving £150 a month, increasing annually in line with price inflation from age 20 to age 65, could have a pension fund of £559,000 *1.
Taking a 5-year career break from age 30 during which pension contributions stop reduces the pension fund to £480,000 - a decrease of over 14 per cent. If you work part-time and cut in half your contributions from age 30 onwards this could reduce the pension fund to £380,000 - a decrease of over 31per cent.

Loss of pension

John Lawson, Head of Pensions Policy at Standard Life said: “It isn’t surprising that those with children living in the household have even more financial constraints than those without. Apart from the actual cost of bringing children up there are so many other considerations these days - such as childcare costs, then for some there are school and university fees to consider. There is obviously only so much money to go round. But the loss of pension can be a forgotten cost for many when making decisions, in particular by going part time."
But there are things you can do, and it’s never too late. If we can save even a small amount for retirement it can make a difference. How and when we retire has changed, we no longer have to retire at age 65, we can work flexibly for much longer.

Other findings from the research of 45-65 year olds include:
- 34 per cent of those with two children in the household will make up for lost time and travel the world in retirement
- 63 per cent with two children in the household are looking forward to spending their time with their children and grandchildren in retirement
- 44 per cent of those questioned without children in their household and who haven’t yet retired intend to stop working completely.

If you have one child in the household, 42 per cent intend to stop work completely but if you have two children only 27 per cent intend to stop working completely

As part of the Changing Face of Retirement research, Standard Life has published a list of top tips to help people re-engage with their financial planning:

- Don’t panic!
- Seek professional financial advice - see also http://www.iangreen.com/
- Continually review your financial goals
- If you don’t have one, make a plan.
- Ask for a state pension forecast and calculate your state pension retirement age)
see also http://greenfinancial.blogspot.com/2012/01/state-pensions-and-missing-14462581.html

- Review your investments
- Consider deferring taking the state pension at your default retirement age - for every year you defer taking benefits you can increase the pension by 10.4 per cent *2

- If you have moved jobs, ensure you have kept your old employer up to date with address changes so you can claim any workplace pension when you retire

If you can, increase your savings If you’re a higher rate tax payer, ensure you claim the tax-relief. Standard Life estimates 300,000 people are not claiming this currently

The above article is available in the Green Financial January/February client magazine at http://www.iangreen.com/magazine.php or via www.facebook.com/GreenFinancial



Notes:
*1. The pension fund figures assume investment returns of 7 per cent p.a. before charges, an annual management charge of 1.7 per cent p.a. and price inflation of 2.57 per cent p.a. The first monthly contribution is made at exactly age 20 and the last contribution is one month before the 65th birthday. The pension fund of £559,000 adjusted for price inflation in today’s terms would be £184,000 at age 65. A five year career break would reduce the figure to £158,000 in today’s terms.
Reducing contributions by half from age 30 would reduce the figure to £124,000 in today’s terms.


2. Source: DirectGov.

Thursday 12 January 2012

You must be KIIDding

You must be kidding. Not more documentation on funds…


What is a KIID?


Just kidding...
A Key Investor Information Document (KIID) is a new document which must be provided to anyone who invests in a fund which comes under the EU’s new regulatory directive, UCITS IV [Ed: snappy names, huh?]. These are funds such as OEICS or Unit Trusts which are held directly in an ISA or Collective Investment Account, but not funds which are held in bonds or pensions.

These regulatory and legislative changes have been driven by requirements introduced by the European parliament and the aim is to ensure investors are able to make fully informed investment choices. This means investment firms will be changing the format of the way they provide information.

On the plus side, the KIID must only be two pages long. Hooray!

[Ed: I can’t see anywhere in the regulations where it says how big a page is. Sorry to be cynical but I’d be buying shares in poster printers if I were you… ;-) ]

If you invest via a platform or a wrap you should know the KIID is produced by the fund manager, not the wrap or platform and shows you details of the fund you are thinking of investing in.

Implementation

KIIDs have been phased in from 1 July 2011 so you might not always receive one, but some fund managers started producing them straight away. Most will be launching during the first part of 2012.

If a new UCITS-regulated fund is launched before July 2012 a KIID must be provided from the outset. By July 2012 all fund managers must produce a KIID for all their UCITS-regulated funds.

It is likely Green Financial will have to change our processes, in the future asking clients to confirm they have read any KIID for a given fund before effecting a switch into that fund, for example when rebalancing portfolios.

The KIID format is prescribed by the European investment regulator. Therefore, when you read a KIID alongside documentation that has been produced by someone else such as a research house or wrap provider (this information could be, for example, a Funds List or Fund Factsheet), you may notice that some information is presented differently. Some areas of difference could be:

Fund objectives & Special risk factors

The wording of the fund objective or special risk factors may differ slightly between documents, but the actual objective or risk factors remain the same. This is simply because different disclosure documents are produced by different entities.

Risk and reward profile

The documentation produced by other entities has historically often used a numerical scale to show the risk rating of a fund.

The KIID uses a scale of 7 risk bands. The scale will be known as the Synthetic Risk and reward Indicator (mercifully shortened to SRRI Acronym fans!). Funds rated at the lower end are typically lower risk with potentially lower rewards and lower volatility. Those at the upper end are typically higher risk with potentially higher rewards and higher volatility:

KIID risk bands


The calculation method is set down in the rules so as to ensure consistency between fund groups, and looks at 5 year volatility but with the ability to use benchmark data where there is not sufficient fund data. Fund managers must review the SRRIs on their funds regularly. The KIID must be updated annually shortly after the beginning of each year, but if the SRRI of the fund changes, more frequent updates may occur.

At Green Financial we will integrate the new KIID risk bands into our existing document that already compares five different grading scales. This is so that our clients can be aware how any given risk rating compares to others and how their own attitude to risk and volatility, along with their portfolio as a whole or individual funds, aligns with other scales. In this sense we feel we have been ahead of the curve and European legislation in helping our clients understand risk and reward profiles.

Fund charges

The charges shown in the KIID are in a format prescribed by the European investment regulator, which is appropriate for an investment directly through the relevant fund manager.

If you are investing through a wrap or platform, the charges you will actually pay for the fund are likely to be different, in most cases lower. This is because wraps and platforms in conjunction use scale and buying power to negotiate better deals with fund managers.

For accurate details of the actual charges you will pay please refer back to your original documentation, log on to your wrap or platform or contact Green Financial directly

To finish, a few FAQs kindly put together by Fidelity (www.fidelity.co.uk)

1: What is UCITS IV and why are the rules changing?

The UCITS Directive 85/611/EEC (entered into

force in 1988 as amended by UCITS III in 2002) has

been the key driver contributing to the significant

development and success of the European

investment fund industry over the last two

decades. However, with the rapid evolution of the

investment fund market, it was necessary to further

enhance the UCITS market and brand.

2: When does UCITS IV come into effect?

The UCITS IV Directive came into effect on 1 July

2011 however a “grandfathering period” will allow

existing funds and associated share classes to

continue to produce a Simplified Prospectus up

until 1 July 2012, when all UCITS funds must have

a KIID. New funds launched during this period must

have a KIID.

Fund groups can transition to KIIDs any time

between 1 July 2011 and 1 July 2012.

3: What is a KIID?

The KIID will replace the existing Simplified

Prospectus for all UCITS funds and will be a

synopsis of key information relating to a fund.

The KIID must be provided pre-sale at fund and

share class level, and is classified as a legal

document. The KIID will be the primary document

provided to investors and potential investors.

4: What information will be included in a KIID?

The KIID has prescribed content which includes:

- a short description of the objectives and

investment policy of the fund

- a risk and reward profile

- past performance data in graphical form and

- details on costs and associated charges.

5. How will funds be measured in terms of risk?

The risk and reward profile, or “Synthetic Risk and

Reward Indicator” (SRRI) is a new representation

of risk factors in the KIID. It is expressed on a

scale of 1 to 7, with 1 being the lowest risk and

potential lowest reward and 7 being the highest

risk and potential highest reward. It is based

upon a prescriptive calculation method to ensure

consistency between fund groups and looks at

five year volatility with the ability to use

benchmark data where there is not sufficient fund

data. It is supplemented with explanatory text,

including risk descriptions relevant to the share

class the KIID represents.

6: Does the FSA require any other


information to be provided with


the KIID?

The KIID will only replace the Simplified

Prospectus. All other documentation will still be

available to investors.

7: What will Green Financial as my

 adviser need to do differently now

that UCITS IV is effective?

An adviser will have a legal and regulatory

obligation to ensure that their client has received

the latest KIID (if available) before an investment

is made.

8: Will I still receive printed documents?

A paper copy of the KIID must be provided to

clients upon request. This will be provided

manually, following the same process employed

when a paper copy of the Simplified Prospectus

is requested currently. Braille and audio copies of

the KIID are also available on request.

How have the pension income drawdown rules changed from 6 April 2011

How have the pension income drawdown rules changed from 6 April 2011



Some important changes were made to the pension benefit rules from 6 April 2011.

In particular:



•Pensions and lump sums no longer have to be taken by age 75;

•New income drawdown rules have replaced the existing unsecured pension (USP) and alternatively secured pension (ASP) rules, which have been abolished;

•A new type of income drawdown, known as flexible drawdown, is available for those who meet the new minimum income requirement (MIR);

•Existing USP and ASP cases will be gradually moved fully onto the new basis under transitional rules;

•The death benefit rules, and aspects of their tax treatment, have changed.

Do pensions and lump sums have to be taken by age 75?

After 5 April 2011, benefits don't have to be taken from a registered pension scheme by age 75 - they can just be left in the scheme as unused funds until the member needs them. Where scheme rules allow, this gives members the flexibility to delay taking their pension or tax-free lump sum until after age 75 - potentially even continuing a phased retirement strategy into their 80s or beyond.

However, the benefits still have to be tested against the lifetime allowance by age 75 (as a benefit crystallisation event). So even though the member may not be taking anything from their fund, if those unused funds are greater than the remaining lifetime allowance, a lifetime allowance tax charge will have to be paid. Any lifetime allowance charge incurred at age 75 would be at the rate of 25%, with the residual excess fund retained in the scheme to provide taxable pension income.



This also means that lump sum death benefits paid after age 75, even from unused funds, will be subject to the 55% tax charge - unless it's a charity lump sum death benefit (which can be paid tax-free).



From 6 April 2011, the following lump sums can also be paid after 75:



•Trivial commutation lump sums;

•Trivial commutation lump sum death benefits;

•Winding up lump sums;

•Serious ill-health lump sums (but only from unused arrangements and subject to a 55% tax charge).

What are the new pension income drawdown rules from 6 April 2011?

On 6 April 2011, the unsecured pension (USP) and alternatively secured pension (ASP) rules were replaced by a new single set of income drawdown rules that are similar to the current USP rules. The key features of the new rules are as follows:



Income limits



•The highest income allowed in a pension year is 100% of the basis amount from the GAD tables at all ages (down from the 120% USP limit, but up from the 90% ASP limit).

•The lowest yearly income allowed is nil (the same as the USP rules, but significantly more flexible than the 55% minimum that had to be taken under the current ASP rules).

Those who meet the new minimum income requirement (MIR) may also have the option of flexible drawdown, which allows unlimited income to be taken at any time.



The GAD tables have been updated to reflect recent mortality improvements and extended to cover ages after 75.



Income reviews

•Until age 75, the income limit must be reviewed at least every three years.

•Once over 75, the limit must be reviewed every year.



Death benefits

•Lump sum death benefits are allowed from income drawdown funds at any age (a welcome relaxation for the over 75s).

•For deaths after 5 April 2011, any lump sum death benefit paid from an income drawdown fund (or after age 75 from unused funds) are taxed at 55% (up from the 35% that previously applied under USP). Lump sums paid on or after 6 April 2011 as a result of a death in USP before then will still be taxed at 35%.



Timing

•The new rules apply immediately to any arrangement moved into income drawdown for the first time after 5 April 2011.

•People in USP or ASP before 6 April 2011 will be moved fully onto the new rules over a period of up to 5 years under transitional rules.

What is pension flexible drawdown?

Flexible drawdown is perhaps the most radical aspect of the new income drawdown rules from 6 April 2011. Under flexible drawdown there's no limit on the amount of income that can be drawn each year - the individual can take their entire income drawdown fund out in one go if they really want to!



The usual tax free lump sum is allowed, but any other withdrawals taken by the individual will be taxed as income in the tax year they're paid. If an individual becomes non-UK resident whilst in flexible drawdown, any income drawn when non-resident will be subject to UK tax if they return to the UK within five tax years of taking it.





To opt for flexible drawdown, an individual must:



•meet the minimum income requirement (which is a safety net, so they won't fall back onto State benefits); and

•not make contributions to a money purchase pension scheme in that tax year - including employer and third party payments; and

•not be an active member of a final salary scheme at the time of making the declaration.

Protected rights

Protected rights funds can use the normal income drawdown basis but can't go into flexible drawdown.



When will the 2011 income drawdown rules apply to existing unsecured or alternatively secured pensions?

People already in unsecured pension (USP) or alternatively secured pension (ASP) before 6 April 2011 will be moved fully onto the new income drawdown rules over a period of up to 5 years.



Unsecured pension (USP) - income limits

Those in USP on 5 April 2011 will keep the 120% income limit until the earliest of:

•Next reference period: The start of their first new reference period (that is, when their five year review falls due or at any earlier interim annual review); or

•Drawdown transfer: The start of their next drawdown year after transferring their drawdown fund; or

•Age 75: The start of their next pension year after age 75.

New phasing, part annuitisation or pension sharing after 5 April 2011 will still trigger an income review. The limit will be calculated using the new GAD tables, but the maximum income will still be 120% of this revised amount. This review won't change the five year reference date or trigger a move to the new 100% income limit.



So someone who goes into USP before 6 April 2011, or resets their five year reference period by requesting an interim review on the anniversary of their drawdown year before 6 April 2011, may not move onto the lower 100% income limit and more frequent reviews until well after 2011.



Alternatively secured pension (ASP) - income limits

Those in ASP on 5 April 2011 will have their first income review using the new rules at the start of their next pension year.



•Until then, the basis amount calculated at their last income review will remain in force.

•However they can switch off their income, or increase it to 100% of their existing basis amount, immediately from 6 April 2011.

How have the pension death benefit rules changed from 6 April 2011?

From 6 April 2011, there are some significant changes to the pension death benefit rules:



•Lump sum death benefits are allowed at any age.

•For deaths after 5 April 2011, the tax charge on lump sum death benefits paid from crystallised rights is 55% (up from the current 35%).

•Tax-free charity lump sum death benefits are allowed in more circumstances.

•The scope for an IHT charge against pension rights has been narrowed.

Death benefits paid from 6 April 2011 relating to a death before then are still be covered by the old rules.



Death before age 75

On death after 5 April 2011 aged less than 75, any lump sum death benefit is:

•still tax free if paid from uncrystallised rights;

•but normally taxed at 55% if paid from crystallised rights (such as income drawdown funds or a value protected annuity). The only exception is for charity lump sum death benefits, which can be paid tax-free from crystallised rights.

Death on or after age 75

On death after 5 April 2011 aged 75 or over, it's okay to pay lump sum death benefits. This is a sea-change from the previous position on death in alternatively secured pension (ASP), where only a charity could legitimately have benefited from a lump sum on death.

•Any lump sum death benefit paid after 75 (including those from unused funds) is taxed at 55%.

Charity lump sum death benefits

Before 6 April 2011, a charity lump sum death benefit could be paid tax free to a nominated charity on death in ASP where there were no surviving dependants. For deaths after 5 April 2011, this option has been extended to cover death in drawdown before age 75.

To qualify as a tax free charity lump sum death benefit, all the following criteria must be met:

•The lump sum is paid from income drawdown funds; and

•There are no surviving dependants of the member to pay a pension to; and

•The deceased member (or dependant) had nominated a recipient charity (it's no longer possible for the scheme administrator to make a nomination).

Lump sums that don't meet these criteria can still be paid to charities, but they will be treated as normal lump sum death benefits - so if they come from crystallised rights the usual 55% tax charge would apply.



IHT

Before 6 April 2011, pension rights could create IHT liabilities - albeit only in fairly limited circumstances. Two significant changes were made from 6 April 2011 that make the risk of IHT charges even smaller:

•The abolition of the ASP rules mean that the IHT charges that previously applied on death in ASP don't apply for deaths after 5 April 2011.

•The ability for HMRC to levy IHT where they consider that someone has deprived their estate through an "omission to act" (for example, by delaying taking their pension) has been removed for omissions after 5 April 2011.

Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

Wednesday 11 January 2012

State Pensions and the missing £144,625.81

Pension Insight magazine (http://www.pensions-insight.co.uk ) editor Bob Campion recently wrote that the gradual reduction in maximum state pension benefits could end up costing some people £144,625.81.
He calculated this is the amount you’d need to buy an annuity to replace the lost £6,326.84 a year if the maximum state pension reduced from £13,606.84 to £7,280

The £13,606.84 is the theoretical maximum for someone with full basic state pension (BSP, currently £102.15pw in 2011/12 available to those with more than 30 years NI contributions) and maximum second state pensions (SERPS and S2P). This contrasts with the maximum £7,280 payable if we move to the proposed £140 per week flat rate system. It would affect most higher earners and those who do not qualify for any kind of pension credits or means tested pension top ups. At present almost 1 in 2 pensioners are eligible for top ups of some kind but for those who do not qualify for state assistance over and above the basic state pension the changes to state pension rules looks likely to mean a significant reduction in available benefits over the coming decades, with less effect on those retiring sooner, especially in the next 10 years.

As a point of interest if the new rules all come in when proposed (but it looks likely they will be brought forwards) it will be into the 2080’s before everyone is on the same rate. Until then there will be a mixture of different regimes and people will have multiple pensions (private and state) with different rules and retirement ages applying depending on age and pension structure.

This makes it nigh on impossible to accurately calculate one’s own state pension benefits until the point you reach them. Indeed even the DWP are not really sure what income a pensioner will get until they reach state pension age (65 and rising). As an IFA it makes it financially impractical to charge a client to work this out. The time and cost involved outweigh the benefit!

Contracting out (called SERPS up until April 2002 and S2P afterwards) will soon no longer be available from money purchase schemes, which includes personal pensions and SIPPs – see also http://greenfinancial.blogspot.com/2011/12/contracting-out-serps-s2p-all-that.html

It used to be the case, that as an IFA, I could estimate whether it was ‘worth’ contracting out or not. There were a multitude of individual factors but the biggest was often if aged under or over 45. So the ending of contracting out from money purchase schemes is a welcome simplification but as indicated above the change to the new regime will bring complification [ED: not a real word but should be] well into the 2080s. Again, on the plus side, the new rules should benefit lower earners.

But what is the detriment to higher earners?

The loss of the income as stated at outset in this article is one but there is another. The impact on attaining qualification for the new ‘flexible drawdown’
- download Green Financial guide here:  http://www.iangreen.com/downloads/Flexible.pdf
or view on facebook here:
http://www.facebook.com/media/set/?set=a.279726955386751.88831.136170059742442&type=1&l=b96248bd07

This requires a lifetime pension income provision of at least £20,000. So having state benefits of £13,000+ goes much further towards this than £7,280! If you had the £13,606 to buy a comparable annuity to top up to £20,000 would mean you’d need a personal pension of about £93,000 to buy the annuity. At the lower state pension income you’d need more like £200,000 to top up.

To repeat a fact I tweeted last year, to purchase an annuity (so income for life) on the same terms as the state pension a 65 year old male would need a private pension fund of £310,343.19

So in summary, pension and state pension simplification is of course welcomed by all, especially me as I will be far better placed to assist clients in calculating what there state pension entitlement might be. But the journey to a simple state pension regime is far from defined and will be a long journey whatever direction it takes.
Under current proposals I’ll be aged 109 when all pensioners are on a flat rate pension income!

For those retiring in the next ten years, there is not so much to worry about as the status quo all but applies, with changes to retirement age (upwards, see link to calculator below to work out yours) being the main factor coming slowly in.

But for those retiring 10 years out, especially those who aspire to or consider they will have taxable income at the higher rate of tax it is well worth making sure your pension – and most importantly forecast pension income - is reviewed to ensure it is on track to meet your aims.

If you are a pension or retirement income client of Green Financial or would be interested in becoming one, please do contact us. We’d love to help if possible.

Further Reading and Resources

28 page Green Financial Retirement Planning Guide - http://www.iangreen.com/downloads/Retirement.pdf

Government Money Advice Service - http://www.moneyadviceservice.org.uk/yourmoney/pensions_and_retirement/default.aspx

State Pension Age Calculator -
http://pensions-service.direct.gov.uk/en/state-pension-age-calculator/home.asp

Getting a State Pension Forecast - http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008

Green PEAs – The Green financial Pension Evaluation and Analysis Service for personal pensions -
http://www.iangreen.com/pensionperformance.php