Publication: Professional Pensions
Publication Date: 18/03/15

Budget 2015: Osborne launches consultation on secondary annuity market

Chancellor George Osborne has launched a consultation on extending pensions freedoms to pensioners who have already bought annuities.

The paper, published alongside the Budget today, sets out the government's plans to give more than 5 million people the chance to cash in their annuities.

It invites views on how a secondary annuity market could work in reality as well as how to ensure pensioners get the right guidance and advice.

Osborne said while an annuity is the right product for many people, for some it makes sense to access their annuity now.

The government proposes to allow individuals to sell their annuities for lump sum cash, flexi-access drawdown fund or a flexible annuity. Annuity holders that assign to a third party the right to their annuity payments will get the £10,000 annual allowance that applied to defined contribution from this April.

There are concerns from industry participants over how such a market will work in practice, however.

The government believes annuity providers, third party purchasers, and intermediaries will allow the development of a "strong market" for secondary annuities. This market will allow annuity holders to assign to a third party the right to their annuity payments. The Treasury also admitted that the market could fail to come to fruition if buyers were unable to price the risk of such purchases correctly.

The government said it will work with the Financial Conduct Authority to ensure there are safeguards to ensure people have the information needed to decide whether to sell. It is considering potential safeguards such as a requirement to take financial advice, an offer of guidance; and regulatory interventions such as risk warnings.

The move is one of four steps the government will undertake to create a savings revolution. There are warnings that many people may expect an unrealistic price for their annuities on the secondary market. A survey by Portal Financial has found that two-thirds of people consider 90% to be the minimum percentage of an annuity's true value that they would accept if they chose to sell it.

Mercer principal Mark Rowlands questioned the value of the government's move as he believes it brings risks.

He said: "We may see people prioritising short term issues, such as, paying off a loan rather than securing their financial future. People typically underestimate their life expectancy by around 5 years, people risk trading their long term financial security for an immediate 1 off payment. No one knows how this market would function and what value the consumer will receive, it is hugely risky."

Managing Partners Limited chief executive officer Jeremy Leach said tax treatment will still need to be clarified. He said: "For example, how will the capital gain for annuitants be taxed and how will the income streams for the new beneficiaries be treated given it will be less than the price paid for some time? Regulators will also have to draft new rules to cover transferability rules."

As the Budget was announced today the government revealed it could save £835m in 2016-2017 from the pension changes.

Publication: IFA Magazine
Publication Date: 18/03/15

Budget 2015

A selection of comments and views on the 2015 Budget coming into the IFA Magazine news desk:

Jeremy Leach, Chief Executive Officer of Managing Partners Limited, which manages a number of funds that invest in insurance linked securities, commented: "This initiative is long overdue given that interest – and therefore annuity – rates have been at all-time lows for a record time. It is a fantastic opportunity for those who bought an annuity when it was not their preferred route to seek financial alternatives that are more suitable to their circumstances, including the paying down of debt. "Annuity sellers could get significant value but a lot will depend on age and health factors. There will be a lot of people who will not be able to achieve the value they want from selling their annuities.

"Tax treatment will need to be clarified. For example, how will the capital gain for annuitants be taxed and how will the income streams for the new beneficiaries be treated given it will be less than the price paid for some time? Regulators will also have to draft new rules to cover transferability rules.

"For many annuity sellers it will be a complicated process though and therefore there will be significantly more demand for financial advice."

Cash-rich Asian Companies Will Drive Equities Higher in 2013

Cash-rich Asian companies will be among those corporations with healthy balance sheets driving global stockmarkets higher through acquisitions in 2013, according to Managing Partners Limited, the boutique fund management company.

On an historical basis, M&A activity is extremely cheap to finance because interest rates are so low, says Jeremy Leach, managing Director of MPL. He commented: “In the 1990s the cost of debt was 10%-plus but it can be done for a fraction of that now, so it is cheaper to raise money with debt rather than raise equity. It is far better issuing some sort of convertible debt and allowing conversion when the share price has gone up.

“Leading Asian businesses are also likely to lead the way with acquisitions in Europe because they are so cash-rich and Europe is so cheap. We could quite easily see a situation where one of the leading bank brands in Europe is acquired by an Asian bank because it has the purse strings to do it.”

Key factors supporting takeover activity, especially from Asia firms, include:

  • In the first three months of 2012, National Oil Companies (NOCs) were involved as buyers in 25 oil and gas transactions with a combined value of US$12.4bn. The most active deal-makers in the first quarter of 2012 were NOCs from Asia and Russia. Recent years have witnessed the Asian NOCs’ international pursuit of production and reserves to meet aggressive supply targets. Most deals announced by Russian NOCs focused on the acquisition of stakes in independent domestic oil and gas companies or regional partnerships to help develop domestic oil and gas reserves
  • Global sourcing and distribution multinational Li & Fung Limited has said it will accelerate its acquisitions in 2013 on the back of continued strong profits. At a recent conference in Hong Kong, William Fung, Chairman of Li & Fung, stated “As the company’s organic growth is virtually zero due to the sluggish market demand in the European and US market, we have to make more acquisition in order to push up the core operating profit performance. Amid the current global economic slowdown, we can find more attractive acquisition targets by paying much cheaper prices. Those European and Asian region focused companies and those health & beauty product providers will be our main priorities for acquisitions.”
  • SABIC, the Saudi Basic Industries Corp., which acquired US' GE Plastics for $11.6bn five years ago, has indicated that it now has appetite to making further significant acquisitions in a bid to become the largest chemicals producer in the world. SABIC is fairly typical of large Middle Eastern companies that see the need to expand outside the Middle East because the continued impact of the Arab Spring has destabilised the growth of Arab markets and is likely to do so for some time to come
  • With the discounted value of many UK and European banks, many are prime for acquisitions by the Asian heavyweights and the timing would appear to be ideal as conservative lending margins (typically 4% above base) have never been more profitable for banks than they are today. Their only restriction is capitalisation, which many wealthy Asian banks could easily deliver to the ailing balance sheets of UK and European lenders

Mr Leach says a wall of cash is waiting to enter the equities market: “The longer the recession goes on for the longer the more dramatic the bounce will be. When it happens we will see a period of sustained recovery that produces better financial results, more trade of equities and more M&As.”

However, Mr Leach does believe Europe will continue to struggle: “Europe has a long journey ahead of it. Austerity can work in a country such as Spain, which has its own economy but Greece has a fabricated economy, with most people working for a government that has no money. It just isn’t feasible that Greece will ever be able to repay its debts.

“There is considerable debate now across Europe and not just in the UK about the amounts that have to be contributed to the EU. We are still likely to see at least one exit from the EU. It is inevitable that Greece will leave but we might also see a significant contributor to the budget depart, which will have long term consequences for the union.”

Mr Leach believes that while there will clearly be a number of corporate casualties resulting from Greece’s departure and some banks will see major corrections in their balance sheets, in general there will be more relief that the inevitable point has been reached.

Is your Swiss bank account UK tax compliant?

Following the signing of the UK-Swiss tax agreement in October 2012, Swiss banks are currently writing letters to all account holders who have a connection with the UK. Letters are also being sent to those considered to be "relevant persons" in respect of trusts and foundations that hold Swiss accounts (settlors and beneficiaries would be regarded as "relevant persons").

The letters provide the account holders with two options:

  1. To authorise the Swiss bank to provide details of assets held by the account holder to HMRC, plus future income and gains received; or
  2. To retain their anonymity but accept a one-off charge plus withholding taxes on future income and gains (this does not mean that this regularises the taxpayer’s tax affairs for prior years).

For those persons who are resident in the UK but not domiciled and claiming the remittance basis, a letter will need to be provided to the bank confirming their status. The letter needs to be signed by an appropriately qualified tax adviser. This will be an annual requirement as the remittance basis claim is an annual election.

Even if the account holder has declared and paid all tax on overseas income and gains and complied fully with their UK tax obligations, the letters must be addressed and full information must be provided in response to the letter before the deadline set by the bank.

The onus will be on the individual to contact the bank, if they have not been contacted by the bank (e.g. due to change of address). Whilst some banks will attempt to follow up on the reason for no response, others will apply a default system whereby a failure to respond will result in the one-off charge followed by on-going withholding taxes being debited from accounts.

For individuals who have historically complied with their UK tax obligations and continue to do so, the procedure for response should be relatively straightforward. If, however, this is not the case then other options need to be considered in a relatively short timeframe.

One option would be to consider making a disclosure under the Lichtenstein Disclosure Facility (LDF), which offers generous terms particularly with penalties for non-compliance.

For further information regarding the Swiss Agreement and options available under the Lichtenstein Disclosure Facility please refer to our LDF and UK Swiss Tax Agreement Report.

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