We unpack the budget and the implications for advisers and consumers with Quilter’s Roddy Munro

Transcript

Bella Caridade-Ferreira

Hello everyone and welcome to Compare the Platform’s Cut Through the Noise podcast, bringing you content that matters to you advisers. So, this time we’ve got Roddy Munro, head of technical sales from Quilter. Again, this is the third time Roddy visits with us each time when we’ve had a new budget and following Rachel Reeves budget, he’s back again. So, Roddy, welcome to the studio.

Roddy Munro

Thank you, Bella. And it’s lovely to talk to you again.

Bella Caridade-Ferreira

It’s great to have you here. So, look, Roddy, there’s a lot to unpick in that last budget. I think everyone was a little bit thrown to a certain extent, talk us through what’s changed and what it means for advisers and clients.

Roddy Munro

That’s a question, Bella, the way you framed that question means I could probably talk all day on, on the back of that. And I know that you, you don’t have all day to listen to me, but I’ll try and get to some of the key points. On the autumn budget, this has a significant impact on financial planning, and I think it’s important that everybody understands the significant underlying narrative shift that Reeves first visit to the dispatch box in her capacity as Chancellor delivering this budget brings when we look at what is going on. We need to kind of wind back a wee bit. Bella to look even pre General Election, when Labour was coming out with their manifesto around, no core tax raises on working people. So, working people were defining them. In fact, it’s really hard to define a working person. Isn’t it great? Yeah. Lately, Labour probably still struggles themselves today to define a working person.

Bella Caridade-Ferreira

What is a working person exactly?

Roddy Munro

What their promise was no increases in the core rates of income tax, VAT or National Insurance. And you know whether that’s hoodwinked the electorate, it doesn’t really matter. I don’t want to get into whether any of this stuff is right or wrong. But when you start to think of that, it narrowed down the options for her as to who she could potentially aim tax rises at. Now back on the 29th of July, we saw her start to introduce some of Labour’s thinking. The winter fuel allowance being cut for pensioners, school fees, private schools and VAT coming in far quicker than what was anticipated. You could kind of see the knife was out. Yeah, in the run up to the budget, there was so much frenzy. In fact, in all my years, 30 plus, I’ve never seen a bigger frenzy in the run up to this, this budget and it’s all to do with this narrative shift.

Bella Caridade-Ferreira

People started to panic.

Roddy Munro

Both Reeves and Starmer were talking about the big black hole £22 billion, and everything was doom and gloom and negative. In the run up, we saw the usual threats to pension tax relief, tax free cash in particular at risk and we saw a lot of clients go early to take tax free cash and we’re now seeing the fallout from that even right now with HMRC and the FCA having differing views on trying to get some of that back in.

Bella Caridade-Ferreira

We did. Whether you can put the money back or not, yes.

Roddy Munro

Yeah, you know what? All this stuff in the media, predominantly driven by the right wing media, just has not led to great customer outcomes. But coming into the budget, you know what we saw here was not a huge amount of people or entities or bodies, that she could aim the tax at. We saw employers take a big brunt, you know, £25 billion of the £40 billion tax rises aimed towards employers through NI. I’ll talk about that in a second. But then who else does she go at if she’s not going after the working person? She’s effectively going after people that have capital, who sit on assets. And fundamentally, you know whether those assets are either productive or unproductive. She’s trying to change behaviour through the art of taxation, and there is a famous quote by a French statesman in and around Louis the 14th times, with chap called Jean Baptiste Colbert, and he said. The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing.

Bella Caridade-Ferreira

A ha

Roddy Munro

When we take a step back a month or 5,6,7 weeks on, there’s been one heck of a lot of hissing. Look at all the farmers that have descended on Whitehall when we really understand that narrative shift. What we have here is a very different approach to economics. You know, more of a Keynesian John Maynard Keynes theme approach, to economics, where you use the art of taxation to give you leverage to increase public spending on infrastructure and that’s certainly my belief as to the big change in the labour narrative, certainly perhaps over the last 20-30, forty years even coming out of a post Thatcher Neo liberalistic world, we’ve got a huge underlying narrative shift. And many people won’t like it, don’t like it, or never will like it. But as you know, financial planners and being involved in the wealth industry, we need to work our way, work our way around. A lot of the change.

Bella Caridade-Ferreira

It’s an interesting one because there’s the narrative shift, but there’s also the execution and I think that’s also something that we can explore later.

Roddy Munro

Yeah, I think that’s right. And there’s a number of analogies you could use there. A sledgehammer to crack a nut would be a good one.

Bella Caridade-Ferreira

Exactly, yeah.

Roddy Munro

Yeah, some of the analogies wouldn’t be for public consumption, Bella. They would be for a dark pub and a glass of wine, but not in this environment. But you know, when you when you start to look at some of the changes bringing pensions into IHT is significant. But that’s probably, the biggest piece affecting financial planning, but yes, we saw rises to CGT and one of the areas you know which plays back to this working person theme though, is, as everybody knows, because it’s been covered by the media very, very well over the last 18 months, we’ve been living in a world of stealth taxation through the freezing of allowances, tax bands. All these bits and bobs, and it was right widely kind of reported right at the last minute that Reeves would push this out for another two years from tax year 28 through to tax year ending 2030. And she stood at the dispatch box and said, no, she wouldn’t do it because she was trying to protect the working person, but that working person has suffered those stealth taxes since Sunak became chancellor in 2021, and she’s chosen to continue it to 2028. And here’s an interesting stat for your avid listeners. We, at Quilter, went for a Freedom of Information request in the summer and we asked HMRC to provide us with stats as to how many people they expected to fall into the higher rates of tax i.e. 40 or 45 or even 48 up where I live between this tax year and 2027/2028, when this will begin to unfreeze.

Bella Caridade-Ferreira

How many more new people. New, yes?

Roddy Munro

Yeah. And the numbers are frightening. The numbers are 11 and a half million folk. And to try and visualise that for your listeners that would fill Wembley Stadium 128x.

Bella Caridade-Ferreira

That is a lot of people. So they’re just the extra 11 and a half million people have been captured by the stealth taxes.

Roddy Munro

Yes, exposed to higher rates 40 and 45, that’s not even accounting for folk who are being pulled into basic or coming into the first rate of plans and you know to suggest that she’s protecting the working people. I’ll leave your listeners to decide where the truth lies.

Bella Caridade-Ferreira

She’s stuck between a rock and a hard place, Roddy right. She’s inherited an economy that is in a complete mess and an NHS that is failing and lots of other things, and the money’s got to come from somewhere. We can’t just magic a cure out of thin air.

Roddy Munro

I think that’s absolutely right. The money can’t be magicked out of thin air, but everyone will behave and react to this differently. Bella, it’s going back to my quote around the goose and the feathers and the hissing.

Bella Caridade-Ferreira

Yes, she’s definitely got the plucking wrong, Roddy, but there’s a lot of hissing.

The plucking could have been smoother.

Roddy Munro

Well, yeah, when we talk about plucking and pheasants and Jeremy Hunt. Have to be careful for slip ups, Bella so let’s change tack quickly.

Bella Caridade-Ferreira

Oh, Jeremy chunt, you mean.

Roddy Munro

No comment, no comment. But you, you know, getting back on topic here, what were the key changes in the budget, employer NI, huge, and you know that that’s taken the commentary around the lines of affecting businesses of all shapes and sizes effectively it costs somewhere between roughly about £1000 per person on national average wage, extra to employ, will that have a knock on effect on the labour market, probably. Will it have different impacts on different business scales? Yes. We even saw the big supermarkets expressing their disappointment in this and perhaps I would have less sympathy for them than I would in most other businesses.

Bella Caridade-Ferreira

Yeah, me too.

Roddy Munro

It’s a hard one. They’re the ones that shaft, the farmers on potatoes 10p a pound at Christmas, you know.

Bella Caridade-Ferreira

Exactly.

Roddy Munro

Yeah. So there’s that and that has an impact. Salary sacrifice should become far more important for people in workplace pensions, for execs who can control their own income, subject to tapering rules. We might even see more people scooting around in electric cars because that wasn’t cut out at budget time and, you know, typically folk in the workplace who can afford salary sacrifice for electric cars are the richer end of society. So you know, is any of this fair? Let’s look at how we deal with it. But then then we have an unintended consequence with this extra kind of perceived business tax when it comes to pensions. And that’s all to do with workplace pensions. Auto enrolment and if we look over the last kind of dozen years or so, going back to 2012. You know, gosh, remember the London Olympics? That’s how far back we’re going to have auto enrolment has been a huge success in terms of getting more people engaged, getting more people into their workplace pension schemes. But whilst it’s successful where it’s lacking is contribution levels.

Bella Caridade-Ferreira

Yes.

Roddy Munro

And contribution levels could be under challenge looking longer term when employers have all these extra costs of employment to contend with. In order to create adequacy in that pension system for folk coming through the workplace, the simple reality is employers and employees need to pay more and employers could find that difficult. With those additional costs associated with increased NI. So, there’s one potential downside that could have an impact on the demography.

Bella Caridade-Ferreira

So you think that employers will perhaps not match or not contribute as much to employees’ pensions as they have until now.

Roddy Munro

It’s certainly one of the things that could be cut if money in a business is tight. But you know, the DWP, even under the Tories and now following them under Labour, the pensions Minister is looking to amend the auto enrolment rules with the passage of time to change the earnings thresholds to bring younger people in more quickly. And then get on a better path to adequacy. But really the only way to get on a better path to adequacy is higher contribution levels, Bella, and employers.

Bella Caridade-Ferreira

Are employers’ contributions corporate tax free?

Roddy Munro

Employer pension contributions are not subject to NI. That was one of the themes that was playing out prior to the bombshell. If we’re going to increase the rates and listen, it isn’t the headline rate, that’s the problem here. It’s the lowering of the threshold that where it gets in from nine one to five that’s really the big fight.

Bella Caridade-Ferreira

Yes, fair enough.

Roddy Munro

Now when it comes to core financial planning, I would say there are two primary themes that play out of this budget, which represent the biggest change. The first one is the impact on investment money, so that’s not the pension space that would be collective investment accounts, general investment accounts, whatever you call it. And then the second big impact is the pension piece and really we need to explore them separately. And then come back to join them together because for the majority of clients who use wealth management services, they will probably have many different types of tax wrapper, savings vehicle. So exploring them in isolation is fine. But then you have to bring it back and link them together.

Bella Caridade-Ferreira

Absolutely. Because I mean, you know, if we’ve made these changes to CGT and also pensions are now in scope for inheritance tax, that has an impact on how people are going to use their money post-retirement. How you go into retirement and how you’re planning that. You can talk us through this, but it seems to me that people might start thinking, well, I’m not going to put as much money into my pension because it’s going to be taxed when I pass it on through inheritance tax. So therefore I’m going to use it less and use other products. That that would be my thinking around that, but that you may have different views.

Roddy Munro

Yeah. Do you want me to tackle the pensions one first or the non-pensions theme?

Bella Caridade-Ferreira

Let’s tackle the pensions ones first. Because I think that’s the big one.

Roddy Munro

OK, so effectively what she announced at the dispatch box is that from April 2027, so it’s still 2 and a bit years away. Pensions will be brought into the inheritance tax regime. And you know, pensions in the main bill have remained largely free from inheritance tax.

Bella Caridade-Ferreira

Mm.

Roddy Munro

Not other forms of death, tax inheritance. Purely because the majority of pension schemes operate on a trust basis, where benefits are distributed to beneficiaries on a non-binding agreement. In other words, it’s the trustees of the scheme who’ve got the final say as to where money can be passed to from a beneficiary perspective.  If the trustees of a scheme are legally bound, in other words, their hands are tied to pay X or Y or Z, that actually becomes binding for IHT purposes, and it’s important to understand that what the government are proposing from April 2027 is that is just chucked out the window and pensions fall into the inheritance tax regime.

Bella Caridade-Ferreira

So does that mean that trustees that there will no longer be a role for people to say, you know, so that would just disappear? Would that be the impact?

Roddy Munro

I certainly think that this will now require trustees of every pension scheme to reconsider how they deal with pension death benefits and they’ll need to look at their scheme rules and talk to their pension lawyers. Yeah. So I could see change coming down the line here as a consequence of that Bella. But remember, there’s a lot of water under the bridge, there’s a consultation taking place on the practicalities of bringing pensions into the IHT regime. There’s no consultation taking place about will pensions fall under the death tax regime from IHT.

Bella Caridade-Ferreira

Yeah, that that’s done and dusted. We know that. It’s just how it’s executed, yeah.

Roddy Munro

That’s right. So there’s a bit of water under the bridge.

Bella Caridade-Ferreira

So for all our advisers who are listening to this. It’s happening whether you like it or not. What matters is how it’s done now.

Roddy Munro

Yeah, absolutely. So we need to absolutely refrain what the primary purpose of a pension is. And even if you just shove it into Google Wikipedia, it’ll come up and tell you that a pension is a tool to provide an income when somebody stops working. When I started in this industry at the brilliant Scottish Widows Fund and Life Assurance Society back in 1990, we certainly went through that academic piece of pensions being used as a tool to provide an income in retirement rather than a wealth transfer.

Bella Caridade-Ferreira

Wasn’t supposed to be a wealth transfer mechanism, was it?

Roddy Munro

No, and it wasn’t really until Osborne did his famous. Yeah, March 2014 he announced it. That’s when it flipped on its head and became a wealth transfer tool.

Bella Caridade-Ferreira

The pension freedom stuff, yes.

Roddy Munro

Because we were still in the midst of the great financial crisis, interest rates and gilt yields were on their knees and annuities provided terrible value for money. So the only way he could solve that was to remove compulsory annuities, which therefore made drawdown attractive. And then he introduced the concept of beneficiaries nominees, successors drawdown, which enabled that cascading, and he also removed that 55% income tax charge on death for anybody that held crystallised rights. Don’t want to go too technical here, but that was the catalyst that really changed the narrative where pensions became the last asset that you would look to drawdown on. Actually, when you start to play out what happened in March 2023 with Jeremy Hunt, when he announced and signalled his intention to abolish the LTA. That actually made the benefits of dying with DC pension money even more attractive, because if you died pre 75, it was all being paid income tax free. It then became a bit too good to be true when you didn’t have the lifetime allowance caps. I don’t know if you remember this the day after Hunt delivered that budget speech, 15th of March.

Bella Caridade-Ferreira

The Ides of March.

Roddy Munro

Yeah, the next day Labour came out and said that if they took power they would put the LTA back in.

Bella Caridade-Ferreira

That’s right.

Roddy Munro

And I think I think they realised that that was just a step too far and actually by pulling pensions into the IHT regime, they’ve gone further than putting the LTA back in.

Roddy Munro

In other words, it’s far harsher. So at times we have to, we have to be careful what we wish for, but if everybody anchors around the fact that the primary raison d’etre for a pension is to provide an income in retirement. I think that’s the starting point, but as an industry, we are going to have to reframe that whole pension discussion with clients who have got big pension pots. Because we’ll go back 180° again, it’s like turning a protractor over on its side. As we approach 27, we go back to where we were ten years ago.

Bella Caridade-Ferreira

Yeah, exactly. What goes around comes around, right?

Roddy Munro

What goes around comes around. There’s a lot of coverage on this. Any adviser listening to this will know. We have a scenario of double taxation. IHT will come first and then on deaths pre 75. Benefits will be paid tax free up to the remaining amount of lump sum death benefit allowance left post 75, It will all be subject to income tax. But some of this.

Bella Caridade-Ferreira

This is also complicated, isn’t it? This is why we will need advisers now. Absolutely need advisers to walk us through all this, these different complications.

Roddy Munro

100% I’ll tell a wee story about that in a minute, but with this income tax situation, some of the spectacular numbers, we’re seeing flying around LinkedIn, the right wing media, all of it can be avoided through good planning. And there’s a good expression out there, Bella. I don’t know if you’ll ever have heard it, you know, healthy.

I have to be careful about Scottish people. Healthy. Well, there’s that’s questionable. Wealthy. Well, that’s questionable.

Bella Caridade-Ferreira

Yes. Yeah.

Roddy Munro

And well advised, well, Scottish. Shut up, Roddy. You know where I’m going. There’s an expression of healthy, wealthy and well advised, and if you’re all three, you shouldn’t really be paying IHT, and it’s that the last point that, that, that’s particularly important.

Bella Caridade-Ferreira

Note to self go and check.

Roddy Munro

Yeah, there was an expression. And you know, many of your listeners won’t remember Roy Jenkins, but he said, gosh, going back many, many decades, that the only folk who are prepared to suffer IHT are folk who like the Inland Revenue more than their loved ones.

Bella Caridade-Ferreira

Right, yes, indeed.

Roddy Munro

From an advice perspective, whilst I think as an industry we’re still scratching our head, this is brilliant for advisers because clients will need your help more than ever.

Bella Caridade-Ferreira

Hmm.

Roddy Munro

And I did a big talk at the PFS conference in Manchester and I was trying to convince the audience that day that actually we’re in a good place because there are things that we can do and the value of your advice just shoots up, it just shoots up.

Bella Caridade-Ferreira

Absolutely, it’s massive.

Roddy Munro

Yeah. So some of the complexities which will be ironed out in the consultation around how this will work in practise. The way that Treasury are suggesting it working today is fraught with complication and difficulty, and it won’t work. There’s a consultation that ends on the 22nd of January, and you can be rest assured that all the big pension scheme administrators and providers and platforms will be singing from the same hymn sheet and certainly at Quilter we’ve got suggestions and ideas that will put back to Treasury to see if we can make this slicker and quicker than what’s being proposed now. A lot of water under this bridge and it raises tonnes and tonnes and tonnes of questions.

As we go into 2025, certainly advisers look out for some of the market leading thought leadership that Quilter will bring in this space. We have written a stack of material ready for next year.

Bella Caridade-Ferreira

Absolutely. Talk me through some of the options that you think advisors will. They’ll need a broader toolkit, won’t they? A broader pallet of tools to advise clients? What do you know? What do you think? What do you think they’ll have to do?

Roddy Munro

Yeah. So, there’s a number of things that can be done here. There are three big themes. Firstly, do we encourage clients to spend their money? That’s effectively that, goose and the feathers and the art of taxation by changing behaviour to drive money into the economy, to stimulate GDP. That’s what she’s trying to do. Spend your money. And one of the big things that I think advisers do say to clients who’ve got wealth and have got IHT problems is spend your money. But many don’t, so that this hopefully will drive that behavioural change.

Bella Caridade-Ferreira

Yes.

Roddy Munro

Spend it. That’s one way you can ensure the risks. So I think we’ll see far more ideas around whole of life planning guaranteed whole of life. Second death arrangements and trust. And then we’ve got gifting and gifting’s the big one. So whether we see significant change in behaviour around tax free cash and I think we will because in some scenarios not all tax free cash being left in a pension scheme could be seen as a tax on a tax because if somebody dies, that money would fall form part of an estate. So we need to look at tax feed cash differently from us.

Bella Caridade-Ferreira

Yes, so you so that would be tax on. Oh, that’s a good point. I hadn’t really thought about it like that.

Roddy Munro

For certain clients, there’s a strong argument to look to crystallise early. But then what do you do with that money? How do you rewrap it?

Bella Caridade-Ferreira

OK.

Roddy Munro

So what we will see is far more insurance bonds, typically onshore UK insurance bonds being used and trust planning. So trust planning will become very, very important as well. But it’s not just those big kind of lumps at the front and at the back, we could see significantly more money being gifted through the exemptions that we have, the 3000 gifts allowance, small things like marriage allowances or marriage gifts, but the big one, I think we’ll see a lot of is gifts out of normal income expenditure.

Bella Caridade-Ferreira

Right.

Roddy Munro

That’s not a well used relief, so if it’s not a well used position, it’s probably because of lack of awareness. So again, using gifting out of normal income expenditure could be a big, big one.

Bella Caridade-Ferreira

You can do that every year, Roddy? How does that work?

Roddy Munro

It’s done on a basis of frequency and there’s a number of criteria that would be involved. Looking at gifting out of normal income expenditure, which would fundamentally be you don’t deprive yourself of the lifestyle you enjoy. You don’t actually use capital. It’s got to be income and there has to be a regular pattern of gifting. That doesn’t mean that every amount has to be exactly the same, but there has to be a regular pattern and if anyone wants to quickly look things up, just shove into Google. IHT 403. And that is the form that that the HMRC would use to kind of layout a template. So we’re going to see that significant behavioural change because at the back end of a pension for wealthy people, there’s now a whole on second death. The only exemption that we can rely on here is spousal exemption for married couples and civil partners. So this now starts to paint a new question for people who cohabit.

Bella Caridade-Ferreira

Should they be married or should they be civil partners?

Roddy Munro

Yes, yes. That’s not a question I think you and I should attempt to answer. Bella, that’s that’s up to them.

Bella Caridade-Ferreira

So although I do, I do tell every cohabiting couple that if they don’t want the tax man to get hold of their money they should, at least for that reason alone, to protect their assets, get married, or get into a civil partnership.

Roddy Munro

Well, yes, there we go. So this whole turn around is significant. And actually when I was on stage at the PFS in November, I said to the audience, I think this is the biggest change to financial planning I’ve seen in my 30 odd years. It’s that big. When you start to tie in the pension stuff to non pension work, you know there’s layer and layer of change and what what I’m really driving at there is the changes that have been running for a while, certainly since Hunt was Chancellor and he delivered his autumn budget in 2022 and I think we spoke about this the last time we were together, which is all to do with the changes in dividend allowances and CGT annual exempt amounts going back to two or three tax years. And remember there was a wide anticipation that Reeves would increase the rates of CGT and she has done so and they weren’t as high as where some commentators thought they could go. So that’s good news to an extent. Just to recap.

She increased the rates of CGT. And I’m not going into any of the round the side things. I’m just talking about main rates of CGT here. She increased the rate, the higher rate typically for higher an additional rate taxpayer, by 20%. So it’s gone from 20 to 24%. 20% uplift. Like when somebody looks at 20 to 24, it doesn’t look big, but if you say 20%, that’s big, right?

Bella Caridade-Ferreira

Yeah.

Roddy Munro

But what’s bigger and I think’s been completely missed, is the rate for the lower rate of CGT for basic rate taxpayers fundamentally, which has gone from 10 to 18%.

Bella Caridade-Ferreira

Yeah, that was a big jump. That’s almost double.

Roddy Munro

Yeah, nearly double. Yeah. And that makes it less attractive now to transfer assets to a lower tax payment. Suppose. So, when you, when you look at that change in CGT, anybody that is thinking, oh, well, it’s not too bad, let’s kick the can down the road.

It isn’t going to get any better. The more gains you have down the line. It’s going to get taxed higher.

Bella Caridade-Ferreira

And that was introduced overnight as well, wasn’t it, Roddy? The increase in the rates?

Roddy Munro

Right. Yeah, yeah. And some were surprised by that, because if she had, she had made a change and say, done it from the end of the tax year or the start of the next tax year, you would see a lot of activity to sell. From a financial planning perspective, when you start to look at those increases in CGT rates. When you start to look at the CGT allowance only a few years ago being at 12,300 and now it’s only 3,000. And you look at the dividend allowance, when Osborne introduced it 6-7 years ago, it was OK, now it’s £500.

Bella Caridade-Ferreira

It’s 10% of that.

Roddy Munro

Yep, wrap that into a box and that’s effectively drained the life out of collective investment accounts or general investment accounts. Now I am not for one minute discussing to say that they’re dead, not at all. But what I am saying is they’re significantly less effective than they ever have been before, and you know, if we wind the clock back some 16 years to 2008. Today actually, is my wedding anniversary.

Bella Caridade-Ferreira

Oh my goodness. I hope you didn’t forget Roddy.

Roddy Munro

I did. I always do, but I’ll apologise make up for later.

Bella Caridade-Ferreira

Oh my goodness.

Roddy Munro

Alistair Darling, back in 2008, slashed the rates of CGT, that meant holding shares or funds or assets in an unwrapped environment.

Bella Caridade-Ferreira

Meant there wasn’t anything to worry about, yeah.

Roddy Munro

And you’ll know better than me, Bella being involved in the side of the market, that you focus on 2006, seven, eight. That’s when platforms really started to take off, right.

Bella Caridade-Ferreira

Yep, exactly right.

Roddy Munro

And you had a GIA, an ISA and a pension. But now in today’s world, you’re going to need GIA, an ISA, pension and onshore bond, a trust range pension wrappers for kids, Junior ISA wrappers for kids. It’s broadened significantly.

Bella Caridade-Ferreira

It’s much more complex.

Roddy Munro

It’s much more complex and trying to plug an IHT black hole on a pension, which for many of your listeners will be substantial amounts of money, we’re going to have to do things differently. And I think as an industry that financial planning rule book that we’ve been using for years shuts and a new chapter has to open.

Bella Caridade-Ferreira

Is it shut or do we just throw it away and rewrite it?

Roddy Munro

Yeah, we shut it. We chuck it on the skip, set it on fire and we rewrite. We start to write a new one.

Bella Caridade-Ferreira

Yes. Yeah. Because everything we’ve been doing for the last 10 years, as you say, is just got to be redone completely.

Roddy Munro

You’ve nailed it. That’s exactly it. And that’s going to require a couple of brave pills, right? Because we operate in an industry with kind of, let’s have a look back and mark our homework. And people are going to have to do things much more differently to what they’ve ever done before.

Bella Caridade-Ferreira

Yeah, it’s going to be really hard for advisors, right, because they’ve been advising clients in a particular way for a long time. You know you your, your ISAs or your GIA accounts first and you leave your pension that’s sacrosanct, you leave it there to the last minute. We’re fundamentally changing all of that and it’s all that’s quite a lot for an advisor to get his head around.

Roddy Munro

It’s massive so that reordering becomes very client specific, but if you were looking for a textbook answer, you would go pension first, but then you’ve got to think about and the exposure to income tax today versus IHT on second death. So it’s a balance. You’ve then got to think well, how heavily do you draw down? Could the client run out of money if you have stock market turn sequence risk? People underestimate their own life expectancy, so a couple in their mid 50s, one of them will statistically get to 100, right? That’s the message. But you then go to switch assets. Next, do you go to draw down on ISAs because they’re ineffective for IHT? And do you leave bonds last? Well arguably so, because having a bond and a trust wrapper is a good mitigant for IHT. So this whole storyboard that had been emerging about used bonds and switch on the 5% withdrawal. That might not be as effective as it once were, and you couldn’t use that strategy for gifting out of normal income expenditure, because that’s a return of capital so. Yeah, this is complex.

Bella Caridade-Ferreira

It’s complicated stuff, yeah, there’s so much to get your head around.

Roddy Munro

There is, but the one thing that we’ve got is time. One big warning sign that I always put up. I know this isn’t visual, but I’d have a big warning sign. Slow down.

Let’s take our time. But as I was trying to reassure 1000 people in the audience at the PFS as an industry we’re resilient, we’ll come through it, we will come through it, but there will be a lot of propositions out there that need refreshed, updated, and there may well be a number of providers that won’t be able to respond to some of this.

Bella Caridade-Ferreira

Well, that’s going to be quite interesting, isn’t it? Because not all platforms have that whole array of tools and products and wrappers. So advisors may have to start thinking about am I on the right platform? If I’ve got customers with complicated needs who are going to need onshore bonds, offshore bonds, if you need an offshore bond, a trust, etc. Then they really do need to find the right platform that’s going to provide that whole gamut of products and not all of them do.

Roddy Munro

Yes, I think that’s right. If they want what I would call a slick user experience, customer journey using platforms that can satisfy all requirements would serve an advice business well. But just the mechanics of setting up an insurance bond require the underlying provider to be an insurance company by definition, and many providers technically aren’t, so they would have to white label.

Bella Caridade-Ferreira

They’d have to white label somebody else product?

Roddy Munro

I would leave that up to you and your listeners to determine that if that’s best outcome.

Bella Caridade-Ferreira

Right. Yeah, it’s all very complicated.

Roddy Munro

It is you mentioned offshore there, Bella. I love in all my years in this game if I had a pound for every time I heard gross roll up wins gross roll up in an offshore environment wins I would be a wee bit richer than I am today. But in today’s world, in tomorrow’s world that storyboard doesn’t wash.

Bella Caridade-Ferreira

Yes.

Roddy Munro

Anymore, purely because of the changing tax landscape over the last two to three years and really an offshore bond truly wins from a tax perspective if an advisor, the family that they’re recommending it to are convinced that the eventual beneficiary would be. A non taxpayer, which typically now can only be children, the changes to tax around state pensions, personal allowance means most pensioners will be basic rate taxpayers soon. So really it only leaves the market open for kids. And that would only be if the gain was within all the allowances available, so the personal allowance 12570, the 5000 savings allowance, the other, the total allowances, 18 and a half grand to the nearest whole number. Or that client is potentially or the eventual beneficiary is going to go and reside offshore, and that narrows it down. So eventual client beneficiaries or owners of those assets, if they’re going to pay basic additional or higher rate tax, offshore is not as attractive as it once was, so that that market’s changed significantly as well.

Bella Caridade-Ferreira

That’s interesting. So just generally then in terms of wealth transfer, what should advisers be thinking about when they’re, you know, obviously not the pension, but what else should they be doing to transfer money to the next generation?

Roddy Munro

So the one conclusion that I will draw now on this stuff and again some of it’s too early to tell a lot of this is going to be behavioural, how we reframe the pensions journey with clients. In today’s world, remember that we’ve still got up until midnight on the 5th of April, 2026, today’s tax rules. And then after midnight on 6th of April 2027, we’ve got the new tax rules. The way I visualise this, Bella is imagine our Big Ben heading to midnight. Tick, tick, tick, tick, tick. Just before midnight, your client dies. Well, its effective for IHT being in the pension.

Bella Caridade-Ferreira

Yeah.

Roddy Munro

Tick, tick, tick tick, tick, tick, midnight. I’ve got another client who’s just died. It’s now ineffective. So you’ve got a cliff edge.

Bella Caridade-Ferreira

Yeah.

Roddy Munro

So really all I would be encouraging advisors to think about now is which clients need to start going on that journey.

Bella Caridade-Ferreira

So that’s even more complicated, isn’t it, Roddy?

Roddy Munro

Yeah, it really is. So that whole reframing is significantly different to what we’ve ever done before with this turnaround.

Bella Caridade-Ferreira

So they’ve almost got to have two sets of rules in place, or two, they’ve got to have two plans in place, haven’t they? Just in case the client dies before that day or just in case after that date.

Roddy Munro

And therein lies the risk. Can the risk is that people go and try and do and execute strategies now and something bad happens, so it’s about going on that journey together, watching the consultation as to how the practicalities of this plays out and then only responding so I can kind of see in my head now five different client types here.

Bella Caridade-Ferreira

Yeah.

Roddy Munro

But going into that now would take far too long and that’s why I would encourage people to come and listen to us next year because we’ve done all this thinking.

And you know you’ll have. You’ll have a client right now who has got so much wealth even in their pension, that IHT is a problem, start dealing with it now and you’ll have the extreme where I need my pension and IHT can never be a concern. And then you’ll have people sat in the middle and then an advisor’s going to have to start to segment across their client bank to see what course of action is best. Now, here’s my point. When it comes to pensions between now and April 2026, pension has always won because it’s the best place tax efficiently to put money in safe.

Bella Caridade-Ferreira

Yep.

Roddy Munro

And it’s also been the best place for somebody to die in. Whereas after April 27, it’s still the most tax efficient place for the majority of folk to put money. But it’s now the least efficient place to die. So in today’s world. It didn’t matter. Tomorrow’s world it does matter and it changes that whole advice landscape. That’s the scale of the change we have here.

Bella Caridade-Ferreira

That’s huge and coming on, you know what advisors platforms and providers have had is two years or so of of implementing Consumer Duty, which is a complete, you know change in the way they work et cetera. And now they’ve got to go into this, this. new set of problems, really. That’s that they have to deal with and get their heads around. So it’s quite a substantial mindset shift really for for advisors.

Roddy Munro

Massive. Much of the work that I’ve done facing into advisors over the last six weeks and that my technical teams out on the road, the thirst in demand for knowledge has gone stratospheric and that’s in particular around IHT planning and trust planning and bonds

Bella Caridade-Ferreira

It’s absolutely huge.

Roddy Munro

Yeah, it’s, massive. You know, there are various other things that we could be thinking about. You know, how do we insure some of those risks? So I would be expecting the protection industry to come up with a response. The best advice for many people might just be go and spend your money. There will be so many clients who choose to live a poorer quality of lifestyle, to try and protect for the next layer down.

Bella Caridade-Ferreira

But actually, sometimes just enjoy your money while you can. You can’t take it with you, and the tax man’s going to get his hands on it before the next generation does, so you might as well spend it while you can.

Roddy Munro

I think there’s a big thing in that and that’s behavioural, that’s a behavioural change and it’s like anything the value of advice isn’t always just from the tools and the plans and the funds that you pick, it’s about the story you take a client on, isn’t it? Yeah. How many basis points are in value when you’ve held a client’s hand when markets are rocky and they’ve not moved to cash? This is a similar piece.

Bella Caridade-Ferreira

Yeah. It’s an interesting one, isn’t it? Because everyone’s tendency is to, you know, save as much as they can and pass it on. But your clients, a client’s shift in mindset because they’ve got to get their heads around that. If they don’t spend that money, the tax man’s going to get it, not the next generation.

Roddy Munro

And that’s why we can come up with the best plans in the world. But part of this journey is behavioural more than anything else. And that brings me back full circle to my goose analogy in the art of taxation. She is using her tax levers here to change client behaviour. Now the big scary thing. Is if clients don’t do anything here, she wins. If clients do do things and just starts changing behaviour and spending, she wins. Where the real win is for clients and advisors is making sure we deploy effective strategies to minimise the tax take and that’s the first barrier for an advisor to get their head round. We can in our own minds fight this stuff as hard as we want think it’s fair. Unfair. Whatever. The fact is, it’s here and it’s our job as an industry to work out how we get the best outcomes for clients when it comes to principle 12, right? The central tenets of Consumer Duty.

Bella Caridade-Ferreira

Yeah. What’s the next three steps that all advisers should do in thinking about all of this?

Roddy Munro

First one is to continue just to keep it slow, we need to see what comes out of the consultation on the practicalities. The second one would be start segmenting clients and getting them on a journey, a talking journey, and that I imagine that will have happened already for many firms and advisors, and it could be many clients picking up the phone going. What have I just read in the daily Telegraph, the right wing media are not helping the game here.

Bella Caridade-Ferreira

Yes. No, they’re not. They’re not. Doom and gloom.

Roddy Munro

And then the third one is work with the platforms and providers that you know will win.

Bella Caridade-Ferreira

And that, I think is you know that’s it in a nutshell. You’ve covered it off really, really well. And I just wanted to bring back something you said earlier about clients needing to be healthy, wealthy and well advised.

Roddy Munro

You know that healthy, wealthy and well advised analogy when it plays into the D2C space of which there is a huge popularity change in regulations around a bridged advice, albeit it’s not aimed at this kind of typical demographic. Any wealthy people who are trying to do this themselves on any of the direct platforms. Forget it. You can’t buy insurance bonds for a start.

Bella Caridade-Ferreira

Forget it, I know. Nope, you can’t. You can’t buy onshore bonds for yourself on a D2C platform.

Roddy Munro

You wouldn’t have a clue which trust to wrap things up in.

Bella Caridade-Ferreira

Oh, dear, no, it’s all way too complicated. Way too complicated. So we see today in Rachel Reeves’ budget the true value of advice coming out.

Roddy Munro

100%. Never more so I think. And actually that should encourage business owners to take a long, hard look at what their VP is and whether or not they need to make changes to how they operate, how they conduct target markets and do they potentially look at their fee arrangements. I’m not saying that fees should go up or down, but some businesses might want to reevaluate that. I don’t think you can do all that until you’ve fully got your head round the implication of these changes, and I think we’ve concluded they’re pretty massive, right?

Bella Caridade-Ferreira

Massive indeed. And 2025 is going to be a huge year of learning for the entire industry.

Roddy Munro

Yeah, that’s it.

Bella Caridade-Ferreira

So on that note, Roddy, I’d like to thank you very, very much for coming on this podcast and talking us through all these changes. And hopefully when we finally have the end of the consultation, you can come back and explain that to us. Again, that would be absolutely wonderful.

Roddy Munro

Happy to do that, Bella.

Bella Caridade-Ferreira

Thank you so much, Roddy, and we look forward to talking to you next year.

Roddy Munro

Merry Christmas. Bye bye.

Bella Caridade-Ferreira

Merry Christmas.