Paul Campion, wealth planner, Succession Wealth, peers through the financial planning lens to highlight some of the technical areas where he believes that change might impact upon financial planning decisions in 2020
As 2019 comes to an end, it brings us to a time when we pause and look ahead to what the New Year might bring in terms of changes to important areas such as pensions amongst others. Whilst our primary focus remains on delivering the financial planning service to support our clients’ needs and to help them meet their goals, we still need to consider those technical changes which might impact on recommendations to support the fulfilment of those goals in practice and for the broader practice of financial planning across the UK.
Defined Benefit Schemes under pressure
It seems likely that in 2020, the pressure on the funding position of Defined Benefit (DB) schemes will remain. With continuing and persistent pressure on the high street and beyond, in addition to business woes being exacerbated by the uncertainty surrounding Brexit, we are likely to see more schemes enter the Pension Protection Fund (PPF). As a result, we should expect the glut of associated negative headlines.
This will create advice needs for clients and the inevitable conversations around the suitability of pension transfers. In turn, this will lead to increased regulatory scrutiny and a further shrinking of availability of Defined Benefit (DB) transfer specialists. Most importantly, consumers might just want reassurance that, for most, as a last resort, the PPF is not that bad.
For scheme trustees, I foresee a greater number of questions being asked of them by their members regarding the underlying investments with respect to environment, social or governance factors. This is clearly also on The Pensions Regulator’s radar. Inevitably, with time, we will see a shifting of some of the underlying securities so, polluters and those with questionable labour policies, beware. I cannot imagine it would ever be suitable to transfer someone from a DB scheme because of its questionable investment practices, but imagine if Greta Thunberg had a DB scheme where one of its major holdings was an oil giant? These are relatively new issues for our sector.
Greater focus on ESG investing
Coupled with the increasing pressure on DB trustees, clients will be asking for more environmental, social and governance (ESG) investments or socially responsible investments (SRI. I also believe that they will become increasingly aware of Greenwashing – when companies, financial planners or fund managers create a false impression or provides misleading information about its environmental credentials. Looking at the ESG investment options available from the investment industry, there are relatively slim pickings at present. This is particularly so in the case of those planning practices which believe in a passive or single multi-asset fund type approach and want a minimum three-year track record.
We need more products coming to market which are focused on multi-asset and/or passive investments with an ESG/SRI element. Interestingly, the DFMs which offer model portfolios via platforms seem better prepared for this than their multi-asset fund counterparts.
The Annual Allowance effect
The Annual Allowance (plus the Lifetime Allowance) is really starting to bite for NHS employees and, politically, the current situation is unpalatable – not least because of the high regard with which we hold the NHS. However, planners (and the Treasury) must not forget that the likes of teachers and fire fighters are equally as affected. I think we are certainly going to see change here, but will it just be within the NHS scheme?
How many potential clients are inadvertently not paying their Annual Allowance tax charge? When is HMRC going to catch up with this group? I believe that we are likely to see HMRC making enquiries, because, after all, it holds all the data (tax returns, income and scheme reporting).
Political uncertainty abounds
Whilst this article was written before the general election, what we know for sure is that we know nothing for sure. Pension tax relief is a gift to the high earners, and because the more left-of-centre parties view this as an inequitable benefit, we could, therefore, see further tightening of the Annual Allowance or even Lifetime Allowance which will be accompanied by the inevitably complicated transitional rules. We may see a continuation of the move away from tax relief to bonuses such as those with which we are already familiar as a result of the Lifetime ISA (LISA). Of course, this could exacerbate difficulties for groups of workers such as NHS workers and teaching professionals.
As a result of the changes that began to emerge in 2006, money purchase pensions have now become extraordinarily tax advantageous within their caps. Coupled with their almost unintentional beneficial inheritance tax consequences, I foresee more changes to pensions that apply post-age 75. This could take the form of a lifetime allowance test or inheritance tax charge on death post age 75. The IHT attractiveness of pensions coupled with tax relief on the way into the pension is notably different from other tax wrappers.
The need for proper financial planning
It is getting more complicated for Joe Public to select the right tax wrapper; long gone are the days when there was only one type of ISA. If you look at any of the internet consumer forums, you can see the conversations taking place and witness the inevitable confusion consumers have when trying to compare LISAs, ISAs and pensions. So many consumers are asking what’s best for them when, in reality, we know it is not a simple question to answer and that the outcome is very often a hybrid solution; they stand little chance of making the right decision using Facebook or any similar online forum.
Consumers are then further confused in the decumulation phase. This is because in many cases, it is better to initially draw a pension income from an ISA than it is to take a pension! Perversely and confusingly for them, is that their retirement income comes from an ISA and not a pension. This is unlikely to have been their expectation when they took out their pension in the first place.
The need for proper planning only grows as legislation and tax wrappers change and become more confusing. It is an interesting and rewarding time to be work in the financial planning profession.
No article which attempts to predict the future is complete without reference to the millennials who, for well-established reasons, are rarely fully and properly serviced by the financial planning community and this who are taking to the internet for advice and to arrange their own affairs. Larger financial planning businesses, particularly those with graduate schemes, should be helping this growing market because they are our future potential clients. Also, profit pressure is eased as servicing costs can be minimised through utilising technology more effectively.
The LISA has now really grown up and public awareness has increased considerably but it is confusing and remains misunderstood, particularly by those already on the property ladder. Martin Lewis has just launched a campaign to highlight the necessity to open a LISA prior to the age of 40 even if someone puts virtually no money in it. For those advising parents of children who are younger than 40 years old, it would be wise to advise them to consider the LISA and of course, they need to know that the LISA cannot be taken out after the age of 40 (but can continue to be funded after that age).
Like every year before it, 2020 promises to be an interesting year and I am sure there will be plenty of surprises in store.
About Paul Campion
Paul is both a Chartered and Certified Financial Planner® and a Fellow member of the PFS and CISI.
Paul’s client-orientated approach stems from the rigid belief and strong foundations that no product recommendation should be made without looking at everything, understanding everything and ideally having a robust financial plan. This approach has put him in a good position with his clients and future-proofed his career for the inevitable rising of the regulatory bar.
Paul’s comments: “When I decided to be an IFA after graduating, I had little idea of what was to come. However, having sat many exams and run countless client meetings I now know, as a financial planning professional, that I firmly believe I have one of the most rewarding jobs possible, and that as planners we add immeasurable benefits to our clients’ lives.”