With the tax year end fast approaching, it would be remiss of this column to ignore looming changes – and potential changes – to the pensions system.
A recap, first, on what we know for (almost) certain. From April 6 this year, anyone with income over £110,000 will face new restrictions on how much they can save into a pension tax-free each year. The annual allowance will be reduced for those with adjusted earnings of more than £150,000, as shown in Graph 1. The way this works is that the annual allowance of £40,000 will be reduced by £1 for every £2 of adjusted income, down to a floor of £10,000 a year. A client with an adjusted income of £180,000 will find their allowance reduced by £15,000 to £25,000.
To find their adjusted income, clients have to add any pension contributions deducted from gross income, then add P11D-style benefits, which can be particularly tricky for clients accruing final salary pension benefits. They will need to request the information from their employer, so fiendishly difficult would the calculation be.
In case this seems relatively straightforward, there is an added complication in the form of an exemption from this regime for those with an unadjusted income of less than £110,000. This unadjusted income does not include pension contributions, but does include salary sacrifice arrangements from 9 July, 2015 onwards.
The good news is that unused annual allowances can still be used as usual – but from 6 April onwards, the unused allowance will be calculated using the new rules. For those clients who are affected by the change in rules, there may be instances where they benefit from making additional contributions before this tax year end. As usual it is quite fiddly and a fair amount of detail is required for any individual to understand the best course of action. To make matters worse, the lifetime allowance is changing too (for more details about this, see this month’s Tax Spotlight column on page 35).
So that is what we know. But what about the known unknowns? The whispers emanating from Downing Street are that Chancellor George Osborne is planning on doing away with the pensions tax system all together. His vision is of an end to income tax relief on pension contributions in favour of tax relief on benefits in retirement; a vision that would eradicate the pensions industry as we know it and confine pension savings products to glorified Isas.
Alternatively, a flat rate ‘savings incentive’ may be introduced, which would slash the benefit of pension contributions to higher-rate tax payers. How a new regime would be interwoven with the existing regime is far from clear. If the tax-free regime were switched from accumulation to decumulation, we would end up with twin regimes; vast legions of clients with two-tier retirement savings pots, some of which would be taxable in retirement, some not.
The incentive for all this upheaval is clear; Mr Osborne wants his taxes now, not later, even though – as this column previously calculated – both the public purse and the client in question are likely to be worse off in the long-run. All eyes are on the budget on 16 March for the latest instalment in the never-ending saga of tinkering with the tax system.
Asset management review
Meanwhile, across London in Canary Wharf, the FCA has embarked on a market study of the asset management industry and employee benefit consultants. This was announced in November, and the regulator is currently busily collecting information and views from related industry participants. There are three main questions it is looking to answer: “How do asset managers compete to deliver value?”; “Are asset managers willing and able to control costs and quality along the value chain?”; and, “How do investment consultants affect competition for institutional asset management?”
Why is the FCA doing this? The document it has issued to explain the study suggests its main motivation comes from concerns that the industry is suffering from barriers to competition, which may have the consequence that retail and institutional investor alike are not getting value for money.
The document goes on to add that, while it is the institutional asset management sector that has prompted the review, the issues are likely to be equally relevant for the retail sector. This all seems to stem from concerns over conflicts of interest among institutional pension consulting firms, many of which have developed asset management services for their clients.
Indeed, the review itself mentions that “three large groups share a high proportion of the UK pension consulting market”, and refers to “fiduciary management” services, which is the term used by asset managers and consultants who provide a whole-portfolio discretionary investment management service to occupational pension schemes.
The fact that consultants and asset managers are both equally active in this market – and actively competing with each other – is partly what has piqued the interest of the FCA. But the issues under investigation are not confined to the institutional market. Retail platforms are on the radar too, as is the general question, “How do investors choose between asset managers?”
The review asks whether investors able to access the right information in order to make informed choices, find the best products for their needs and act on this information to get the best value product for them.
In many ways this study is a much belated follow-up to the RDR. While that attempted to clean up the advisory industry by changing the rules concerning fees and commissions, there is clearly still a lingering doubt in the minds of FCA officials as to the effectiveness of the advisory industry generally. Are clients, whether companies or individuals, making sensible decisions about products and services or, rather, are consultants giving them the right sort of help?
The study is in its infancy, but it should make pension advisers think about how they recommend asset management products and services. This is not about suitability, which the FCA has already robustly explored, but how one product is compared with another.
Compared with consumer insurance and banking products, where the customer can easily access directly comparable information through online supermarkets, asset management remains an opaque and complicated industry. And opacity, in the eyes of the regulator, is not positive for consumers.
Whether the FCA can work out how to improve this is another question entirely.
Bob Campion is head of institutional business at Charles Stanley Pan Asset Capital Management
