After the dust has settled following the government’s emergency budget announcement, many financial advisers are asking what the implications will be for their clients.

In the last four years the industry has had to cope with numerous changes to rules on annuitisation, tax, the retirement age and the introduction of NEST, which means advisers have had to adapt constantly to a highly fluid market.

And it appears we’ll have to adapt all over again. So is it still tax efficient to invest in a pension plan for a high income client? Will the tax free cash sum survive? And does the length of the proposed investment effect its tax efficiency?

In this live WebTV show, brought to you by Legal & General, we have not one but two renowned industry experts on pensions, John Moret – Director at Suffolk Life and Adrian Boulding - Pensions Strategy Director at Legal & General to explain what options are now on the table following the budget and answer your questions about how pensions continue to provide benefits for retirement for your high net worth clients.

John Moret and Adrian Boulding join us live online on Thursday 1st July at 2pm to discuss the ever changing pensions industry and how best you can advise your clients.

For more information visit www.legalandgeneral.com/pensions-retirement/

H: Jayne Constantinis, host

A: Adrian Boulding, Pensions strategy director, Legal & General

B: John Moret, Director, Suffolk Life

H: Hello and welcome to the Business Show, I’m Jayne Constantinis. Pensions seem to feature heavily in the news these days with seemingly endless changes to the rules around how we can save for retirement. Well of course that’s nothing new to anybody that’s been advising in the pension’s market for any length of time. Since “A” Day in 2006 there’s been continuing change in pensions’ regulations, which make it difficult for advisors to know what to recommend to clients. For example changes to the rules in annuitisation, tax changes, the change to the retirement age, and the introduction of the government national pension scheme, NEST, aimed at poorly paid savers. What you may ask will appear on the agenda for the Department of Work and Pensions next? Well in today’s broadcast we have not one but two renowned industry experts on pensions to explain what options may be on the table and to answer your questions about how pensions continue to provide benefits for retirement for your high net worth clients. I’m joined today by Mr SIPP himself, John Moret, director at Suffolk Life, and Adrian Boulding who is currently appointed to the government’s independent commission to review the National Employment Savings Trust, NEST. Adrian is also pensions’ strategy director at Legal & General. Welcome to both of you and Adrian let me just ask you first of all what are you up to on - or in the NEST as it were.

A: Well what we’re doing, we’ve been commissioned as an independent review team by the government to spend three months looking at the rules surrounding enrolment into workplace pensions schemes which start in 2012. So we’re going to take a short, hard look at those rules, we’re going to make sure that the right people are being automatically enrolled, that the right earnings are being taken into account for pensionable purposes, that we’ve got the correct processes in place for employers to make that happen. It’s all about trying to say in the current, constrained fiscal circumstances, are we still getting good value for the taxpayer for this, are we going to get good value for the individuals making their savings, are we placing a fair burden on the employers that are being asked to do that? And within that of course we are also looking at NEST which is the failsafe scheme that any employer can choose to designate as the scheme into which they automatically enrol people if they don’t already have a workplace pension scheme of their own

H: Sounds like you’re a busy man

A: It’s remarkably hard work yes, it’s been great fun

H: And of course we are live so if you’ve got a question for either of our guests then type it in the box on your screen and send it to us with your name of course, we’ll get through as many as we can during the course of the program. Coming up on today’s show we look in detail at the budget implications on helping you with your clients’ pensions and retirement planning. Investment vehicles and capital gains tax changes; and of course all your questions answered. So let’s begin if we may by looking back to the emergency budget, and I’d like to get a feel for your mood at the end of that – were you head in hands, this is a nightmare, it’s worse than we expected, or was it actually we can work with this?

B: I was pleasantly – I was going to say surprised but enthuses actually by what came out – particularly on pensions. There had been all sorts of speculation but I think what we saw in terms of proposals – not all directly in the budget but linked to the budget so the public and private sector pensions, and state pensions – all of that I think’s positive. Clearly there’s a very long way to go. As ever the devil will be in the detail, but particularly on annuitisation and also on pensions tax relief, I think there’s some really interesting proposals

H: What was your reaction Adrian?

A: Well I was very pleased with the way that the two halves of the coalition government have managed to sort of meld themselves together and come up with a sort of strong and coherent economic strategy. I think there’s a strong feeling of confidence in the nation, we’ve set a course and we’re going to pursue that course, you know, rigorously over the next five years. And I think you saw things like the bond market in particular, appreciating that and the yields on government gilt fell as a result of the safety that overseas investors in particular now attach to the British economy, as a result of that really very reassuring budget

H: Just to go back to your point though John about the obligation to annuitisation aged 75. Tell us a little bit more about what the implication of that is going to be and how it’s going to work in practice?

B: It’s early days. What we know is that the government have stated their intent to remove the requirement to purchase an annuity which currently – effectively – applies at age 75. I mean there are alternative structures but used by very few. And they put in place some transitional arrangements to cover individuals who would go through the age 75 barrier between now and April next year. What we don’t know at the moment is quite what they have in mind post-April next year. It’s a big, big subject. My hope would be that – and they do plan to do some limited consultation – my hope would be that we’d move to a structure which is simpler – which is fairer, and most importantly which is durable.

H: So not knowing – that puts advisors in a very difficult position isn’t it, know what recommendations to make to their clients?

A: I think – I think we’re optimistic, and I think I say that because it’s really quite interesting to look and see who this effects. On a narrow sense it effects the people at age 75, but actually there’s a much broader population which it effects which is people in their late ‘60s who want to sit in income drawdown and they want to set a long term investment strategy for their pension plan. Now hitherto they haven’t been able to do that. You can’t set a sensible long term investment strategy if you’ve got to cash up at age 75 and turn everything into an annuity at that point. So for those that want to remain invested in their sort of late ‘60s now, they can sit down with an advisor and say now we can plan a ten year plus horizon investment strategy, confident that that age 75 limit isn’t going to trip us up along the way down that road

H: Now is it still tax efficient for high net worth individuals to be investing in pensions?

A: Let me – let me slice that question and let’s look at – to date – let’s look at the 2010 / 2011 tax year first. We’re operating under the government’s anti-forestalling rules. The easy answer is yes within the low allowance people have been given. So depending upon your past contribution history you can either put £20,000 a year or £30,000 a year in, and get a full tax relief on that, and undoubtedly people should be making advantage of that facility. Beyond that it’s a more interesting question because beyond that you have the situation that contributions above that could, if you’re a high earner, be taxed twice. You could be taxed with down to just getting 20% tax relief on the way in and then taxed again on the way out, and the natural reaction amongst clients has been to say I will not be taxed twice; I do now want to make that pension contribution. In fact, it’s still tax efficient to do that, if you’ve got a long enough period of investment growth because it’s during that period of investment growth that your investment is growing tax free within the pension fund and it’s compounding, it is compound investment growth and the power of compound interest is so great that with enough investment period you can overcome being taxed at both ends

H: And how long is long?

A: And long, we’re talking, probably 15 years. If you’ve got at least 15 years in the pension fund then I would say even if you’re being taxed at both ends it’s still tax efficient to make that contribution

B: Yes Adrian has covered the situation up to April 2011. Situation gets – well becomes different post-2011 and the difficulty is right now we’re not sure just what that regime will be. The proposal is to do away with the high level of annual contribution limit at the moment at £255,000 and replace it with something around £30 /40 / 50,000. For anyone that’s in a position to contribute at those levels, assuming the tax regime isn’t changed then, as Adrian’s already said, it must make sense to contribute. What we don’t know is quite what will happen post-April 2011 to high earners, particularly those who will be paying tax at 50% and whether it will be to their advantage at that point to make pension contributions or indeed whether it would be advantageous to even make contributions in excess of whatever the annual allowance is, because there may still be some marginal benefit in doing that. So it – right now it’s a difficult one to answer, we really do need to see a little more in terms of what the government has got in mind, but you know alongside all of this one shouldn’t clearly ignore the fact that 25% of the fund, as things stand, will be tax-free, and that’s a huge benefit and a huge plus point for pensions

H: And what about somebody who’s got, you know when they’re at the point of doing that long term planning, an under-funded final salary scheme? Who might be worried about their employer’s prospects – what advice would you give to them?

A: That’s a very interesting group in that what happens to a lot of the final funded salaries scheme is the moment of danger is when the employer tips over the brink, and the actual point is the day the administrator turns up in the office and takes control and the insolvency event happens. From that point on the pension scheme is locked down and it will in time fall into the pension protection fund which is the safety net that the government have set up. Now that safety net covers nearly everybody. And I say that in the sense of what it will cover – it will cover 90% of the pension that is promised, up to a top limit in the region of £27 / 28,000 a year. It depends a little bit upon when you actually draw the pension. For most people that’s enough and that’s fine and that gives people the reassurance that if their employer were to fail then the promise made at that employer’s scheme will still hold good. But for the wealthy people with very large pensions promised in their firm, they could be expecting twice that and we are meeting some people where they are saying actually rather than see my employer fold and my pension disappear into the government safety net which has this maximum cap on it, they will take your transfer value out and they’ll move off typically into their own self-invested personal pension plan and take the money before their employer folds

B: Yes I would endorse that entirely and as a SIPP provider that we sort of see the other end of this, which is the transfers coming in, and about 2% of our SIPPS portfolio are represented by individuals who’ve got transfer values in excess of seven figures, and I think that’s the sort of area that we’re actually talking about here, and I think that we will as we see more and more DB schemes fall by the wayside, I think we will see more of this happening. But we’ve got to be clear, it’s a relatively small part of the overall population and there are lots of other reasons why advisors might be thinking about moving clients out of DB schemes aside from just the under-funding situation, for example if an individual wants to use draw down or there are particular reasons why a draw down’s attractive to them

H: We are live of course as I said a few moments ago, so if you’ve got specific questions for John and Adrian do send them in, put them in the box on your screen and send them to us with your name. In a moment we’re going to be talking about investments in capital gains tax

Break

H: So if you’ve just joined us we’re looking at how the recent emergency budget is going to affect your clients, and we’re going to think now about investments and capital gains. John I wanted to ask you about what the potential pitfalls are with capital gains on pension assets?

B: I don’t know that there’s necessarily pitfalls, I think the – what we saw in the budget was a much anticipated increase in the rate of tax from 18% to 28%. It wasn’t as high as some people feared. We actually saw in the run-up to the budget, in response to those fears, quite a spike in terms of interest, particularly in SIPPS involving property purchase. We saw a doubling of enquiries and completions in the run-up to the 22nd June, so there obviously are concerns, and there is also obviously interest in the actually sheltering those assets, particularly property as you can do within a SIPP from a capital gains tax charge that might otherwise apply

H: Anything to add on that Adrian about CGT?

A: Well I think the interesting thing is that this is actually the second rise in capital gains tax that we’ve seen. A very obvious rise this time that the tax rate has increased from 18% to 28% for a higher rate tax payer. The previous rise which Alistair Darling introduced was quite a complex rise where the tax rate itself fell but at the same time as reducing the tax rate he removed the taper provisions and the indexation provisions. When you delved inside the budget red book in 2007 what you saw was the treasury calculating an increase in CGT receipts, several billion pounds additional capital gains tax has been paid under Alistair Darling’s proposals, because those tapers and indexations were worth rather more than the reduction in CGT rate. So we’ve now seen two increases in capital gains tax on assets that are directly held like shares, you know trusts, a second property – increasing the relative attraction of investing your money in a pension plan where of course there’s no capital gains tax to pay

H: So this rise is more transparent. More to come you think?

B: On CGT? I wouldn’t rule anything out I guess at this stage. I’m not sure that they would go any further in the short term on this; it was obviously a political dimension to this because clearly there’s – the parties weren’t totally aligned so I think this is definitely a compromise

H: Let me ask you a very general question – how long is long term when it comes to financial planning?

A: I think you should be planning at ten years plus in terms of setting out investment variety, so if you’re saying I want to invest in equities then you’ve got to ride out complete economic cycles and you’ve got to be investing into shares or funds or investment themes that you think will play over that sort of length of duration. So that if you like is all an asset allocation-type answer to it. If you look at it back in the – the liability side in terms of looking at an individual’s circumstances, I think long could be whole of life. I think an advisor can sit down today with a client and there’s stuff that’s available to help them and say let’s plan out the rest of your life in a financial sort of scene, and that really does help people to understand the cash flows, to understand when in their life are they going to be in surpluses, have they built up enough surplus for the draw down years, have they saved too much? And in many cases they actually see when they do a life-long plan they’ve saved too much already and they need to be thinking about how to de-cumulate it, when is the right time to be giving the money away, you know to their sons and daughters, and those sorts of issues

H: And that of course leads us neatly onto end – the very end of life and thoughts about inheritance tax. No changes in the budget, but what are your thoughts on planning for the – you know what you’re going to leave behind in order to maximise tax efficiencies?

B: I think the current regime clearly has disadvantages IHT-wise for anyone above age 75 where we have – at the moment – very penal tax regime. We can but wait and see what comes out of the consultation on age 75 as we’ve talked about but I would hope that as part of the review we will move to a sensible and equitable treatment of death benefits within a pension scheme, so it isn’t – or it’s no longer a lottery in terms of the tax implications. The lottery being about when you die

H: So live as long as you can is your basic advice?

B: Well I think the other point of course is that as we know life expectancy is rocketing away, and just as Adrian was saying – I mean I’ve always talked in terms of SIPPS being cradle to grave pension solution. The cradle end we’ve been able to deal with for some time now, what’s been missing is the graveyard end if you like, but I think the prospect is, with the removal of annuity compulsion, that we will have a true cradle to grave pension solution in a SIPP

H: And what about you Adrian, apart from keep eating your five fruit and veg a day?

A: I think – I think what John’s saying is going to become increasingly important to look at the sort of survivorship issue within a pension and look at them at the same time as the rest of your assets, so we’re going to get some new rules, we don’t know exactly what they’re going to be, we’re going to get some new rules which will enable people to remain invested in a pension for longer, and so there will be something in that pension plan leftover at the end to leave to your heirs. You’ve got then to look at that in conjunction with the rest of your assets, you know where there’s a variety of a sort of IHT planning scheme that advisors have at their fingertips that they can help clients with. And of course giving away – there’s no substitute for giving away – because once you’ve given it away and the magic seven year period has expired, it’s out of the estate and it’s safely got

H: That’s what all children say to their parents anyway and grandparents. Fantastic. And coming up in the final part of the show, our two guests will be answering your questions

Break

H: So if you’ve just joined us we’re looking at the emergency budget’s implications on your clients’ financial planning arrangements, and since we’ve been on air we’ve had a number of questions in, so let’s tackle those now. George has sent a question in – “if aim shares are held in a self-invested personal pension do they become exempt from inheritance tax after being held for two years, as they’re outside of a wrapper?”

B: I think aim shares in the context of SIPPS are treated no differently IHT from other assets, so the only area where potentially at the moment there would be a disadvantage as far as I can see is if anyone above age 75 where the tax treatment IHT-wise can be quite penal. Otherwise I think the position IHT-wise on aim shares is neutral

A: Yes I think so John, I think it’s also a “watch this space” answer and these are the fine details which we need to come out of the age 75 review, in that as well as saying the government are going to abolish the requirement to annuitisation age 75, they’ve got to define quite closely what happens to the money after age 75 when you die. Now at the moment as John says there’s some really quite penal treatment, I think the public are shocked to hear that you can lose 82% of your pension if at the moment you die after age 75 and you’re sat in an unsecured pension vehicle. You know that’s why the government have said that’s not acceptable, we’re going to change that – exactly what they’re going to change it to, well we’re all having a consultation about it, let’s hope we get something workable

H: Yes

B: Yes. One of the hopes is it may be possible to transfer pension assets to the next generation. From one pension to another which at the moment you’re not able to do and I think that’s the sort of area where there could be some quite interesting developments

H: I mean Osbourne’s talked about simplifying the whole process. Is that possible? And who will be penalised if it’s oversimplified?

B: I think we have already seen with the announcements, aside from the annuitisation issue, when the proposals around tax relief on pensions which is a move away from this horrible regime that we have at the moment with anti- forestalling and what have you to a new regime post-2011 where at the moment they’re talking about an annual allowance in the region of £30-45,000. My hope would be it would be nearer 45 than 30 because otherwise I think a lot of people would be penalised. But that’s one area where they could make I think quite quickly some rapid in-roads into the complexities that we’ve got right now. They’ve also talked about having to look at lifetime allowance which is another area which has led to all sorts of confusion and complexity

H: Sabuey has sent a question in – “what do you think about the government raising the state pension age?” Obviously you gentlemen are far, far away from that but what impact might it have on people in terms of their financial planning?

A: Well I think it needs to be done. Not actually for the reasons the government are asking, the government is saying it needs to be raised because people are living longer and so they’re suggesting you need to work another year, 65 to 66 because in 20 years’ time you’ll live another year from 85 to 86. People don’t think that far ahead, I don’t think that’s going to be the convincing argument. The convincing argument for me is that this country is bust. We’ve got colossal levels of debt both at the state level and at corporate level and at individual level and when you’ve got an awful lot of debt the only thing you can do is you’ve got to work harder and longer to get yourself out of debt. That’s why I think the state pension age needs to rise, so that more of us stay in work for longer to pay off the debts that we’ve all got

H: You’re echoing that – your eyebrow’s going up and down!

B: Absolutely there is no question and in my view the proposals at the moment don’t go far enough. I mean I just think if I looked at what’s happening to life expectancy and the rate of increase and you look at the proposals in terms of increase in state pension age there’s still a big gap, and somehow that gap’s got to be closed for the reasons Adrian’s advised

H: Steve has sent a question in – “with interest rates so low and the FTSE hardly rocketing, now probably is a really good time to push pension products. Do you think prospective clients recognise the current context?” It sounds as if Steve is an advisor himself. What are your thoughts? Clients recognise the context that it’s a good time?

B: I think financially they may well recognise it. I think there is an issue with just the work pension for a lot of people and there’s a need to rebuild trust in pensions and pension savings, and a lot of that will be dependent on what comes out of some of the consultations post-budget. But I think there is still a huge sway of the population, particularly the wealthier end who would prefer to save in a property and dismiss pensions, and I think that’s a worry when one looks at what’s happened to property in recent years

A: I like Steve’s point about it being a good time because there are a lot of companies on the stock market that are still at very low valuations, very attractive, as we trade through the recovery and as we come out the other side we can expect to see share prices rise, and where better than a pension to shelter that money because you won’t pay capital gains tax on that future increase n the share prices

H: But that used to be the perception but as you say that’s been rocked, the very foundations of that reliance and trust in pensions was rocked wasn’t it?

B: It was indeed and we have to find a way of rebuilding that. The SIPP is an ideal vehicle in a way because it’s a wrap around a block of investments n the same way an ISA is a wrap of a block investment. ISAs have the confidence of investors, it would appear, why should pensions or SIPPS be any different? But there’s a job to be done

H: Perhaps it’s – it’s a word isn’t it, it’s the terminology. Excuse me. And let me just take one final question I think. “As an advisor should I be recommending specific investment funds or is it better to use a multi-manager fund to pick and choose for me?” Adrian what are your thoughts on that?

A: I think if you look at what the multi-manager fund does, the multimanager fund can rebalance on a daily basis because the manager there will be watching the different markets, seeing which ones are up, which ones are down and markets are so volatile at the moment those buying and selling opportunities come and go very quickly and a multi-manager approach can do that whereas an IFA will be out on business and so not able to do that. On the other hand if the IFA wants to sit down with a client and set some long term investment strategies, agreeing that we’re going to put this chunk in UK equities and this chunk in US equities and this chunk into emerging markets, then you can set that in stone using some funds or using some index trackers and say there’s the bedrock of the portfolio and that doesn’t need to move because that’s a long-term investment approach. So there’s pros and cons for both sides

B: Yes I’d agree entirely. I’d just add that with our SIPPS a high proportion, probably close to 50% of the assets are actually managed by discretionary managers. This is where clients are using those investment managers perhaps to slightly diversify into direct equities or maybe going into one or two other areas. I really think in this context it genuinely is horses for courses

H: Horses for courses. On that note we have to end I’m afraid we’re out of time. Thank you both very much indeed and thank you for sending in those questions. If you’d like further advice on pensions or other investments then go to legalandgeneral.com/advisorcentre. Thank you for watching, see you again soon. Bye bye