Replacement of the lifetime allowance

Financial planning considerations for the new tax year and the new LTA regime

Welcome and introduction (00:00)

Tom Dickerson: Good morning. Thank you for joining us for the latest Fidelity Adviser Solutions webinar. For those of you who don't know me, my name is Tom Dickerson, and I'm the Senior Business Development Manager covering the South East. Most of you, however, will know my colleague and the guest speaker today, Paul Squirrell, who is Head of Retirement and Savings here at Fidelity.

Now, today's session is going to be slightly different to the previous sessions we have run. I'll be hosting the Q&A session with Paul, concentrating on the recent pension legislation changes as well as other financial planning considerations in the new tax year. Now, we've received a number of questions prior to the event and we will do our best to cover as many of these as possible.

Just before we begin there are, however, a couple of housekeeping points. A Certificate of Attendance will be emailed out at the end of the session and, on that email, there'll be a chance to ask any further questions you may have on the subject, as well as suggestions for our next webinar.

Overview of the changes to pension legislation (01:04)

So, without further ado, good morning, Paul, and I guess the best place to start is the changes within the pensions world. So, can we have a brief recap of what has actually changed?

Paul Squirrell: Morning, Tom, morning, everyone. Yes, I think that's a good question, Tom, and, it's fair to say, quite a lot has changed over the last year, starting back with the Spring Budget on March 15th last year. Part of the policy intent, and the Budget was called, “growing the economy” and the concern was that – I think the stats were something like 400,000 people of a working age had stopped work since the start of the Covid lockdown – so, a number of measures, including changes to pensions, were introduced. I'm sure everyone's aware that there were increases to a number of allowances, such as increases to the pensions annual allowance, increases to the amount you can pay if you're affected by tapering, money purchase annual allowance, increases to the calculations for the adjusted income for tapering calculations.

But the game changer really was the announcement that they were to abolish the lifetime allowance, starting with a removal of the tax charge from last year and replacement legislation for this year, which, of course, is now in statute. So, whilst it has been abolished, we do have new allowances to work with. Three new allowances, which are known as the lump sum allowance, which, for anyone without protection, starts at £268,275. A familiar number, of course, because it is 25% of the old standard lifetime allowance. The lump sum and death benefit allowance, which, for those without protection, is £1,073,100 – wouldn't it have been nice if they'd rounded it up or down or something like that but no, it's the same as the old lifetime allowance. and the overseas transfer allowance that effectively replaces the old BCE 8 legislation for those wanting to transfer their pension benefits overseas.

So, those are the allowances. However, if individuals had forms of LTA protection in the past, their allowances will be increased. So, for example, if somebody had enhanced protection, their allowances will be increased, but it's a slight change to as it was in the past, because if you've got no LTA protection, then your lump sum allowance would be £375,000. But if you have got lump sum protection, it's not as it used to be, it will actually be the value of your PCLS benefits as they were as at 5th April 2023. For the purposes of the lump, sum and death benefit allowance, for those with enhanced protection, it will be the value of the uncrystallised benefits as at 5th April 2024. That's the confusing bit – everything else is pretty much more straightforward. For example, if you got fixed protection 2016, then your lump sum and death benefit allowance will be £1,250,000 and your lump sum allowance will be £312,500.

Tom Dickerson: Actually, listening to that, Paul, reading some of the legislation, the new rules do appear remarkably similar to the previous lifetime allowance rules that we had. Is that the case?

Paul Squirrell: It's a fair question, Tom, and, yes, you could say, hold on, aren't they the same numbers? And they are, but the way that they are tested is significantly different. In order to avoid confusion, we don't have anything called ‘benefit crystallisation events’ anymore, which we used to have in the past. We've given them a completely new name which, to avoid confusion, is ‘relevant benefit crystallisation events’. So, these are payments of lump sums – and it is only lump sums that are tested. So, for example, if we look at the lump sum allowance, somebody without protection, £268,275, that would be tested in three areas. So, the payment of a PCLS payment, the tax-free portion of UFPLS payments and standalone, so those benefits that were fully tax-free cash. Other benefits, however, are completely unlimited. So, yes, it's just the lump sum allowance, tax-free lump sums. Any other pensions are completely unlimited, there is no test.

Tom Dickerson: Right. Okay, so correct me if I'm wrong here, but what you're saying there, Paul, is if a client wants to take £100,000 pension commencement lump sum, for example, and then put the remaining £300,000 into drawdown, there's actually no test on those drawdown benefits?

Paul Squirrell: Completely. Yes, you're absolutely right, Tom. And for me, that's the game changer because, in the past, advisers, with their clients, would be considering pension savings to what I would call a watermark. So, we were always cognizant that if you're paying money in, obviously the annual allowance was one consideration, but of course, the lifetime allowance was the other consideration. But, going forward, there is only the limit on tax-free cash, but there is no limit on the amount of pension savings. As I alluded to a couple of times, Tom, I think that's the game changer, because, for me, in terms of paying money into a pension – yes, it's nice to get the tax-free cash portion when you can – but even if you can't, provided that you're not going to pay more tax on the way out than the tax relief you're getting on the way in. Yes, if you're saving money and you're not going to access it until you get to your normal minimum pension age, surely pensions have to be the first place to start and use your allowances where you can.

The lump sum and death benefit allowance (06:53)

Tom Dickerson: I was going to say, from what you've just said there, Paul, it does kind of sound like you want to be putting as much money as possible into your pension. Is it that simple?

Paul Squirrell: Yes, in the main, I'd say it is, certainly if you're saving for yourself, Tom, because you haven't got that tax charge on the way out, then pension savings make a lot of sense. The only consideration I would say, though, however, is the way that benefits are paid on death, because when it comes to paying benefits on death before 75, there is a limit on the amount that can be paid out as a lump sum tax free, which is the bit that's measured by the lump sum and death benefit allowance.

Tom Dickerson: Okay, so I’ve just picked up there, I think that's the second allowance that you've mentioned there, Paul, the lump sum and death benefit allowance. Can you just briefly explain how that works, please?

Paul Squirrell: Yes, sure. So, the first point is, I mentioned there about the lump sum allowance, so I take a £100,000 PCLS payment, it uses £100,000 of my lump sum allowance. That payment also uses part of my lump sum and death benefit allowance. So, those bits that use the lump sum allowance, in those cases would also use the lump sum and death benefit allowance. But, as the name suggests, Tom, there are other things that are tested. The first thing, and the only thing I would say, other test during the members lifetime is what's known as the payment of a serious ill health payment. We don't often do these, to be fair. Serious ill health payments, just to briefly explain this, where you've got somebody who's under the age of 75, uncrystallised benefits, and unfortunately has a diagnosis of less than 12 months to live, then the Revenue, in their generosity say, well, you've got those pension savings over there, if you want to access them, we will allow you to access them up to a limit tax free. But, of course, that would be taking money from an IHT-favourable environment and bringing it into your estate so, quite clearly, we don't often do that.

Other than that, as the name suggests, it's a test on lump sum death benefits and I think the easiest way to remember this – and its tests before 75 – is to try and remember what isn't tested because it is, going forward, a test on all lump sum death benefits paid from pension arrangements with three exceptions, two of which we don't come across very often – which are the charitable lump sum death benefits and trivial commutation lump sum death benefits – but the other one is something that advisers will come across and this is where benefits were crystallised prior to this tax year. So, prior to the 6th April, 2024. So, benefits were crystallised before the 6th April 2024 – and you die – then they won't be tested on death if they are paid as a lump sum before 75.

Tom Dickerson: Okay, thank you, Paul. As what we said before, it does sound quite similar to the previous rules we've had in place. So, what is the difference?

Paul Squirrell: I think the main difference, as I see it, is that test on crystallised benefits, because, in the past, we've been used to a test on death before 75 only affecting uncrystallised funds, but, going forwards, it will be a test on crystallised funds as well. When you think about it, there's some logic here, because in the past, your example earlier, you said £100,000 PCLS and £300,000 into drawdown – under the old rules, the £300,000 drawdown was tested against the lifetime allowance. Now, going forward, that £300,000 isn't tested against the lump sum and death benefit allowance until the client dies. So, it's a test on the crystallised benefits. But I think the important point here, Tom, as we’ve said a few times, it is only lump sum payments, so direct lump sum payments from pensions, that are tested on death.

Beneficiary’s drawdown and pension death benefits (11:02)

Tom Dickerson: I was going to say, Paul, that the expression ‘lump sum’ came out quite prominently in that last bit you did there. So, because it did, I presume that it doesn't include any payments that go into beneficiary’s drawdown?

Paul Squirrell: Correct, absolutely right. So, BFAD has always been important and it continues to be important. So, if you pay benefits into beneficiary’s drawdown on death, because it is considered a pension, even if the individual then went ahead afterwards and took a lump sum, the initial payment isn't into a pension so, therefore, it's not tested at all. So, if it's before 75, unlimited amounts could be paid into beneficiary’s drawdown and can then be withdrawn tax free. If it's paid into beneficiary’s drawdown and the benefits are taken after age 75, then they will be taxable on withdrawal.

Tom Dickerson: Brilliant thanks, Paul. The first 13 minutes of this and there’s been a lot going on there, so I might put you on the spot slightly here, but if you did have to summarise the position on pension death benefits, how would you do that?

Paul Squirrell: Well, the first thing to say is, over 75, there hasn't been any change from the previous tax year, so die after 75, pension benefits are paid out, they will be taxable. However, if they're paid as a lump sum, that'd be fully taxable as a lump sum when they're paid out, if they're paid as beneficiary’s drawdown, as we’ve just discussed, then you've got more control because it's taxed as and when it's taken out. However, if you die before 75, then I'll say there's a few questions. The first question is, were these crystallised benefits? If so, were they crystallised before the 6th April this year? If the answer to that question is yes, there is no test. So, they're not tested.

If they were uncrystallised benefits, or they were crystallised after the 6th April 2024, then if it's paid as beneficiary’s drawdown, as we said, it's okay. But if it's paid as a lump sum, this is when we get down to the consideration for the remaining lump sum and death benefit allowance. So, we're talking about deaths under age of 75 where they were uncrystallised or crystallised after April 2024, and paid as a lump sum – that's where the lump sum and death benefit allowance comes in – pay them within the lump sum and death benefit allowance, no tax charge. If the benefits exceed the lump sum and death benefit allowance, or the remaining lump sum and death benefit allowance, that bit in excess will be taxable to the recipient at their marginal rates.

Tom Dickerson: Okay. So, the main phrase I'm getting out of there is beneficiary’s drawdown, isn't it, Paul? So, what you appear to be saying there, it is probably more important than ever to ensure that things like expression of wishes are up to date, the nominees and beneficiaries are how you want them to be, but, also on the flip side of that, I guess it's understanding what a pension provider’s options are when it actually comes to this kind of stuff?

Paul Squirrell: Absolutely, Tom, and also the type of death benefit. Because if it's a DB lump sum death in service, written under pensions rules, then, yes, it will be paid as a lump sum. Other than that, when we're talking about pension savings vehicles, I think we often pigeonhole this to talking about it being legacy arrangements, and to a certain extent that is true, but there are a lot of existing schemes that don't offer or, new schemes – the biggest defined contribution scheme in the workplace market at the moment, NEST, doesn't offer beneficiary’s drawdown. So, it is important, as you rightly say, to, first of all, consider what are the options under this scheme. The second thing is, if it is a discretionary arrangement and it does offer beneficiary’s drawdown, as you rightly say, expression of wishes are really important, because when it comes to beneficiary’s drawdown, we've talked about this before, it's not everyone that can have beneficiary’s drawdown, it's those people that are classified as dependents of nominees. So, therefore, keeping the expression wish up to date and relevant is really important.

And, on that point, it sounds like a bit of a pitch, but I think it's worth pointing out, if you use Fidelity, of course, remember we've got the Pension Summary report, where you can just look across your business, all your clients, and easily identify if the expression of wish is up to date and when was it last updated, because I don't think is a bad thing, Tom, even if the circumstances don't change, to keep it regularly updated because, if I'm a trustee, the more recently it was updated, the more confident I am that that's what the member wanted.

Tom Dickerson: So, I guess the obvious thing would be, if it's not already, is to factor an expression of wish into your annual review with the client. Just quickly show them that this is what it is, is this still the case? And then, as you say, go online with Fidelity, check the box.

Paul Squirrell: Yes, definitely.

Transitional arrangements and the transitional tax free amount certificate (15:51)

Tom Dickerson: Thank you, Paul, that's covered the allowances and how they’re used in the new tax year. However, most of the questions I received prior to this event, and a lot of the conversations I've had with advisers, it's more around what does it mean when a client has already taken benefits under the old lifetime allowance regime?

Paul Squirrell: That's a fair question, Tom. And you're right, it's probably where we’ve spent the majority of our time speaking about this recently. So, just to drill this down, what the legislation actually says is that your allowances in the new regime will be determined at your first relevant benefit crystallisation event – so, the first payment of tax-free cash will determine your allowances from that point going forwards.

Now, if you've not had any events that have occurred in the past, then it's quite simple. Your allowances are what your allowances are. So, if you've got protection, 2, 6, 8, etc. However, if you've had events that have occurred under the old lifetime allowance regime, then your starting allowances will be reduced. And there is a default calculation and reduction, and the Revenue rightly say that this probably would be sufficient for about 98% of the population, etc. But there are circumstances, and I'm sure we're going to come onto this, is where the individual may benefit from a transitional tax-free amount certificate. But, before we talk about that, let’s talk about the default calculations, because I know that they've caused a little bit of confusion.

The starting point is that, if the client has used 100% or more of the lifetime allowance, then the default calculation is that there are no allowances going forwards. If the client has used some but not all of their lifetime allowances, then the calculation is slightly different. For the purposes of the lump sum allowance, what we would do is we would take their current lifetime allowance, the percentage to that date of the old lifetime announce that they used, and then we would take 25% of that amount as the default calculation for how much we would take from the starting allowances.

The lump sum of death benefit allowance works pretty much the same way, with one exception and that is if the individual had taken payments as a serious ill health payment, or if you're dealing with a situation where a client has died, then the default is it's 100% of the benefits if they are lump sum death benefits that have already been paid out. They're the defaults. But, the conversations we've had, is that in some circumstances it may be better to use the transitional tax-free amount certificate.

Tom Dickerson: Thanks, Paul. Just before we get onto the transitional tax-free certificate, easy for me to say! You know I'm not going to let you get away with without giving us an example of how that default calculation would work.

Paul Squirrell: I knew you were going to say that! So, let's start with a simple example. So, let's say the client has got fixed protection 2016 – £1,250,000 – because it keeps my maths a little bit simpler, Tom. And, let's say that individual has used 40% of the lifetime allowance. So, I just want to stress this point, it doesn't matter what the lifetime allowance was when they took the benefits, etc. The two figures we're interested in is what the individual’s lifetime allowance, or the equivalent of the lump sum of death benefit allowance is now, so in this case it's £1,250,000, what percentage have they used? In this case, it's 40%. So, the starting point, you take the current allowance, lifetime or lump sum and death benefit allowance, and times by the usage, so that's 40%, 40% of £1,250,000, which is £500,000. And we take 25% of that. So, that's £125,000. So, for this client, their starting lump sum and death benefit allowance would have been £312,500 but we take £125,000 off that which gives us £187,500. They're starting lump sum and death benefit allowance would have been £1,250,000 but £125,000 off that is £1,125,000.

I've had a lot of questions about the transitional tax-free certificates but, if you can get your head around that default calculation, Tom, it's quite an easy thing to work out whether the client needs a certificate, because the starting point is, that's the default deduction – in our example £125,000 – so the question that you've got is, has the client, when they've used lifetime allowance in the past, taken £125,000 or more? If the answer is yes, they have taken £125,000 or more, then clearly the default deduction is going to be better for you. If you've taken less than £125,000, then a certificate would be in your advantage.

Tom Dickerson: Well, as you say, Paul, presumably there are going to be winners and losers from this legislation change as there almost inevitably is with anything that changes. Let's start with an example of a client that would be advantaged by this.

Paul Squirrell: Yes, sure. I think the first thing to say before I consider this is, I think there was a lot of people panicked by this, understandably, because, crikey, I've got to get these certificates, but you've got to put this in context. The client’s overall pension savings have got to get somewhere near the lifetime allowance for this to be a consideration, because if you’re way below the lifetime allowance then this isn't, generally speaking, going to affect you. And also, if you are looking to get one of these certificates because you want to take more tax-free cash, then the client is, of course, going to need uncrystallised funds in order to take the tax-free cash from.

But, yes, we've got examples, let's say the client used 40% but took a scheme pension and didn't take PCLS. Then, clearly, the default calculation is going to be worse than getting a certificate. It could affect clients where you had guaranteed annuity rates, and because the guaranteed annuity rate was so generous, it was better to fully take income rather than take some PCLS. There could be clients, for example, there was a GMP with a section 32 so you had to take it fully as income. So, if those are the scenarios, they work well. But it could also affect those people who have fully crystallised and still have uncrystallised benefits because they're starting point would be zero. Do they just want to get a certificate to get themselves some more lump sum and death benefit allowance to cover the uncrystallised funds? So, they are the obvious examples of where somebody would be advantaged.

Tom Dickerson: So, I guess the obvious question following on from that is should everyone just apply then, or will there be times where there is a disadvantage?

Paul Squirrell: Oh, yes, there will. And, if I stick with my 40% example, let's say the client doesn't have protection, but they used 40% of the lifetime allowance in 2015 when the lifetime allowance was £1,250,000, they took £125,000 tax-free cash and put £375,000 into drawdown. So, the default calculation would be 40% of the current lifetime allowance times 25%, which, if is my maths is right, is around about £107,000, which is less than what they’ve taken, so, in that case, you wouldn't go for one. Another one, a clear one, let's say you had a client where money came into payment and they had a big protected amount of tax-free cash. So, if I took £500,000 worth of benefit and £300,000 was tax-free cash, the default is clearly going to be better than the actual PCLS used.

Tom Dickerson: We'll come back to the protected PCLS part but I guess the inevitable question following that is how do you actually apply? And is there a deadline for the application that advisers and clients need to know?

Paul Squirrell: Yes, I think that's another question we've had a lot. I'll start with the latter part, if that's alright, Tom, because I think it's important to say that, as I said earlier, all your allowances are established at the first relevant benefit crystallisation event. So, you can't apply for a certificate after your first relevant benefit crystallisation event. So, if you need a certificate, you need to get it beforehand. So, if you're looking to take tax-free cash and your benefits certificate, get the certificate before the tax-free cash. If a client has died, then the personal representatives in that example can apply for it, they'd need to do that before any payments have been made. In terms of how to apply, the most difficult thing, I think, Tom, would be the gathering of evidence, because you're going to need to go to a provider where you're still a member, generally speaking, it's going to be the provider where the first event is occurring, it’s fair to say, but you're going to need…

Tom Dickerson: Sorry. That’s post, obviously, the new...

Paul Squirrell: Yes, exactly. So, you're looking to take PCLS from a new provider, it's that provider you're going to go to in order to get the certificate. But you're going to need to give full evidence of every event that occurred up to then. So, if you've had taken DB scheme pensions, etc, or guaranteed annuity rates and stuff, it's the gathering of the evidence which is going to be the difficult part. Once you've got the evidence, it's a case of presenting that to the provider, saying here's a full history of the LTA usage, and how it was used, and what tax-free cash amounts were paid. And then, at that point, the provider would issue this certificate. Legislation says they've got three months, in reality, we're already issuing them. They shouldn't take that long, if I'm being honest with you.

Tom Dickerson: So as soon as you got the information, and that, as you say, is the key point I would have thought is the main takeaway from that.

Protected tax-free cash (26:08)

Paul, you mentioned clients with protected tax-free cash allowances. So, how will that work within this new legislation?

Paul Squirrell: Yes, we've had a lot of questions submitted on this, Tom, as well. The first thing to say is that, as it did under the old lifetime allowance regime, the rules for PCLS, protected PCLS, are slightly different for standard PCLS. So, where you've got standard PCLS, I know you asked me about protected PCLS but, as we're just mentioning this, if you got standard PCLS then the rules say this – the permitted maximum you can have is 25% of the amount coming into payment – pretty much same as the old rules. All the remaining lump sum allowance, all the remaining lump sum and death benefit allowance, whichever is the lower.

When it comes to protected tax-free cash, however, the rules are different. The only thing it does say is that you need some lump sum allowance available, but not necessarily sufficient lump sum allowance to cover the protected PCLS payment coming into an effect. So, arguably, you could have a £1 lump sum allowance and it opens up the door for protected PCLS payments. So, the protected PCLS can exceed the available lump sum allowance, but if it also exceeds the remaining lump sum and death benefit allowance, that's when the excess would be taxable. If it's within the remaining lump sum and death benefit allowance, it's absolutely fine. But if it does exceed the remaining lump sum and death benefit allowance, then the excess will be chargeable at marginal rates.

For the purposes of how it uses the allowances, they don't take the full payment. So, let's say, for example, you have somebody with £800,000 worth of savings with a protected PCLS of £400,000. For the purposes of using the lump sum allowance, you use 25% of the total amount. So, £200,000 is what's deducted from your lump sum allowance. But it used to be the case under the old lifetime allowance regime, and it is the case under the new regime, that where you’ve got an individual with protected and non-protected PCLS payments, the order in which you do things, where the total benefits are over the lifetime allowance, the old lifetime allowance, is very important because it can lead to different results.

Tom Dickerson: You highlight the importance there, Paul, and you touched on a brief example. I think – I'm not going to apologise for labouring the point here because this is most of the questions and the conversations we're having around this topic is – can you just expand on that a little bit more, please, or, just follow through that example.

Paul Squirrell: I'm so glad you asked! I'll try, Tom. Let's go back to the £1,250,000 to keep the maths a little bit simple. So, let's say you've got an individual with £1,250,000 FP16 and they haven't taken any benefits. So, their starting lump sum allowance is £312,500. Let's say they've got two arrangements, both valued at £800,000, one of which is has a protected PCLS payment of £400,000, and the other one has standard PCLS protection.

As I said, the order in which you do things may lead to different results. Let's say, in our example, we take the protected PCLS first. So, we take the protected PCLS first, the £400,000 payment. Now, as I said a moment ago, in terms of using the lump sum allowance, we don't use the £400,000, we use 25% of the total amount. So, that was £800,000, so we take £200,000 off the lump sum allowance, so that takes that down to £112,500. And they've still got £800,000 odd of lump sum of death benefit allowance available.

So, they go to take the second arrangement, the £800,000 with standard PCLS protection. Now with standard PCLS protection, so we're now back to the permitted maximums. 25% of the amount of the commencement payment, well, that's £200,000, remaining lump sum and death benefit allowance – plenty to cover that – remaining lump sum allowance is £112,500, so we wouldn't have sufficient, would be restricted to £112,500.

Do it the other way around – take the non-protected first – then we take the £200,000. £200,000 is reduced from allowances – £112,500 and £1,050,000. We go then to take the protected PCLS. The first question is, is there remaining lump sum allowance? Yes, there is, there’s £112,500. Is there a sufficient lump sum and death benefit allowance? Yes, there's a million pounds. Okay, I can pay the £400,000. So, you can see from that example, £600,000 doing it that way – £512,500.

Now, just to say, I don't think you need to remember all of this. But what you need to think, and it's a recurring theme here, you're looking at the first relevant benefit crystallisation event in the new tax year. There are flags. I need to think about the order I need to do things. Do I need to get a certificate? If I've got protected, non-protected, do I need to think about the order in which I do things?

Tom Dickerson: Exactly, as you say, you highlight the importance there of nearly £90,000 pounds difference with a pot of £800,000. So, I guess it's just getting your head around, as you say, the order to do things and go from there.

The overseas transfer allowance (31:44)

So, Paul, correct me if I'm wrong, out of the three allowances we discussed at the start of the session, I think that's two that we've covered. The final one is the overseas transfer allowance. So, can we just briefly explain how that works?

Paul Squirrell: Well, it's good news, Tom, as it's not as complicated as the other two, you'll be pleased to hear! Essentially, this replaces, for anyone that remembers, the old BCE 8 legislation. In a sense, the starting overseas transfer allowance will be the same as your lump sum and death benefit allowance at the start. So, if you have had previous LTA events, it would reduce your starting overseas transfer allowance. If you haven't, you haven't got protection, it's £1,073,100. And it's simply a case, if you want to transfer benefits overseas to a QROPS – and, of course, it is only QROPS because if you transfer to anything else it’s an unauthorised payment – if you want to transfer a QROPS, you can transfer anything up to your remaining overseas and transfer allowance and there'll be no charge for doing so. Exceed it, and just like it was under the old regime, and anything in excess of that will be chargeable at 25%.

Tom Dickerson: Thankfully, Paul, as you said, that does appear slightly easier to understand. So, thank you for that.

The new legislation and accessing benefits (33:01)

I've been reading a few articles and having conversations around the actual concept of potentially advising clients not to access benefits until HMRC brought out this new legislation. Can we touch on what that's all about?

Paul Squirrell: Yes, for anyone's interest, pension schemes newsletter 158, from memory, listed a number of areas from HMRC where they acknowledged – unless anything's changed in the last 24 hours because I've been out and about – then there are a few things that need a little bit of clarity.

Currently, we talked about protected tax-free cash there and, in certain circumstances, unfortunately, the formula that HMRC have come out with in order to calculate your PCLS, or protected PCLS, doesn't work. So, you might come to a provider who says, actually, we can't pay that at the moment because of the calculations, we're waiting for updated legislation from HMRC. There is a little bit of an issue around certain death benefits, where they were previously crystallised, because, even though we said that they aren't tested, the legislation was written in a way that it still falls under permitted maximums so you might find a little bit of delay in all of these cases. HMRC is saying if it causes hardship then to contact them.

The big ones, I think, the two big things definitely to be aware of. First of all, enhanced protection. If you've got a client with enhanced protection, the way the legislation has been written means that the legislation is written at scheme level, which then means, if you transfer, you would lose the enhanced protection. Now we're not expecting that to happen, and we're expecting that the Revenue would be sensible. But what I would say, they've acknowledged the mistake, they’ve said they're going to bring out legislation, you probably just want to hold fire for now if you’ve got someone in that situation. And also, if you've got a client with enhanced protection or primary protection and the value of their PCLS rights was greater than £375,000, again, there are some drafting errors with the legislation which means that you may have some difficulty accessing those benefits as well.

The final thing is, there is something around if you're trying to apply for a transitional tax-free amount certificate for individuals who have been taking benefits after 75, they may have some difficulty again. But hopefully, Tom, to be fair, the Revenue have had a few months to sort out 18 years’ worth of legislation and there was always going to be some snagging issues, let’s just hope we get these resolved sooner rather than later.

Potential further legislation changes under a new government (35:32)

Tom Dickerson: Thanks, Paul. When I've been having these conversations with advisers, and actually quite a popular question that came in beforehand is, this is great, this is the legislation change now, we've got an imminent general election coming up, and what do advisers do if, as expected, the government may change, and we have new people in power. What do we do there?

Paul Squirrell: Yes, this has come up. And then it wasn't helped because of certain comments that are made after the Spring Budget last year. But the rhetoric, I think it's fair to say, has somewhat changed since then, and it has been a lot quieter. I think, Tom, there's two things to say here. I think it's a bit of a red herring in many senses, because whether we have a change of government, we don't have a change of government, and I take your point what the likely outcome is, but whether we do or don't have a change of government, legislation will change. We've been sitting here for the last 40 minutes discussing changes that have happened over the last year. So, I think the danger is for advisers, and I get it and I get the fact that clients will be asking certain questions, but you can only ever advise on what is here in front of you right now.

We have to remember the policy intent for these changes, to keep people back in work, to stop people leaving the workforce, etc. Advisers’ suitability reports almost certainly will contain something that says my advice is based on current legislation that may be subject to change in the future. And I think that's the way we should base our advice on. So, base advice on what the legislation is.

And the final point is, whenever there's been changes, as we've just have been at pains to talk about, there are provisions, and there's things that we need to take into account. So, there's generally provisions with changes anyway.

Tom Dickerson: I guess, Paul, as you quite rightly say, with most of what we've actually discussed today, an adviser can only advise on today's legislation and, as you say, having a caveat in their report, and kind of covers that off. So, thank you, Paul.

Changes to ISAs (37:39)

Moving on from pensions, you may or might not be pleased to hear, but there are obviously other wrappers that advisers must utilise for their clients. In the Spring Budget there were talk of changes to ISAs, including the launch of a British ISA. Have these been finalised? It all seems to have gone a little bit quiet.

Paul Squirrell: It has gone quite because it's under consultation still, Tom. So, the UK ISA or British ISA, one of the same, but it's under consultation. The consultation period actually ends in about a month's time, the 6th June, I believe. So, we'll see what comes out of that, whether there is any new legislation or not. There were some changes that did come into effect from this year, such as you're now allowed to do multiple subscriptions of the same ISA type in the same tax year, with the exception of Lifetime ISAs and Junior ISAs. Partial transfers, current year ISAs. It’s permissible for certain new investment options with extended redemption periods, so it’ll be interesting to see if anything is launched on the back of that. Ages for cash ISAs or adult ISAs have now been harmonised. There used to be this loophole for those 16, 17-year-olds to have two ISA allowances, that's now gone, it's just down to one.

For me, we talked about what has changed or may change, but the important thing is what hasn't changed, Tom. It's a subscription, you can't carry it forward. It's not like your pensions annual allowance. You've got an allowance – you use it or you lose it.

Bonds versus collectives (39:12)

Tom Dickerson: Good piece of advice to finish on there. Just before we do finish, Paul, I don't think we can ignore the ongoing conversation that's been around bonds versus OEICs, bonds versus collectives, especially with the reducing CGT allowance. So, we've got four- or five-minutes left. But briefly, just what are your thoughts on this?

Paul Squirrell: Yes, it's an interesting one. I think the first thing to reiterate is that we just talked about pensions allowances at length there and the annual allowance, of course, is now up to £60,000. So, anyone under the age of 75 can pay in between £3,600 and £60,000 into a pension and get tax relief. And, as we said, there is no lifetime allowance tax charges, anyway. So, a really valuable allowance. £20,000 ISA allowance, we talked about use it or lose it. You start adding these allowances up for a couple, that's anywhere between £43,200 and £160,000 a year of allowances. So, over a five-year period, that's between £236,000 and £800,000 worth of allowances. They are valuable allowances. We need to make sure that capital remains available to continue to use those, so don't snooker yourself, in other words, don't do something to your money that means you can't use your allowances.

Beyond that, in the interest of time, I think it's not bonds versus collectives. It’s bonds or collectives. It's going to be client specific. There are areas where you're going to use bonds, your IHT planning, you're using a trust, such as a discretionary trust, you're not going to want a yielding asset. You're going to use offshore and onshore bonds. If the client, however, is investing money for themselves, I think what is important, very important, since the reduction of certain allowances, is to consider the most tax-efficient way of holding the investments. Now, in the past, a joint investment may have made sense, because over £12,000 of CGT allowances, £2,000 worth of dividend allowances, it made sense. But with those allowances withdrawing, is it time to reconsider how that asset is held? And does it make sense to switch it, especially, if you've got a basic rate taxpayer? Because, I will say this generally, if you've got a basic rate taxpayer and the individual is always going to pay tax at basic rate, now and in the future, collectives will come out the best place to hold your money. If you've got a client who is an additional rate taxpayer or a higher rate taxpayer and they will always stay at that rate of tax, then collectives will come out, probably, the best wrapper. Where the bonds fit in, particularly with onshore, is where they'll be paying a higher rate and they will drop down to basic rate, where an onshore bond may work. If it's going to be no tax, an offshore bond may work. So, I know that's sort of a bit of a whistlestop tour, but it’s really important, before we just think what wrapper should we use, it's how do we hold it? Yes?

Tom Dickerson: I was going say that the key takeaway from that, Paul, I took was there's no assumption. It's just because allowances are reducing and, as our advisers do, look at each client circumstance on an individual basis. So, Paul, that's fantastic. Thank you very much.

Key takeaways (42:22)

But you knew I was going to do this, but just before we do finish, Paul, there's been a hell of a lot of information to digest and take in there so can I just ask for your three key takeaways from what you said?

Paul Squirrell: Yes, sure. I think the first one is that we went through a lot of complicated legislation there when it comes to pensions. But, don't forget, the overriding thing is that that watermark is gone. The door is wide open for pension savings. It is the first place to save if you’re not going to take you money. So, use the allowances, even if pension savings means that you're not going to get PCLS, if you’re not going to pay more tax on the way out than you get tax free on the way in, it's the first port of call.

The second takeaway for me is, before you have your first relevant benefit crystallisation event, take a step back. Some of the things we said, is the client going to get over the lifetime allowance in total? If they are, let's think about certificates if we've got protected tax-free cash. So, it's use your money, first of all. Watermark has gone, save the money into pension. Secondly, before you take it, take a step back.

And the last one, as we just talked about, continue to use the allowances which includes the ISA. But if you're investing beyond that, it is fundamentally important to just consider the most tax-efficient way of investing your money.

Tom Dickerson: Paul, that was brilliant. Thank you very much, and that brings our session to a close, and it just leaves me to thank you once again, Paul, for your time today, and I hope everybody on the call found the session useful. We didn't get to answer every question, which I apologise for, but everyone that was asked, we will come back to you individually. For further details on the topics covered today, there's a lot of information and several articles within the technical hub on our website.

As I mentioned, right at the top of the session, your certificate of attendance will be emailed to you. And on that email, you'll be offered the chance to ask any further questions you may have and topics you would like covered in future webinars. That just leaves me to say thank you once again for your support of the platform, and for joining us this morning and enjoy the rest of your day. Thank you.