Five key retirement issues

M&G's Technical Development Director Julian Hince & Investment Specialist Maria Municchi look at some of the key issues to be overcome when planning for retirement.

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Osborne secures deals on 30% cuts as DWP digs in

Chancellor George Osborne is set to announce four government departments have agreed to cut their spending by an average of 30 per cent over the next four years.

The BBC reports the Treasury, transport, local government and environment departments have agreed provisional deals on cutting day-to-day spending ahead of the joint spending review and Autumn Statement on 25 November

Osborne has asked most Government departments to come up with savings of between 25 per cent and 40 per cent by the end of this parliament, with health and overseas aid budgets protected.

The Chancellor is expected to say later: “While debt is high, our economic security is in danger.

“No one knows what the next economic crisis to hit our world will be, or when it will come. But we know we haven’t abolished boom and bust.”

Osborne is seeking £12bn in welfare savings from the Department for Work and Pensions, but an agreement is yet to be reached.

Following the defeat in the House of Lords over working tax credits, he is looking for new ways to save £4bn.

But Work and Pensions secretary Iain Duncan Smith is said to be strongly resisting attempts to make universal credit less generous.

FCA starts collecting evidence on advice review

The FCA is to approach around 400 advice firms and providers as part of an exercise to gather data for the Financial Advice Market Review.

The process is expected to begin from Monday, and will involve groups including directly authorised advisers and networks, as well as banks and life insurers.

Questions will focus on the provision of advice for clients or customers seeking advice on retirement income, pensions or retail investments.

An FCA spokeswoman says the regulator will ask for information on the areas on which firms provide advice and firms’ relevant advice channels, charging structures, customer numbers and investable assets.

It will be looking for details of any issues around defined benefit to defined contribution transfers, firms’ future plans, use of technology, barriers to innovation, entering the advice market and expanding advice services, and liabilities and costs.

The exercise will be in addition to responses sent to the regulator as part of the broader FCA’s call for input on the FAMR, which is looking at the accessibility and affordability of advice.

Among other measures, it will include a consultation on a 15-year long-stop on liabilities for financial advisers.

The FAMR review is being jointly led by the FCA and the Treasury, and is expected to conclude ahead of next year’s Budget, although the regulator’s practitioner panel has warned against its “ambitious” timetable.

An FCA spokeswoman says: “This exercise will use more granular questions than were in the call for input to provide quantitative information. Firms involved can still participate in the call for input as well.”

Pensions: Reading the tea leaves…

Last week it was widely reported that The Chancellor, George Osborne, has signalled that there will be no announcements from him in response to the “Strengthening the Incentive to Save” consultation until the 2016 Spring Budget statement.

This continued uncertainty has left commentators sifting through the tea-leaves in an effort to reach a consensus of opinion as to what the eventual outcome for UK pensions will be. But for me there is at least one key pointer within the following exchange recorded in Hansard this week:

“Richard Graham (Gloucester) (Con): The coalition Government freed pensioners from mandatory annuities and encouraged saving through ISAs and auto-enrolment. However, tax relief on contributions to pensions is expensive and favours higher-rate taxpayers much more than others. Does my right hon. Friend agree that that is an area in which sensible reform could be considered, in order to help to balance the budget without disincentivising saving?

Mr Osborne: My hon. Friend is right to say that we have taken significant steps to encourage saving, not least by giving pensioners control over their pension pots in retirement and by trusting those who have saved all their lives with the money that they have earned and put aside. He is an expert in these matters, and he will know that we are open to consultation on the pensions taxation system at the moment. It is a completely open consultation and a genuine Green Paper, and we are receiving a lot of interesting suggestions on potential reform. We will respond to that consultation fully in the Budget.”

The key clue is not so much in The Chancellor’s response – more the source of the question.

Followers of our updates will note that this point was raised by a fellow Conservative MP, and it is therefore more than likely that the question was “on message” from the governments point of view. And given that Higher-Rate tax relief was highlighted in this question it would seem that this one component of the system is set for major reform. There may of course be greater change afoot as well – but employers would be well advised to at least notify their higher-earners of the possibility of a swift change to their pension’s tax relief position come 2016.

For more information on the consultation and likely outcomes, please speak to your usual Jelf consultant.

For the full original article and other similar posts please visit the Jelf Group blog

Pressure builds on Europe to delay Mifid II

European policymakers could push back the implementation deadline for Mifid II as concerns grow that firms will run out of time to comply.

The FCA is due to publish its Mifid II policy statement in June 2016, before the legislation comes into force in January 2017.

There are unresolved issues with Mifid II, including a requirement to disclose all charges relating to a product to investors upfront, a different independence definition and tougher inducement rules.

However, the FCA cannot start the consultation process until the European Commission publishes final technical standards.

Draft technical standards published by the European Securities and Markets Authority in September still have to be endorsed by the commission, a process that could take up to three months.

The commission has also yet to publish delegated acts – the detail underpinning the retail part of the legislation. These were due in July but are now not expected before the end of this month.

The FCA has said it will publish one consultation paper on markets issues in December, and another on conduct issues in March.

Cicero Brussels deputy head James Hughes says: “Everyone has been working towards the technical standards and delegated acts being finalised by the end of this year. That would give national regulators enough time to prepare their domestic consultations and the industry close to a year to get ready.

“However, it now looks pretty unlikely that we will have both completed by the end of this year.”

Wealth Management Association director of regulation Ian Cornwall says: “January 2017 would have been a tight deadline even if the delegated acts were published in July, but we have lost five months and it is almost impossible now. However, our advice to our members remains that they should plan for a January 2017 implementation date.”

MEPs are discussing whether the implementation could be delayed.

Hughes says: “We have spoken to a lot of MEPs and they have competing views on how easy it would be to introduce a delay. The FCA is certainly sympathetic to the fact the timetable is becoming increasingly condensed. If the deadline stays the same, the FCA could signal to firms that it will be lenient initially, provided firms can show they have made sufficient effort to comply.”

In a speech at the FCA’s Mifid II conference last month, FCA director of markets policy and international David Lawton said: “We are all too aware that the later it is we consult on, and finally publish, final rules, the less time it is for the industry to prepare and implement. Be assured, we are treading the line between getting things right and moving quickly, carefully.

“The ultimate deadline of January 2017 is universally recognised as challenging. For everyone. Regulators included.

“Even now that Esma has delivered the draft technical standards, it will be for the commission and co-legislators to make decisions about the European timetable, not for national competent authorities.”

Expert view: Mifid II shambles must be delayed

It is a racing certainty that the implementation date will be delayed. If you read David Lawton’s speech at the FCA’s Mifid II conference carefully, he is signalling as clearly as any official can that there is great uncertainty about the timetable.

Furthermore, in International Organization of Securities Commission circles they are talking about not just a 12-month delay but a delay of two or three years.

This is like Solvency II all over again, where the implementation date was eventually delayed by eight years. Frankly, it is a shambles. The European regulatory system is just too cumbersome.

It is very easy to draft the high-level stuff, but then you delegate to technical experts on how it will be implemented. And sometimes you discover that things don’t work in practice.

For example, the idea of having to disclose all product costs upfront is pretty stupid because for funds you only know the costs after the event. Regulators are straining so hard to achieve greater levels of consumer protection that sometimes it cannot be done.

To change the implementation date would require another piece of legislation, but we know it can be done because it has been done before. What the FCA was signalling at the conference was that we are out of time already.

The timetable was very tight 12 months ago; now we are staring down the barrel of a gun.

Richard Hobbs is an independent regulatory consultant

Six arrested over auto-enrol fraud allegations

Six people were arrested earlier today in Nottingham and Derby over allegations of fraud relating to automatic enrolment.

It is the first time anyone has been arrested for auto-enrolment fraud.

The arrests were part of a joint operation involving Derbyshire and Nottinghamshire Police, The Pensions Regulator and the Employment Agency Standards Inspectorate.

In Derby three men aged between 28 and 38 were arrested, while a 31-year-old woman was arrested after voluntarily attending a police station in the city.

A 35-year-old man was also arrested at a business in Nottingham city centre.

All the arrests were on suspicion of fraud and are part of an ongoing criminal investigation into allegations of wrongdoing relating to auto-enrolment of staff into workplace schemes and underpaying workers.

The Pensions Regulator declined to comment further.

Last week, TPR published the first figures showing the number of times employers have questioned the regulator’s auto-enrolment enforcement action.

There were 379 reviews of statutory notices handed out by the regulator for breaches of auto-enrolment duties up to September 2015.

Of these, 279 resulted in the notice being “revoked, substituted or varied”.

Scott Gallacher: Are you about to give your business away for free?

A retiring IFA recently sold his practice to a well-known national wealth manager. When it started undertaking its reviews of clients’ planning, one client was surprised enough to seek me out. I undertook my own review and concluded although his Isas and pensions (£450,000 overall) should be updated and refreshed, the basic structure was perfectly sound, flexible and appropriate: certainly no need for big changes or costs.

The incoming adviser, however, had different ideas. To start with, everything was to be moved to its preferred platform. I use various platforms but, in this case, I did not see how the change benefited the client. Next, the whole portfolio was to go into just one relatively untested fund. A good multi-asset, multi-manager fund can give a decent spread but diversification should mean more. One fund is still the creation of one investment committee.

But what really made the client’s eyebrows hit the ceiling were the charges: £500 for the review, £13,500 (3 per cent) for making the changes and then £4,500 (1 per cent) a year from then on. If you are going to charge a first-year fee of £18,000, you had better be delivering some truly world-class benefits. However, with very few discernible benefits in the advice, my dismaying conclusion was that, once again, a client was simply being taken advantage of.

But there is another intriguing point. Adviser firms typically sell for three times the annual income, so on £450,000 (assuming historic trail of 0.5 per cent) the retiring IFA might receive £6,750 for this client.

Presumably the IFA knew what was going to happen to his clients and so the question arises: if he thought it was acceptable for his clients to pay such high fees for these changes, why did he not do it himself? Not only would he double his £6,750 to an impressive £13,500 but he would also double his yearly earnings.

But he did not. Instead, he sold out in the knowledge the new owners would immediately scoop up £2 for every £1 he received. That means once they have paid the outgoing IFA his £1, the new owners have effectively been handed a free business. Why would any financially literate business owner do that?

My suspicion is that, like me, he did not really believe it was justified to exploit his clients like this and that is why he had never done it himself. The fact he then allowed it to happen under the new advisers could be for many reasons. Perhaps he had no other choice financially; perhaps he was pressed by family problems or ill-health. We will probably never know.

But we do know that being an IFA is all about trust and when we come to pass over the reins, we should honour the client’s trust by taking just as much care as we have done at every other stage.

I know balancing ethical duties and commercial realism is easier said than done but, at the very least, we owe it to our clients to pass them to somebody we trust in turn. Hopefully, that will be somewhere they will not be hurried into an entirely new model involving major costs. At least that way they would have breathing space to take stock.

Scott Gallacher is director of Rowley Turton