Quilter’s Roddy Munro explains how the abolition of the LTA has the potential to be a massive tax hit for retirees

Transcript

Bella Caridade-Ferreira

Hello everyone and welcome to Compare the Platform’s Cut Through the Noise Podcast which brings you content that matters to you, the adviser. So about a year ago you all remember that Liz Truss and Kwasi Kwarteng took over with some exceptionally dire consequences. It’s been nearly a year since that happened and Jeremy Hunt was brought in to stabilise the ship, UK PLC, and with me today I’ve got Roddy Munro, pensions and tax specialist at Quilter, to discuss the ramifications of some of the stuff that Jeremy has done. So welcome, Roddy.

Roddy Munro

Hello. Hello. Good afternoon, Bella. Thank you, thank you for having me and go easy on me today please.

Bella Caridade-Ferreira

I will. Don’t worry. Don’t worry. It’s going to be fun. So, look, Roddy, it’s been almost a year since Jeremy Hunt took over. He’s had two visits to the dispatch box. Could you explain what he’s done and what impact that could have in respect to financial planning?

Roddy Munro

Yes, of course. I know we don’t have many hours to cover all this in depth, Bella. That you know, it probably does need quite a lot of time to go through in detail. What I’ll try and bring out for you here are some of the main headlines that I think advisers need to consider because in my opinion, in our opinion at Quilter, we do believe that many current financial planning strategies that have served advisers and clients well over the years have really kind of reached the end of the line and you know, when we consider current treasury policy, as you said Bella, Jeremy Hunt has delivered two big announcements at the dispatch box. The last one was in the spring and that was the spring budget where, where he pulled the rabbit from the hat, should I say, in terms of knowing, yeah, signalling his intent to abolish the lifetime allowance. Well, let me tell you now, it’s nowhere near as straightforward as that and it’s horrifically complex, so there’s big, big issues for folk, especially with those with big pension pots, Bella. And I’ll bring that to life later. And also going back to November last year, so November 2022 when he announced his autumn statement, and you know, some of the things in there which we can pick up are quite substantial. But really when you start to crash together the impact of the spring budget and the autumn statement going back to November, the impact on financial planning, Bella, is profound.

Bella Caridade-Ferreira

OK. That sounds intriguing. Tell me more.

Roddy Munro

Yeah. There’s one big area here and it’s all to do with the concept of fiscal drag. And I think it’s really important that everybody understands kind of what fiscal drag is about. Another way of looking at it or calling it is, you know the big freeze out there and what I mean by the big freeze is the freezing of, you know, kind of tax allowances. When Sunak became chancellor a few years back, he froze all the primary tax allowances, income tax allowances, in the main IHT, all that kind of stuff. And he froze them until 2026, when Hunt took charge and delivered his autumn statement last year, he froze them again out until 2028, and you might not think that 2028’s that far away, Bella. But when you think about it in a different guise, it’s half a decade away, that’s a long time.

Bella Caridade-Ferreira

Yeah, it’s five. It’s five years. I’m looking at your chart here and it’s really quite interesting cause that already demonstrates that far more people are being captured by the frozen allowances, right?

Roddy Munro

Yeah, I mean, look, I started in this industry in 1990. And I was probably paying hardly an income tax at all because I didn’t get paid much in 1990. But look where we are now. The blue line, they over the last few years, the amount of folk paying tax has kind of gone through the roof and the number of people paying higher rates have gone through the roof, and you know if I break some of that down further stats published by the government recently only three months ago, tells us that over the next kind of period, we’re going to see an additional 40% of people paying higher rate tax.

Bella Caridade-Ferreira

That’s an incredible amount. That is. I mean, it’s practically looking at your numbers like 3.9 million right now, but rising to 5.6 million, that’s almost doubling really, isn’t it?

Roddy Munro

Well, it’s a huge increase. But when you talk about doubling Bella, what is going to double is the amount of people that are subject to additional rate tax.

Bella Caridade-Ferreira

Ohh wow yes.

Roddy Munro

Yeah, that’s going up 100%. And that in main is because he’s lowered that threshold from broadly 150K down to 125K and so many people have fallen into that trap and will continue to do so. Now that may well be noticeable to somebody up at that earnings level in their payslip but kind of below these levels Bella, it isn’t that noticeable to the majority of folk. And when you’re in an environment of high inflation, and therefore, you know, pressure for wage and pay rises, it’s dead easy. The Chancellor just sits back and watches, all the money coming, rolling in. And really my call to action here is that advisers really need to think about the impact of fiscal drag and how it is affecting their, not just them as individuals, but their clients. You’ve got a duty, a duty of care under consumer duty, haven’t we?

Bella Caridade-Ferreira

Ohh absolutely. I mean and it’s a really, really valid point, isn’t it? Because you know, you now have to look at everything including your exposure to tax in the long run because you do have to yes, as you say consumer duty is all important.

Roddy Munro

And do you know the interesting thing here that gets forgotten when we start to talk about higher rate taxpayers and additional rate, that’s the wealthy in the country. Come down the scale, what we’re going to see for the very first time, it’s about 800,000 people or pensioners, I should say, being drawn into paying tax for the first time. Now why is that? State pensions, you know, the new state pension 10,600 pounds per annum, it’s got the triple lock attached to it, very quickly through inflation growth the…

Bella Caridade-Ferreira

That’s going to go. That’s going to be higher than the allowance isn’t it.

Roddy Munro

It’s going to be higher than the allowance and therefore any client who’s got any private pension provision over and above state pension, they’re going to get taxed for the first time on that. It’s not a good outlook. The tax take is on the rise.

Bella Caridade-Ferreira

And they’re not going to be expecting it. Anybody who’s retiring now, who was still on a defined benefit pension, for example. Yeah, is absolutely not expecting to suddenly be hit with all this tax. I mean, you know.

Roddy Munro

They’re not expecting it at all. No. No one’s having that conversation with them. Especially if they don’t have an adviser, but it’s this whole concept of fiscal drag and the way that the Treasury use it to grow their coffers at the expense of people that they’re looking to serve.

Bella Caridade-Ferreira

Yeah, exactly. I mean, this is exactly what they’re doing, isn’t it? Keeping the average person down while increasing their tax intake.

Roddy Munro

Yes, absolutely, absolutely. So when you start to think all this through in terms of the impact on financial planning, there are probably kind of three key areas that I see being affected and the first one is funding into pensions. When we look at the spring budget and the Chancellor’s announcement to signal the intent to abolish the lifetime allowance, what he stood up and on budget day and said, was all the kind of headline grabbing stuff, the real nitty gritty Bella, as you could imagine, was in the papers that followed from the Treasury thereafter. And there are a few stings in the tale that that we can go through today. If you would like to.

Bella Caridade-Ferreira

Yeah, and that would be great. The devil’s always in the detail Roddy, right?

Roddy Munro

Devil is in the detail and this stuff isn’t good news for a lot of folks who’ve worked hard to save into pensions. So much so that there’s kind of a new question that has arisen out there for many, many clients and their planners, it’s getting it’s kind of like got a bit of a Shakespearean content to it, the new question, to crystallise or not to crystallise?

Bella Caridade-Ferreira

That’s interesting. And so is that sort of an assumption that, you know, obviously with the rather than me jumping in what you talked me through, sorry I’m just intrigued by the crystallise or not to crystallise.

Roddy Munro

Yeah. So again, I can go through it in a little bit more detail later, but in essence, if a client has reached the age where they could crystallise and potentially look to encash and do something with their PCLS, their tax free cash, even although they might not have any need for retirement benefits, there is now a strong argument going forward that an adviser should consider crystallising and re-enveloping their tax free cash into more tax efficient shelters or tax efficient wrappers, Bella.

Bella Caridade-Ferreira

Oh. Oh, that is really interesting. You will have to talk me through this in a bit more detail, but you’re basically saying that even if you don’t need the cash now you are better off taking it now and sticking it somewhere safe or where it’s continuing to grow or it’s protected, because otherwise the tax consequences are substantial.

Roddy Munro

Yes. Now, that’s not for everyone, but it could be for quite a few. It all depends what are the primary tax drivers around client circumstances. But yes, that’s exactly what I am saying and that goes absolutely against the grain of pensions.

Bella Caridade-Ferreira

It does indeed, yeah. Because normally you would recommend to a client you only take the money when you need it, right? And stay invested as long as possible, yeah.

Roddy Munro

Yes. The difference here though is we’re not, in any way, suggesting that the client actually gets their hands on that tax free cash, the keyword to pull out here. And do you know what, Bella? You’ll know better than me, I don’t even know if this is a word, and the word is re-enveloping, but whether it’s a word or not, I don’t care because I really like it.

Bella Caridade-Ferreira

Suppose, like you’re repackaging, you want to repackage that money. You want to repackage it, don’t you? That’s the point. Yes, yeah.

Roddy Munro

And then the third area. It’s, you know, the impact again going back to the autumn statement of the changes that the chancellor made to capital gains tax and the allowance, the annual exempt allowance around capital gains tax and for years…

Bella Caridade-Ferreira

Oh yeah, because that was slashed.

Roddy Munro

It was slashed. Yeah. I mean, gosh, talk about Scream six, that that was really slashed, you know, for years the annual exempt allowance has been about £12,300. This tax year it’s £6,000. And as we go into the next tax year in April, you know only what 6-7 months away, we’re down to £3,000. That fundamentally changes financial planning.

Bella Caridade-Ferreira

Yeah, that’s a that’s a massive issue. Massive, massive issue.

Roddy Munro

And dividend, I forgot about dividends.

Bella Caridade-Ferreira

And the bit I was going to say, the dividends as well. So they’re slash too. What are the rates available there?

Roddy Munro

So dividends for years were sitting, you know, kind of £5,000 that then, it got cut in two (£2,000). So last tax year it was 2 (£2,000). this tax year, it’s £1,000. And again as we go into the 2024 tax year, it halves again down to £500 and what we need to be thinking of here, is when we look at clients investment portfolios and equities in particular, how much of the kind of overall growth is driven by divvies, it’s huge.

Bella Caridade-Ferreira

Oh, this is huge. Definitely. Absolutely huge. I mean, what they’re doing, really Roddy, is they’re going after the business owners, aren’t they? They’re going after people who would normally pay themselves, you know, divvy, you know, a small salary, 12 grand a year and some dividends. All these business owners who are creating wealth in the industry are being targeted by the government and that and then they’re the ones who are also going to be really, really affected by the capital gains, if they sell their businesses off.

Roddy Munro

Yeah. Yes, I would say it’s even broader than that, Bella. They’re going after people who’ve done the right thing. So for all these people who have saved hard, worked hard, and done the right thing, the tax man’s after them like never before. And I think it’s our responsibility to make sure that we do try to protect every single pound of client’s wealth and prosperity going forward. That’s why we’re out talking about this, that’s why it might sound controversial. But it’s our responsibility to make sure that we that we do the best for, for clients, that’s what our jobs and our roles are to look at giving good client outcomes.

Bella Caridade-Ferreira

Yeah, I know that. Absolutely. And this and this now really brings it into focus, doesn’t it? So whereas you know, as you approach retirement, you really do need to go and get some advice. The value of advice really comes sharply into focus because the risk to your finances in the long run is absolutely huge.

Roddy Munro

Without a shadow of a doubt. And you know at a time where, excuse me, consumer duty is asking us all as an industry to provide evidence of what we do and why we do it and why it represents fair value. Actually, what we’ve got here is one of the best opportunities for the financial planning profession to now really show the value of their advice, because the delta upside and the delta downside here, Bella, is huge. Absolutely huge.

Bella Caridade-Ferreira

Yeah. And I know this is this is massive. I know absolutely. I mean this in itself, if you had one, say if you just one reason, one unique reason this is it.

Roddy Munro

Yeah, I think so. I think so. Would it help if I tried to bring some of these bits to life?

Bella Caridade-Ferreira

Yes indeed, I think having some sort of practical examples I think would be really, really useful for our listeners.

Roddy Munro

Yeah. OK. So listen, pensions are still a very, very attractive tax planning tool, if not the most tax advantageous planning tool. And you know, one of the good things that Mister Hunt did in the spring budget was he increased the annual allowance, he increased it by 50%, it went from 40K to 60K, absolutely brilliant. Just got to be careful for those clients who are caught by the tapering rules that are in play for high earners, but that could be for another podcast Bella. Not for today. Yeah, and remember that pensions attract tax relief at highest marginal rate, 45% in England and Wales slightly higher in Scotland, where I am. I won’t explain to you my thinking behind that, but it’s higher, 47, and carry forward still, a very useful tool to soak up reliefs from previous unused years and the new carry forward figure to get a maximum single premium into pensions 180,000. Brilliant for controlling directors, business owners who can pay those kind of contributions.

Bella Caridade-Ferreira

Right. Yeah. Yeah. I’m sensing a but here, though.

Roddy Munro

Well, I’ll come to the but in a minute. Yes. What’s kind of worrying me are these two things. Firstly, Mr. Hunt said that any client who had enjoyed legacy protections under the old, the kind of lifetime allowance regime going back 17 years to A Day, have they got a certificate? They wouldn’t have been able to fund for years and years, they could now restart contributions.

Bella Caridade-Ferreira

Well, that’s a good thing, right?

Roddy Munro (17 min 45 seconds)

That’s a good thing, right, yeah. But I think it comes with a big warning symbol next to it. Because whilst it could be a good thing, it might not be as good as what one thinks it might be. Now it requires a little bit of technical understanding to go into that and I’ll try and bring that to life for you in a minute, but the real, real sting in the tail, Bella, that wasn’t announced in the House of Commons, that was deep in the dark papers that came out from the Treasury thereafter, was that there was the introduction of a new tax free cash limit going forward.

Bella Caridade-Ferreira

Hold on a new tax free cash limit. Right. OK.

Roddy Munro

Yeah, yeah, a new tax free cash limit going forward for anybody that doesn’t have any legacy protections, and that figure is £268,275. And the mathematicians…

Bella Caridade-Ferreira

So, yeah Roddy, just so what you’re basically saying is that they like, they give on one hand but take on the other.

Roddy Munro

Yes, yes.

Bella Caridade-Ferreira

Robbing Peter to pay Paul, it sounds like it.

Roddy Munro

Well, yeah, certainly the sting in the tail is quite, quite impactful.

Bella Caridade-Ferreira

OK. Talk me through it.

Roddy Munro

Yeah, when, you sit in a dark room like I have, day on day and night on night, studying this. You, then see actually how really clever they’ve been and there’s a real danger. There’s a real danger, Bella, that advisers and planners fall into the inertia trap. And what do I mean by that? They do nothing. Hunt’s relying on us all here, doing nothing. And let me try and bring this to life, this new PCLS maximum tax-free cash maximum of £268,275 sounds great for the majority and it is. But for people who’ve got substantial pension pots, this tax-free, cash limit becomes a problem. Let me try and bring this to life for you. The numbers that everyone can see here, looks at the mathematical relationship between tax relief on the way in to a pension and then the rate of marginal tax on the way out of a pension, assuming clients draw anything other than tax free cash, so on the kind of Y axis on the left you have the rate of tax going in to a contribution today across the top, the rate of tax payable coming out and a common one there is 40% on the way in, 20% tax on the way out. And the mathematics tell us there that through the impact of tax relief, getting some tax-free cash at 25p in the pound, your return on a pound going into a pension is 31.25%.

Bella Caridade-Ferreira

OK, that’s not bad.

Roddy Munro (20 min 40 sec)

It’s really good. It’s really good and even, you know, when you’ve got 20 to 20 or 40 to 40, even 45 to 45, you’ve always got a positive return. And you get these positive returns in the main because you get 25p in the pound back tax free, otherwise known as tax free cash. Let me replay these numbers for you, Bella. If we were to take that pound of tax free, that that 25p of tax free cash out, so I’m now funding a pound which is beyond the current lifetime allowance and therefore will not generate me any more tax free cash. Look at how it changes, that reduces the tax effectiveness of my pound by 20%.

Bella Caridade-Ferreira

Yeah, that is very, that’s a massive drop.

Roddy Munro

It’s a massive drop.

Bella Caridade-Ferreira

But equally, the rates of tax paid by people who are on 40% or 45% really jump.

Roddy Munro

They do and look what happens when you’ve got tax neutrality. So 20 to 20, 40 to 40, 45 to 45, it goes to 0. So pensions start to behave like ISAs up at that top level. And that is the 1st signal that I’ve seen of a significant shift in tax policy when it comes to pensions.

Bella Caridade-Ferreira

This is really quite dastardly, isn’t it? I mean, they’ve sat there and worked this out. It’s really, really very crafty, because no one’s picked up on this at all.

Roddy Munro

Well, I’ve not heard any.

Bella Caridade-Ferreira

Well, you you’ve picked up on it obviously, but no. But no journalists or anyone. No one else has picked up on this.

Roddy Munro

Well, yeah, Machiavellian might be the word that I would use.

Bella Caridade-Ferreira

Yes, it is Machiavellian.

Roddy Munro

That this pales into insignificance in terms of the debate around do I crystallise or do I not crystallise. You know what this is telling us here is whilst Mr. Hunt has invited people who have not paid into pensions for a long time because they’ve got big pots to chuck more money in, great, still might be effective for tax purposes, maybe IHT purposes, but they’re not getting any more tax free cash back. And when you think the big issue we have is clients anchor to tax free cash being at 25% or 25p in the pound, that’s just a rule of pensions, tax free cash is 25% for as long as I can remember. And I’ve been doing this for 33 years, so that that’s beginning to break. Let me look at this crystallisation piece or not, I talked about the anchor.  I really, really need to make sure everybody understands this point this freezing of this tax free cash figure at 268,275 for the majority of folk out there isn’t a problem, but there are over, I think there’s 1.3 million people plus, from ONS stats 2020 that have pension rights greater than £1,000,000 and most of them should have financial advisers and planners wrapped around them. This tax-free cash figure is a problem.

Bella Caridade-Ferreira

Right. OK.

Roddy Munro

Because if that tax free cash figure is reached, and it can’t grow, you begin to see this anchor drop to the bottom of the ocean. It will also be ripped apart by continued stubborn inflation, Bella. Maybe I could bring it to life with some numbers would, that be helpful.

Bella Caridade-Ferreira

Yeah, please. Please do I think so, definitely, that be helpful. Our listeners are going to want to know more.

Roddy Munro

I’m just going to sit, take a pause and have a have a wee sip of tea because this is a big one.

Bella Caridade-Ferreira

I thought are you not sipping on a gin and tonic, Roddy?

Roddy Munro

Well, no, it would really be a nice fine malt up here.

Bella Caridade-Ferreira

Yes, exactly. Yeah. Some whisky to fortify your loins before you carry on.

Roddy Munro

I don’t think Quilter would be very happy knowing that I was doing that at 2:30 in the afternoon, but yeah. Here, goes. Right, let’s take a client today with just under 1.1 million in their pot, so the lifetime allowance, and they’ve got tax free cash entitlement of £268k, that’s 25% of the pot as we know, let’s just to roll that forward at a notional growth rate, let’s take 6%, and that’s in a gross environment in a pension, and that grows the pot to 1.4 million in five years time. The client might now be 60 years of age. The tax free cash is still frozen at £268k, so as a percentage of the pot Bella, and wait for this one, it’s now only 19%. Roll forward 10 years. Your pots grown to 1.9 million. Your tax free cash is still £268k. Your percentage of the pot is 14%.

Bella Caridade-Ferreira

Is now 14%.

Roddy Munro

If I continue to do the maths here, pushing out to 75. The relationship and tax-free cash would be down to 8% of the pot. At that point your anchor is firmly at the bottom of the ocean and you’re sailing away. So when you think this through, even at 10 years time, if only 14% of my pot is tax free, 86% of it is now taxable.

Bella Caridade-Ferreira

Well, that is, yeah.

Roddy Munro

And we know that state pension will wipe out the personal allowance. So it could be exposed at least to basic, but typically clients who’ve got a couple of million pounds in pensions will have always had a nice lifestyle. And if they want to continue that nice lifestyle, they may well have to draw hard on their pension Bella and therefore subject it to 40% of tax. So this is huge.

Bella Caridade-Ferreira

Well, so this has a massive impact, massive impact.

Roddy Munro

Massive impact and what Jeremy Hunt’s done here is he’s basically saying I’m going to screw up the tax-free cash so I can get more of your hard earned coin.

Bella Caridade-Ferreira

Absolutely. That’s exactly what he’s doing. I was about to swear there, but I won’t. But I won’t. But you know what I think about the Tories. So I won’t swear. Hopefully you’re going to tell me, Roddy, that there is something we can do about this or there is some things that we can do to mitigate the impact of this.

Roddy Munro

I think I think there is, yes, definitely, I’ll come and talk about that in a minute. Let’s explore the inflation bit, Bella. So you know again over those time periods, today, tax free cash at £268k would go, you could go out into the street and buy goods at £268k. In five years time, the purchasing power of that falls nearly £40,000.

Bella Caridade-Ferreira

Of course it does.

Roddy Munro

When we go to 10 years out, yeah, you’ve lost nearly £70,000 worth of purchasing power. That’s the price of a nice sports car, if you like cars, or you know, seven round-the-world holidays.

Bella Caridade-Ferreira

That’s the price of a cheap run around, which is what I have in London.

Roddy Munro

Yeah, so this inflation drag is a problem, and you’ll notice I’ve not used an inflation rate kind of today at 6%, 7%. I’ve gone back to where we think inflation might stabilise at 3% per annum. So actually when you sit and think what the Treasury have done here, they’ve been really, really clever.

Bella Caridade-Ferreira

Very clever.

Roddy Munro

So is there something else that could be done here? What we are thinking is and it’s very, very much driven by client circumstances around what are the most important drivers for, you know, an individual and their spouse, their wider family, what are their primary tax drivers? Is it income tax? Is it corporation tax? Is it inheritance tax? Is that a mixture of all three? But what we are saying is for some clients it is most definitely the right idea to crystallise and look to re-envelope or as you say, repackage that tax free cash.

Bella Caridade-Ferreira

OK.

Roddy Munro

And you know the most important thing to point out here is that there isn’t really any right answer to where that tax free cash is rehoused.

Bella Caridade-Ferreira

OK.

Roddy Munro

We have to be careful, I guess, with the old strategies of chucking it all into collectives and dripping it into ISAS year on year. Because of the kind of CGT and divvies issue that perhaps isn’t the most auspicious way of doing.

Bella Caridade-Ferreira

Right. Of course, yeah.

Roddy Munro

But remember, and we can come on to this in another section in a minute, insurance bonds are back in town, you know. Yes. And you and I will both remember the days of insurance bonds and they kind of fell out of Vogue but they are now they’re back on.

Bella Caridade-Ferreira

Yeah, the last few years, they’ve really been sort of out of, you know, when I look at my platform statistics, onshore and offshore bonds have been sort of gradually on the, you know, on the decline for a good number of years. And you’re saying that they’re going to be useful as a strategy to kind of to mitigate against this stuff right?

Roddy Munro

Well, yeah, yes. I mean the old strategies of as I say, collectives and ISAs are still effective, but not as effective as what they once were. So we need to look at other tax wrappers to house things, we could explore that in more detail in a few minutes if you want because this all ties into this whole impact of advice piece. But you know, I don’t know if you remember the Thin Lizzy song The boys are back in town.

Bella Caridade-Ferreira

Yes, exactly.

Roddy Munro

I kind of buzz around thinking “The bonds are back in town”. It’s crazy, isn’t, but there we go. The key to all this though, Bella is clients will be spectacularly unaware of this.

Bella Caridade-Ferreira

Yeah, you’re telling me I’m sitting here absolutely flabbergasted and I’m part of the industry. I have no idea that this is heading down the tracks towards me so.

Roddy Munro

It’s right on us. And none of this improves as we go into 2024 with the proposed removal of the lifetime allowance. We don’t have enough certainty yet from HMRC and Treasury as to what the exact final rules will look like. But what we see in front of us today that’s contained in the Finance Bill for removing the lifetime allowance would not change a jot of what I’m talking about now.

Bella Caridade-Ferreira

OK, so there’s nothing in the Finance Bill that would make any changes?

Roddy Munro

No or in other words, removing the lifetime allowance is a misnomer.

Bella Caridade-Ferreira

So it’s not really. They haven’t really removed it at all, is what you’re saying. It’s still there, but just under a different, it’s just called something else.

Roddy Munro

Yes, absolutely. And really, you know this re-enveloping, resheathing, repackaging of tax-free cash, it’s about making all the tax wrappers that are available to work here, you know, in order to get the benefit of, you know, spouses tax allowances, especially if you’ve got a mismatch of wealth and earnings across husband and wife or partners or whatever. You may well want to use partners own allowances. So funding into pensions becomes attractive, perhaps using some of the tax free cash to do some of that. Or begin actually to start some wealth transfer. You know what we’ve always got to start thinking about is the future and how we protect that wider family wealth and that big intergenerational story that’s about to hit us when we look at the demographic time bomb that we have. So that kind of takes us really into the area which was evolving around the autumn statement and I’m not sure if you’re sitting down for this one, Bella, but I think I’m going to have to ask you to sit down.

Bella Caridade-Ferreira

Yes, I’m sitting down. Allowance is going down, tax collection going up, yes.

Roddy Munro

Yeah. So capital gains tax, it was 12,300 for years, the annual exempt amount. It’s now 6000 this tax year. It’s 3000, next tax year, frozen out until 2028.

Bella Caridade-Ferreira

Wow. And then it will probably go down then, won’t it?

Roddy Munro

I can’t see it going up, can you? Yeah. And figures taken from the Treasury themselves, tell us that’s going to generate 1.6 billion in tax, but the probably the bigger thing there it is going to impact over half a million folk for the first time. And I’m not sure about you, Bella, but I bloody well hate doing tax returns.

Bella Caridade-Ferreira

Me too. I really hate them.

Roddy Munro

Yeah. And I think a lot of advisers are going to be absolutely inundated from clients going “I’m really worried about my tax return. Can you help?”

Bella Caridade-Ferreira

Yeah, yeah, you’re right. I mean, and I think a lot of people are going to be caught, aren’t they? They just, they won’t even realise that they need to do a tax return to at least, you know, make sure they are paying the right tax and not overpaying you know.

Roddy Munro

You’re dead, right? And you know when I do my tax return every year, and I look at the pension bit, do you have any excess annual allowance charges to declare? I look at it and I go, how does the man in the street have a clue what to do with that?

Bella Caridade-Ferreira

Yeah, exactly.

Roddy Munro

They don’t. And you know the impact on CGT is huge but also divvies. Where we were at 2000 last year used to be 5000 for years, we’re now 1000 this tax year and it’s 500 quid next tax year.

Bella Caridade-Ferreira

Might as well not bother. I mean, What’s the point of 500 quid, for God’s sake?

Roddy Munro

Yeah, but look how much money this is going to raise, this is where I need you to sit down, 3 billion.

Bella Caridade-Ferreira

Oh my goodness. 3 billion and 4.4 million people were affected. That is just outrageous.

Roddy Munro

It’s heavy. It’s heavy, isn’t it? So you know we have to do something about this. And this has the biggest impact on peoples investments in wealth that isn’t in a pension arrangement. So really, you know, over the years for as long as we’ve been involved in financial planning collectives, general investment accounts have been used, but we should never forget that that environment is not a taxed, privileged environment like a pension or an ISA.

Bella Caridade-Ferreira

Yeah, exactly, exactly.

Roddy Munro

It’s just a wrapper.

Bella Caridade-Ferreira

This looks like we’ve just been painted into a into a corner here, right? You know, we just can’t do anything. You know, we’ve earned all this money. We’ve paid our taxes, and then we retire and then bang, we get hit by even much, you know, even more.

Roddy Munro

You’re absolutely right and the twist in this, there’s a bit of chicken and egg in this, Bella, I think when you sit and work this through. In order to protect client’s wealth when they’re in retirement or decumulation, we really need to be thinking now about what buckets we fill with our money today. Because if we get to the point in retirement where we turn on the right taps where we can control the rates of tax payable, we have far better client outcomes, because so much less tax gets taken away from having to cancel too many units in their investment pots. So we need to be thinking about tax as another charge like we do an advice charge like we do as an investment charge or like we do is what’s the, the manufacturing or the platform wrapper charge, think of tax and actually what you’ll find here is that when you express some of the tax costs as basis point, it’s higher than everything else put together, if you get it wrong.

Bella Caridade-Ferreira

Christ almighty, yeah.

Roddy Munro

Yeah. So this is where I’m kind of getting my Thin Lizzy analogy from. My insurance bonds are back in town, but just let’s go back to CGT. When we had an annual exempt amount at 12,300, you could easily chuck 1/4 of a million in. And you wouldn’t really have to worry too much about gain management. But this year, when we’re at six, one could suggest that that value halves down to 120K. And then when we go into next year, we’re down to 60K and I’ve spoken to many advice firms recently who’ve realised this is a problem and they have set a kind of new de minimis maximum amount that they will hold in a collective.

Bella Caridade-Ferreira

Oh really?

Roddy Munro

Yeah. Yeah, it’s been really quite an interesting conversation. I spoke to one firm the other day that was at 50K max, another firm that was at 70 and another firm that was at 100. Now, whether these numbers are right or wrong, what it shows to me that they’ve given due thought in regard to the changing landscape. Because in the past it didn’t really matter. You could kind of get away with it when you had 12,300 to play with. So this is where bonds Bella become really quite fashionable and back on vogue because an insurance bond, maybe there’s three areas that I would highlight out here. The first one would be it’s a very simplified world of reporting. If clients don’t have to, don’t want to worry about tax reporting, tax returns, all that good stuff that they hate. You don’t have to worry about bond because it’s all done within the Life fund.

Bella Caridade-Ferreira

Right. OK.

Roddy Munro

Yeah, and there, there are other things, the tax situation, you can push the tax payable points way down the line with bonds. You remember you’ve got this 5% tax deferral.

Bella Caridade-Ferreira

Yeah, you exactly. Exactly. Right.

Roddy Munro

And that can really help clients supplement their retirement income, which means they don’t have to withdraw so much from their pension and therefore get hammered with tax. And the other thing, when you start to bring in the intergenerational story with an insurance bond, onshore, even offshore, but the tax advantages offshore nowadays can diminish when you look at the dividend returns with an onshore insurance bond, you’ve got assignments you can start to gift money away, you can write the insurance bond into trust. And for a good quality on platform solution, you can run your own investment proposition, in it provided you pick the right platform that is.

Bella Caridade-Ferreira

That’s presumably you’ve got to have somebody or something like not all platforms are going to have that, that L&P in-house, are they?

Roddy Munro

No, to run a proper onshore insurance bond you need to have insurance company rules and insurance company set up and then there aren’t many platforms out there that have that legal structure and Quilter most definitely does. And then you need to think about how you run your investment strategies in those insurance onshore insurance wrappers, yes.

Bella Caridade-Ferreira

I’m sitting here trying to dust off all my knowledge of onshore and offshore bonds, so I have to review all of this, but I think this is absolutely fascinating stuff.

Roddy Munro

It is so, you know, this is why we think that the landscape has changed and really the kind of key takeaways is you know on the pension story funding, especially when we’re away up at these bigger pot levels and potentially looking to crystallise some clients and rehousing and re- enveloping that tax free cash. And then what kind of tax shelters and wrappers do we use to protect non pension wealth and potentially tax free cash? I sit here having been maybe a specialist or an expert in these things for many years, they’re my words, probably nobody else’s, certainly not my boss and, you know, the landscapes changed, big style.

Bella Caridade-Ferreira

Yeah, I mean I’m looking at your bullets here, your 5 bullets and you know, your last two, it’s important to use all the tax allowances available more than ever and you you’ve kind of demonstrated that it’s quite scary stuff, but the I think the fifth one is really important. Many of the old strategies aren’t as effective. I’d almost say that you know, the old strategies just don’t work at all now really. It’s like you have to rewrite new strategies for the new environment.

Roddy Munro

You do. That’s the main message, and that’s why we kind of we’re talking about this is all change please, all change. You know, why existing financial planning strategies have reached the end of the line. This is probably the biggest impact I’ve seen since the lifetime allowance was actually introduced 17 years ago, I think this is bigger than pension freedoms back in 2015.

Bella Caridade-Ferreira

Wow, well, that’s quite, I mean, you’ve been around for a long time, Roddy, so no offence. But if you’re saying that then, you know what I mean, look, you’ve been around for a long time, so have I mean, you know there have been some major pieces of legislation, but I think what’s striking about this is that it isn’t a major piece of legislation. For example, you know we’ve got consumer duty that is, and we’re all talking about it, but this has been done under the radar. That’s the scary bit about it and it will catch people unawares and bite them on the frigging arse won’t it?

Roddy Munro

Well, that that’s the thing and that’s where I talk about the inertia trap, that’s what Mr. Hunt and the Treasury are relying on. And that’s the power of fiscal drag, let’s do this and the majority of folk won’t notice.

Bella Caridade-Ferreira

They won’t notice. Indeed, indeed. So what else are you doing? Is there anything else that you can offer to advisers to help them? Because they’re going to all the advisers who are listening to this podcast and this podcast goes out to about 20,000 people. So they’re all going to be sitting here going, what the actual, you know, and how do I do this? Are there any tools out there or have you Quilter designed any tools that advisers could access and use?

Roddy Munro

Yeah, yes, we have, I mean. I must give so much credit to the experts that I have working with me in in my team at Quilter, we’ve got some really, really clever people and we’ve been working on this for months. We were waiting for finalised Royal assent to all the pension stuff that was given in the middle of July, when Scotland was on holiday. So we’re now out talking about this heavily. We’ve built a suite of tools, a suite of case studies and calculation systems that will help. That we think will help advisers with their clients who could fall into many of these predicaments, Bella. So yes, we have a huge package of support ready to go, backed up by a platform that gives an adviser all the tax shelters that they need in order to get the best out of the new landscape. So really it’s about helping advisers protect their clients wealth to remain prosperous. Because regretfully, on an ad valorem model, if client’s wealth diminishes, so does everybody else.

Bella Caridade-Ferreira

Well, so yeah, exactly. So does everybody else, everyone’s fees go down. And look, I know you’ve said, you know, you’ve got these great tools backed up by a great platform. You know, you’re own platform, but if advisers are currently using other platforms, can they still access your tools?

Roddy Munro

Yes, they can, but then they would not be able to perhaps benefit from some of the solutions. Where we have real strength is the package of our platform Bella in terms of bringing all the key tax wrappers together. So you know the pension, the ISA, our ISAs flexible, I still can’t believe how many advisers out there today recommend ISAs that are not flexible ISAs. It is simply less tax efficient for your client.

Bella Caridade-Ferreira

Especially now. Yeah, from based on what you’ve said. So and do all platforms have flexible ISAs?

Roddy Munro

No.

Bella Caridade-Ferreira

Oh, OK.

Roddy Munro

But it would be wrong for me to single any out.

Bella Caridade-Ferreira

Oh, go on. Go on. Don’t be scared.

Roddy Munro

That’s not my style. That’s not my style.

Bella Caridade-Ferreira

Fair enough. That’ll be me. I’ll do that. I’m going to go away and find. Leave it to me. I’m going to go and find out who doesn’t have a flexible ISA and give him a bit of a kicking.

Roddy Munro

OK. Yeah, I prefer to focus on our strengths, but our unique selling point right now is that fully onshore integrated bond, where advisers can plug in their centralised investment proposition and run a bond as simply as they can their ISA, their pension and their collective strategy. A package in a box, home in a boat, Bella.

Bella Caridade-Ferreira

Sounds good. It sounds very, good. Is there a very simple link that you can say right now that will take advisers listening to this podcast straight to your solution where they can go and understand a bit more?

Roddy Munro

Yeah, without going into www. or anything like that, if you just go into Google and type in Quilter all change please, all change. We’ve got a big landing page set up for all this stuff and equally please get in touch with your local contacts at Quilter. If you don’t have any, please go into our website and we’ll have somebody get in touch with you quicker than you can say boo to a goose because we would be delighted to help.

Bella Caridade-Ferreira

Well, that’s great. Good. Thank you. That was looking very comprehensive review of the tax implications of Jeremy Hunt’s visits to the dispatch box.

Roddy Munro

Well, no problem. Hope you enjoyed it and maybe you need to go see your own financial adviser.

Bella Caridade-Ferreira

Look, I do. I’m intrigued cause you’re also a chartered financial planner, aren’t you? Do you, you know do you, are you taking on any clients, Roddy? Do you need a new client?

Roddy Munro

Well, I Would love you to be my client, but I’m not allowed to actually practise advice.

Bella Caridade-Ferreira

I didn’t think so. I didn’t think so. But you sound very, very capable so. So anyway, any advisers out there listening to this who think they might want to offer me some financial advice for my future capital gains issues then please do get in touch, but in the meantime, what I’d like to do is thank Roddy Munro so much for his absolutely brilliant presentation on the on the changes that are coming down the track towards us. So really, really fantastic, Roddy. Great to have you on board on the podcast and let’s do this again sometime soon. Look perhaps we can catch up in a year’s time to see if anything, we’ve got the next statement coming out on the 22nd of November, haven’t we? So we may have even more horrors in that, that we’ll want to catch up on.

Roddy Munro

Yeah, we do. We’ve got that coming in anticipation and then hopefully around that time we’ll have far more clarity from HMRC on what removing the lifetime allowance looks like, but that’s not going to be straightforward, Bella, I can say that to you now.

Bella Caridade-Ferreira

I’m sure I’m sure. So let’s sort of agree to speak again by before the end of the year and do a catch up on that. But in the meantime, thank you very much and I look forward to talking to you soon.

Roddy Munro

Perfect. All the best. Bye. Bye now. Bye bye.