Technical news update 26/03/2019

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Taxation and trusts

• Help to buy schemes proving to be successful
• The FCA publishes two pieces of research looking at UK consumer attitudes to cryptoassets
• The disguised remuneration loan charge – HMRC letter
• Making tax digital – Government update
• Trust law reform in Scotland
• The reform of succession law in Scotland

Investment planning

• Indexation allowance and Retail Prices Index tables – basket review
• MSCI increases China weighting in emerging markets index
• January 2019 Investment Association statistics
• An end to the personal allowance?

Pensions

• FCA confirms increase in Financial Ombudsman Service award limit
• The single financial guidance body gets a name
• Life expectancy improvements

 

TAXATION AND TRUSTS

Help to buy schemes proving to be successful             

(FA5)

According to a news story published by HMRC almost half a million completions have taken place since 2013 using one or more of the Government’s Help to Buy schemes. What’s more, 430,000 of these completions were made by first-time buyers, who benefited from the £3,000 Government top up on their savings on Help to Buy ISAs. 

The quarterly Help to Buy statistics show that: 

• 494,108 completions have taken place using one or more Help to Buy schemes, over 93% of which took place outside of London; 

• the average house price purchased through the schemes is £202,815; 

• first-time buyers have now opened 1.4 million Help to Buy ISAs, offering Government bonuses of up to £3,000 on top of their savings.

It is evident that during recent years it has become increasingly more difficult for many to get onto the property ladder primarily due to the rapid increase in property prices. Despite this, the introduction of specific schemes/products for first-time home buyers, like the Help to Buy ISA, are, as the statistics show, proving to be successful in helping to combat the issue. 

The Help to Buy ISA scheme is due to be withdrawn for new entrants on 30 November 2019, after which point only existing Help to Buy ISA account holders will be able to continue saving into the scheme. Existing Help to Buy ISA account holders can continue saving into their account until 30 November 2029 and must claim the Government bonus by 1 December 2030. Considering its apparent success, it will be interesting to see if the Government announces an extension to the 30 November 2019 deadline for opening a Help to Buy ISA account. 

Source: Government news story entitled ‘almost half a million new keys exchanged with Help to Buy’ published 26 February 2019.

 

The FCA publishes two pieces of research looking at UK consumer attitudes to cryptoassets

(AF4, FA7, LP2, RO2) 

The Financial Conduct Authority (FCA) recently published research looking at UK consumer attitudes to cryptoassets, such as Bitcoin and Ether. The research includes qualitative interviews with UK consumers and a national survey.

It probably does not come as a huge surprise, but many consumers do not fully understand what they are purchasing when it comes to cryptoassets thereby indicating potential harm for such investors – those most aware of them are likely to be men aged between 20 and 44. 

Both the survey and qualitative research found that some cryptoasset owners made their purchases without completing any research beforehand.

 Those who were interviewed were basically looking for ways to ‘get rich quick’ and were mainly influenced by friends, acquaintances and social media. The FCA found that 73% of UK consumers that were surveyed didn’t know what a ‘cryptocurrency’ was so could not really define it. 

Further, the FCA estimates that only 3% of those surveyed had bought cryptoassets and of the small sample of consumers who had bought cryptoassets, around half spent less than £200. Most consumers who haven’t bought cryptoassets to date aren’t likely to do so, so despite the general lack of understanding of cryptoassets amongst UK consumers, findings from the survey suggest that currently the overall scale of harm may not be as high as previously thought. 

Source:  FCA Press Release on findings from first cryptoassets consumer research published 7 March 2019

  

The disguised remuneration loan charge – HMRC letter

(AF1, RO3) 

HMRC has recently published a letter setting out its updated guidance on disguised remuneration and settling your tax affairs. 

The loan charge

The loan charge for disguised remuneration loans arises on 5 April 2019. You’ll have to pay the loan charge for any loan from 6 April 1999 that: 

• you received through a disguised remuneration tax avoidance scheme;
• is still outstanding on 5 April 2019.

Typically, disguised remuneration schemes involve an employer paying an employee indirectly through a third-party company, often in the form of an offshore trust. Rather than paying a salary which would attract income tax and National Insurance contributions, employees are loaned money by the trust on terms that mean it is unlikely ever to be repaid. 

On 8 January, an amendment was tabled to the Finance Bill by Liberal Democrat MP Edward Davey, requiring the Treasury to re-assess the likely effects of the loan charge policy before it comes into force, and to present its report to Parliament by 30 March. 

However, it now appears that this review will be restricted to a report on the effect of changes made to the time limits for recovery or assessment where tax loss arises in relation to offshore tax, and a comparison of these changes with other legislation, including the charge on disguised remuneration loans. 

Ruth Stanier, HMRC Director General for Customer Strategy and Tax Design, has now written to Edward Davey, in his capacity as Chair of the All Party Parliamentary Group (APPG) on the loan charge. This letter and accompanying schedules were provided by HMRC as a substitute for appearing before the APPG to answer questions from MPs on 5 March 2019. Reportedly, both Mel Stride, financial secretary to the Treasury, and Ruth Stanier were invited to appear but declined to do so. The letter sets out HMRC’s perspective on the following: 

• the history of disguised remuneration loan schemes;
• the legality and fairness of HMRC’s actions;
• details on settling for those affected; and
• next steps. 

Reflecting a slight softening of its approach relative to its earlier guidance, which required “all the information … by 5 April 2019 at the latest”, HMRC confirms in the letter that scheme users who come forward with a genuine intention to settle before 5 April 2019 will not be disadvantaged and can still benefit from the opportunity to settle under the published terms. 

By “a genuine intention to settle” HMRC says it means users should provide it with, as a minimum, their name and tax reference numbers (unique taxpayer reference or National Insurance number), the amount and period that loans were received and the name of the employer who provided the loans.

 Employers will need to provide their details, the amounts involved and, where possible, the dates on which funds were paid into the scheme and details of any corporation tax relief claimed on the contributions. 

The letter says that settlement negotiations must move quickly after 5 April 2019 and all settlements must then be reached by 31 August 2019, or the loan charge will apply. Scheme users approaching HMRC after 5 April 2019 will be subject to the charge on disguised remuneration loans - although HMRC denies that these individuals will face a tax bill to be paid on 5 April 2019. 

Appendix 1 of the schedules to the Director General’s letter sets out the key dates for taxpayers and their employers to report and pay the loan charge. 

The individual taxpayer must complete an information return setting out their loan balance by 30 September 2019. Individuals subject to the loan charge will have until 31 January 2020 to discharge their liability, and, as necessary, HMRC can agree flexible payment terms beyond that point. 

Where the employer who provided the loan still exists, the employer needs to pay PAYE on the outstanding loan by 22 April 2019 and report the amounts due under Real Time Information (RTI).

The letter also says HMRC has committed not to make anyone sell their main home to pay their disguised remuneration tax bills and that fears that people will be made homeless because of HMRC debt enforcement activity in relation to the charge on disguised remuneration loans are unfounded. And it states that HMRC does not want to make anyone bankrupt. 

Sources:

• HMRC Letter: From Ruth Stanier to the Loan Charge All Party Parliamentary Group – dated 7 March 2019;
• AccountingWeb news: How to not pay the 2019 loan charge – dated 8 March 2019.

 

Making tax digital – Government update

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8) 

The 2019 Spring Statement included a brief update from the Government about the introduction of Making Tax Digital (MTD).

In November, the House of Lords called for a general delay to the introduction of MTD for all businesses. 

Unfortunately, the written ministerial statement, published after the 2019 Spring Statement, confirms that government will not be delaying MTD for VAT (apart from the previously announced deferral by six months for certain businesses, trusts, charitable trusts, and ‘not for profit’ organisations that are not set up as a company.) 

But it’s not all bad news. 

The government has advised that there will be a light touch approach to penalties in the first year of implementation, saying “Where businesses are doing their best to comply, no filing or record keeping penalties will be issued.” 

And MTD for other taxes has been deferred, with the government saying: “The focus will be on supporting businesses to transition and the government will therefore not be mandating MTD for any new taxes or businesses in 2020.” 

The Lords had suggested a delay until April 2022 at the earliest -  allowing two years to learn and act on lessons from the implementation of MTD for VAT, with a further year required for the software industry and taxpayers to prepare. 

Background 

MTD for income tax and corporation tax

MTD for income tax and corporation tax is a requirement to keep digital records and make regular quarterly reports of income and expenditure to HMRC, the intention being that transactions will be recorded, using accounting software, as near as possible to the time when those transactions occurred.

At the end of the accounting period taxpayers will need to send a final digital report to confirm their income and expenses for the year, and to claim allowances and reliefs.

MTD for VAT 

From 1 April 2019, most VAT-registered businesses with a taxable turnover above the £85,000 VAT threshold will be required to keep their VAT-business records digitally and send their VAT returns using MTD-compatible software. 

MTD won’t be applied to businesses that have voluntarily registered for VAT. It will, however, be available on a voluntary basis for businesses with income below the VAT threshold.

The government previously announced that MTD for VAT would be deferred by six months for certain businesses, trusts, charitable trusts, and ‘not for profit’ organisations that are not set up as a company.

The current timetable for MTD 

1. Consultation on MTD for corporation tax deferred - (this was previously expected in late 2018); 

2. Digital records required for VAT purposes from 1 April 2019 (except those “customers” that have been deferred for six months, see above); 

3. Digital records required for VAT purposes from 1 October 2019 for those “customers” that have been deferred; 

4. Digital records and quarterly reporting required for other taxes - income tax and corporation tax - deferred – (this was previously due to apply from April 2020 at the earliest); 

5. New penalty regime - from April 2021 at the earliest.

Source:  Spring Statement 2019 Written Ministerial Statement: Making Tax Digital (MTD) - published 13 March 2019.

  

Trust law reform in Scotland

(AF1, JO2, RO3)

The Scottish Law Commission has been working on the reform of trust law in Scotland for a number of years and it issued a comprehensive set of proposals and a draft Bill in 2014. 

Unfortunately, since then the proposals have not gone any further due to the lack of Parliamentary time.  

A revised and improved version of the proposed Trusts (Scotland) Bill was published by the Scottish Law Commission in December 2018. The new law is to replace the current legislation, namely the Trusts (Scotland) Act 1921, described by the Chairman of the Scottish Law Commission as “archaic and difficult to work with”. It is hoped that this time the proposals are taken forward in the not too distant future. 

The Bill includes 83 sections and a Schedule. It contains comprehensive provisions on the appointment of new trustees, resignation and removal of trustees (including provisions for the removal of trustees by co-trustees and the removal of trustees by beneficiaries).  It also contains a set of provisions relating to decision making by trustees, including specific provisions dealing with trustees’ powers of investment, delegation, appointment of nominees as well as a power to advance capital to beneficiaries and make other payments.

 It also deals with trustees’ duties to provide information and trustees’ personal liability for beneficiaries’ losses and numerous other minor specific provisions which we will review in due course when the legislation is enacted.  

Very importantly, the Bill also includes a provision to abolish the restriction on accumulations of income (currently in Scotland there is a restriction to 21 years as opposed to the position in England where income can be accumulated throughout the duration of the trust, ie. 125 years). 

At the time of writing the Scottish Government is still considering its response to the original report which was published by the Scottish Law Commission in 2014.  

While the revised Bill is an improved and more comprehensive version of the 2014 draft, the original recommendations from the report remain unaltered, the key of those being that the Trusts (Scotland) Act 1921 needs to be repealed and replaced with legislation fit for the 21^st century. 

Of course, the governments on both sides of the border are otherwise engaged at present, but it is hoped that this reform is brought to its conclusion in the near future. 

Source: Scottish Law Commission News: Further work on Trust Law reform - dated 11 December 2018

 

The reform of succession law in Scotland

(AF1, JO2, RO3)

The latest consultation on the law of succession issued by the Scottish government last month focuses on the intestacy provisions where there is a surviving spouse/civil partner and children. 

The Scottish government’s consultation document ‘Law of succession: consultation’ can be found here. 

The reform of succession law in Scotland has been going on since 2009. After the first set of consultations, the Succession (Scotland) Act 2016 introduced certain technical changes to the law and clarified certain provisions in the light of the then recent case law. However, the major areas of reform, such as intestate succession and dealing with cohabitants, had been left until later. For more details of how the reform has been going please see ‘here’. 

Last October, the Scottish government announced the programme of reform to the laws of intestacy. What apparently has already been agreed is one major change, namely that when an individual dies intestate and is survived by either a spouse/civil partner only or children only then the whole estate will be inherited by that surviving spouse/civil partner or issue. This change is to be implemented in future legislation. This will be a significant change from the current rules where, for example, currently if there is only a surviving spouse/civil partner, their claim is restricted to prior rights and legal rights. After these rights are claimed the remaining estate would pass to the surviving parents or siblings. 

At that time, the Scottish government also announced that it had decided to keep the distinction between heritable and moveable property. This decision was considered important as the previously expressed views had been in favour of removing the distinction. The decision to keep the distinction was particularly welcomed by Scottish farmers, the reason being that claims of legal rights only apply to moveable property and therefore land, (ie. heritable property), can be left in accordance with the testator’s wishes. 

At that time, it was also announced that it was proving difficult to obtain a consensus on what to do when there were both a surviving spouse/civil partner and children, which is why we have a new consultation now. 

In considering a possible new approach the Scottish government looked at the legal position in Washington State law and in British Columbia.  

The main identified problem is where a couple divorce and remarry. This is because, under the current system in Scotland, if one party to the new marriage dies intestate, all the property will pass to the new spouse/civil partner and then, perhaps, that spouse’s/civil partner’s children, effectively cutting out the children of the first marriage from succeeding to their parent’s property. 

Both the British Columbia and Washington systems appear to provide for a more equal division of wealth between the surviving spouse/civil partner and the children, in particular that the children common to both spouses/civil partners are not treated more favourably than those who are only children of the deceased.  

The Washington State model applies a split of the assets into community property, which is property acquired during marriage, and separate property, ie. that acquired before marriage or during marriage but through a gift or inheritance. There are then different provisions on who benefits from which part of the property depending on who survives. 

In the British Columbia model, the assets up to a specified threshold pass to the spouse/civil partner, but a threshold depends on whether there are children and whether the children are of both spouses/civil partners or just the deceased. 

Either of these models would provide a fairer division than the current Scottish system.  However, clearly what is likely to be adopted, if indeed any one of those systems is, will depend on the results consultation.  

Two other matters are included in the consultation and these are: the treatment of succession rights of cohabitants, namely whether there should be an automatic right of succession for cohabitants; and secondly, whether step children should have the same succession rights as biological or adopted children.  

In total there are 41 questions in this consultation and responses must be submitted by 10 May this year.  

While legal professionals continue to consult and discuss with the government it should be noted that the length of time that these reforms have already been going on for, and the fact that there is no set timeline for the introduction of legislation dealing with the issues, merely confirms that the only sensible way for any individual to ensure that their wishes are carried out after their death is to ensure that they have a valid Will. 

Of course, a summary of all the possibilities mentioned above and the consultation document itself may be a useful topic for discussion with a client and, for those who have not yet made a Will, a good reminder of why they should do so without delay. 

Source: Scottish Government consultation paper: Law of succession: consultation – dated 17 February 2019.

 

INVESTMENT PLANNING 

Indexation allowance and Retail Prices Index tables – basket review

(AF4, FA7, LP2, RO2) 

Every year the Office for National Statistics (ONS) reviews and updates the basket of goods and services which it uses to calculate the various Consumer Prices indices. It has just published its 2019 revisions, which will take effect from the February inflation numbers, due to be published on 20 March. 

The 2019 basket consists of 720 items and on this occasion 10 have been removed and 16 new ones added. The adjustments are a reminder that measuring inflation is no simple matter, a fact also evidenced by the continuing controversy surrounding the legacy RPI measure. What we spend our money on and how we allocate our expenditure are far from static. 

The headline changes: 

• A sign of the electronic times is that envelopes have disappeared from the basket. 

• Another pointer to technological change is that portable speakers and smart speakers have been added, while traditional hi-fi equipment has been dropped due to ‘low coverage and declining consumer spend’. 

• New food items added to the list include popcorn, flavoured/herbal teas and peanut butter. “Cola flavoured drinks” have been split into regular and diet categories in response to the introduction of the “sugar tax”. 

• Dry dog food has been given its walkies/marching orders, replaced by dog treats, which now attract a higher spend than complete dry dog food. 

• The single dinner plate has supplanted crockery sets ‘reflecting a change in consumers’ buying habits with more people buying crockery items individually’. 

• Washing powder has been dispensed with and in its place come washing liquid and gels. Again, this is a response to changed consumer expenditure. 

• Over five years after the Retail Distribution Review (RDR) kicked in, National Statistics has decided to remove unit trust initial charges from the basket. Unit trust fees will still be represented, but only in the form of ongoing charges. 

The changes grabbed a few headlines, with much focus on the arrival of Alexa in the shopping basket.

  

MSCI increases China weighting in emerging markets index

(AF4, FA7, LP2, RO2)

In its June 2017 Market Classification Review, the leading provider of emerging market equity indices, MSCI, announced a new approach to China. As we explained last year: 

• From June 2018, for the first time MSCI included China A shares (ie. shares listed on the Chinese mainland, rather than in Hong Kong) in its Emerging Markets Index and the MSCI All Cap World Index. 

• About 220 China A Large Cap stocks were added to the MSCI Emerging Markets Index. 

• MSCI applied a 5% “index inclusion factor” (IIF), meaning that China was not being given the full index weighting that its market capitalisation would justify. The A shares thus only represented 0.8% of the Emerging Markets Index’s value, rather than the roughly 16% that full inclusion would imply.

The choice of a 5% IIF - and the year’s deferral – were both designed to smooth the path of transition and encourage China to increase foreign investors’ ability to trade in A Shares. At the time, MSCI said “When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index”. 

MSCI now judges that the time has arrived to make a staged increase in the IIF. In a statement issued at the end of February, MSCI announced: 

• The IIF for all China A Large Cap shares in the MSCI Indices will rise from 5% to 10% from May 2019. At the same time 10% of ChiNext shares would be included. ChiNext is the Chinese equivalent of the US NASDAQ, focusing on high growth, mainly technology companies. 

• From August 2019, the IIF for all China A Large Cap shares in the MSCI Indices will rise by another 5% to 15%. 

• Three months later, the IIF will increase to 20% for both China A Large Cap shares and eligible ChiNext shares. 

By the end of the process, MSCI estimates that there will be 253 Large and 168 Mid Cap China A shares, including 27 ChiNext shares, in the MSCI Emerging Markets Index, a weighting of 3.3%. If shares in Chinese ex A shares are included – shares in Chinese companies listed outside mainland China – then by November just over a third of the Index will be Chinese. 

If and when the IIF reaches 100%, MSCI estimates that China would move from the current overall weighting of 31.3% to 42% of the Index, as demonstrated below: 

A change from 0.8% to 3.3% may not sound much, but once you take account of the fact that the MSCI Emerging Markets Index is tracked by $1.9tn of assets worldwide, potentially close to $50bn will flow into China A shares over the next nine months. 

Source:  MSCI Press Release 28/2/19

  

January 2019 Investment Association statistics

(FA4, LP2) 

The final quarter of 2018 was a volatile time in world markets and, as the Investment Association (IA) latest monthly statistics for January 2019 show, this has continued to have an impact on retail fund sales. The markets’ rally at the beginning of the year reduced the outflows from the previous three months, when they averaged nearly £2,000m a month, but failed to reverse the trend. 

As the IA’s press release noted “Dry January extended to the fund markets as savers remained cautious”. The month’s highlights include: 

• The net retail outflow for the month was £859m, down from £1,622m in December. In January 2018 the corresponding inflow was $4,202m. Gross retail sales for January were up £672m on December’s figure, at £18.322bn, while redemptions fell marginally from £19.272bn to £19.181bn – all large numbers compared with the overall net result. 

• Net institutional outflow for January was £60m, against an outflow of £2,748m in December (the second highest for the year). 

• The net outflows were more than countered by positive market movements across the month, resulting in total funds under management rising by 1.7% to £1,173.2bn. That was £64.1bn (5.2%) down on January 2018. 

• Mixed Asset was the best-selling asset class in January with net retail sales of £367m. Fixed income came second, at £253m. All the other asset classes recorded outflows, even Money Market (£74m). 

• UK Direct Property saw a net outflow over the month of £136m, the fourth successive month of outflows, but £92m less than December’s figure. 

• £ Strategic Bond was the most popular sector in terms of monthly net retail sales (£801m). Mixed Investment (20%-60%) was second (£424m), while Mixed Investment 40-85% was third (£217m). Volatility Managed was fourth (£186m) while the top performing equity sector, coming in at fifth, was North America (£142m). 

• At the opposite end of the popularity stakes, the Targeted Absolute Return sector experienced a net retail outflow of £665m – the seventh successive month of outflows for the sector. In the last 12 months, funds under management in the sector have contracted by 16.9%. The average sector return in 2018 of -2.8% has clearly had an impact on what was, as recently as last May, the best-selling sector. 

• ISA net flows were again negative at -£506m: only two months of 2018, predictably March and April, saw net inflows. 

• The total value of tracker funds rose 1.9% over the month to £184.351bn, meaning that they now account for 15.7% of the industry total. The corresponding figure for January 2018 was 14.6%. Tracker fund net retail sales amounted to £641m, a rise of £6m from December. 

The two top selling funds, £ Strategic Bond and Mixed Investment (20%-60%) (aka Cautious Managed) tell their own story about investor confidence. As the IA says, “The threat of a no-deal Brexit, Eurozone instability, and international trade tensions, combined to dampen investor appetite…” 

Source:  IA 7/3/2019

 

An end to the personal allowance?

(AF4, FA7, LP2, RO2) 

Two days before the Spring Statement, the New Economic Foundation (NEF) published a paper proposing a radical reworking of one of the basic features of the UK income tax system. Its target was the personal allowance, which since 2010 has been the main focus for Government income tax policy. In 2010/11 the allowance was £6,475; next month it rises to £12,500. The 2019/20 personal allowance would be around £7,925, had CPI increases been applied throughout (as the graph above demonstrates). As the NEF notes, HMRC estimates the tax cost of the personal allowance at £107bn in 2018/19. To put that into context, the same HMRC cost of reliefs table values the income tax cost of registered pension schemes at £25.6bn.

The NEF proposal has two principal elements: 

1. Scrap the personal allowance and replace it with a weekly cash amount payable to “everyone over the age of 18 with a UK national insurance number… earning below £125,000”. The largely unconditional weekly payment would be of equivalent value to the personal allowance for a basic rate taxpayer (£48.08 a week) or, in Scotland, a starting rate taxpayer (£45.67 a week). Between £100,000 and £125,000 the payment would be tapered to mirror the effect of the current personal allowance tapering. 

2. Restore child benefit to its real terms 2010/11 value, an increase of about 20%, and combine this with the new cash payment to form the ‘Weekly National Allowance’ (WNA). This allowance would then be taken into account when means testing benefits.

The NEF has costed its idea using the tax and benefit microsimulation model of the Institute for Public Policy Research (IPPR), a separate centre-left think tank that came up with its own ideas for income tax reform last year. Perhaps surprisingly, the simulations suggest that the NEF’s proposed reform would add £2.9bn to the Government’s coffers: 

	£ billion
Expenditure
Weekly National Allowance	128.9
of which
New cash payment	126.8
Restored child benefit	2.1
Total expenditure	128.9
Receipts and savings
Personal allowance of income tax	111.2
Means-tested benefits	20.6
Total receipts and savings	131.8
Total net saving	2.9

A move from personal allowance to WNF would, as the NEF says, be “highly redistributive”, transferring £8bn spent on the 35% of highest income families to the remaining 65%. Ignoring Scotland, which seems hard done by, the result for the rest of the UK would be:

• The higher rate threshold would effectively become £37,500 – the 2019/20 basic rate band. Anyone with income above this level, but below £125,000, would be worse off.
• Those with income above the 2019/20 higher rate threshold of £50,000 but below £100,000 would be £2,500 a year worse off. 

• Between £100,000 and £125,000 there would be a gradually reducing effect, with the extra tax payment going down by £1 for each £10 of income above £100,000. 

• Those with income above £125,000 would be unaffected, as they have no personal allowance under the current regime. 

The NEF proposal, like the IPPR’s before, may well appeal to John McDonald. It offers the shadow chancellor a way of substantially rejigging the tax system without raising the overall income tax take by much more than the equivalent of 0.5p on basic rate. It also represents a step towards a universal basic income (UBI), a hot topic among economists and something that the Five Star Movement campaigned for in Italy. 

Source: New Economic Foundation (NEF) Paper: nothing personal - replacing the personal tax allowance with a weekly national allowance – dated 11 March 2019.

 

PENSIONS

FCA confirms increase in Financial Ombudsman Service award limit

(AF3, FA2, JO5, RO4, RO8) 

The Financial Conduct Authority (FCA) has published a policy statement confirming that the Financial Ombudsman Service (FOS) will soon be able to require financial services firms to pay significantly more compensation to consumers and businesses. 

From 1 April 2019, the current £150,000 limit will increase to £350,000 for complaints about actions by firms on or after that date. For complaints about actions before 1 April that are referred to the Financial Ombudsman Service after that date, the limit will rise to £160,000.

The FCA has also confirmed that both award limits will be automatically adjusted every year to ensure they keep pace with inflation. 

The FCA has said that it estimates there could be up to 500 complaints upheld by the ombudsman service each year where the amount of compensation the service determines is due is above the previous award limit of £150,000. 

130 responses were received to FCA’s consultation on this increase. Most responses on the £350,000 limit proposals came from personal investment firms (PIFs), particularly small independent financial advisers (IFAs), and insurers providing professional indemnity insurance (PII) to these firms. According to the FCA, these respondents did not support any increase to the ombudsman service's limit, mainly due to the potential impact on the PII market. 

The FCA said it accepted respondents’ views that there could be a material impact on the price and availability of PII cover for activities carried out by PIFs that are subject to the £350,000 award limit. The example it gave was DB transfer advice provided after the in-force date of 1 April 2019. The FCA has stressed that whilst it does not expect it to materialise, it has modelled a ‘worst-case’ scenario, based on PII premium increases of between 200% and 500% forecasted by insurers. Although the FCA’s own estimate is 140%. 

The new award limit will come into force at the same time as the extension of the service to larger small and medium-sized enterprises (SMEs). These are firms with an annual turnover of under £6.5 million, an annual balance sheet total of under £5 million, or fewer than 50 employees. The FCA news update says that this means an additional 210,000 SMEs will be able to complain to the Financial Ombudsman Service. 

 

The single financial guidance body gets a name

(AF3, FA2, JO5, RO4, RO8) 

At the start of the year, the Single Financial Guidance Body (SFGB) officially took on its ‘delivery functions’ from 1 January 2019. However, at the time it didn’t have an actual name because the SFGB was just a “working title”. 

It has now been named the Money and Pensions Service (MAPS). 

The body now called MAPS was established by the Financial Guidance and Claims Act 2018 and is (theoretically) the one stop shop combining three Government-sponsored financial advice bodies: 

• The Money Advice Service;
• The Pensions Advisory Service; and
• Pension Wise.

MAPS, chaired by Sir Hector Sants, became a legal entity back in October. Structurally it is classed as an executive non-departmental public body, sponsored by the Department for Work and Pensions. That means there is no Treasury involvement and underlines the bias towards pension guidance. 

The SFGB website has yet to be rebranded and is still only four pages long.

  

Life expectancy improvements

(AF3, FA2, JO5, RO4, RO8) 

Life expectancies as at 1 January 2019 at age 65 from CMI_2018 and earlier versions 

In August we commented on a report from Office for National Statistics (ONS) about changing mortality experience. The thrust of the ONS review was that the UK had seen a marked slowing down in improvements to life expectancy since 2011. As we remarked at the time, this was not news to the pensions industry which had not only noticed the effect but had also started to factor it into defined benefit scheme valuations. 

In the past few weeks, more evidence of decelerating mortality improvements has emerged: 

• Legal & General’s annual results included a £433m mortality reserve release as a result of a review of future mortality improvement assumptions. In 2017, a similar review released £332m. L&G noted that “Higher mortality has continued into 2018, a fact we will prudently consider in our future mortality assumption reviews”. Analysts read that as a promise of more reserve releases, which in the latest accounts represented 18.5% of the company’s operating profit. 

• Aviva’s annual results also included mortality adjustments helpful to the bottom line. It said “Other [operating profit component] … includes the benefit of continued positive longevity developments where recent experience has led to a positive change to base mortality for individual annuities of £345 million. Updates to the rate of mortality improvements, including CMI 2017, had a benefit of £251 million and a refinement to BPA modelling together with changes to base mortality and improvements had a benefit of £132 million”. 

• The Institute and Faculty of Actuaries Continuous Mortality Investigation (CMI) has just published its latest briefing note on mortality projections. It notes that “life expectancies at age 65 are around 6 months lower in CMI_2018 than in CMI_2017, for both males and females. The differences are more pronounced when comparing to earlier versions of the CMI Model”. 

The CMI says that life expectancies at age 65 are now 21.9 years for males and 24.2 years for females. The importance of this for defined benefit schemes is highlighted by the CMI, observing that in the context of triennial valuations, the life expectancies at age 65 are 13 months lower for males and 14 months lower for females than three years ago. 

Comment 

These deteriorating mortality figures can be easily misunderstood. They all still allow for future improvements in mortality. For example, if no improvements were assumed the life expectancy of a 65 year old male would be 20.9 years. What has happened is that since 2011, mortality experience has pointed to a slowing down in the rate of improvement which is now being brought into actuarial calculations. The release of reserves by life assurance companies is a reflection that, to quote the CMI, there is “increasing evidence that the lower level of improvements may be due to medium or long-term influences, rather than just short-term volatility.”