PFP - Spring 2023

Spring 2023 thepfs.org

PROFESSIONAL

Pension puzzle HELPING CLIENTS NAVIGATE THE RISKY ROUTE TO RETIREMENT

HOME REPAIR

SPRING FORWARD

DUTY BOUND

The UK mortgage market aims to rebuild in 2023

Tax opportunities following the Autumn Statement

Firms prepare for the new Consumer Duty this July

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02/02/2023 11:07

Connections that matter Learn from others or give back.

With Connect the choice is yours.

In 2023 we’re growing the number of mentees AND mentors on Connect. Find your perfect match.

Start your journey at thepfs.org/connect PFP.Spring23_002.indd 2

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CONTENTS Spring 2023

Sector Focus

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10 Regulation Updates on regulation and legislation across the UK and Europe 12-13 Edinburgh Reforms What the UK government’s regulatory reforms will mean for advisers 14-16 Consumer Duty How firms can prepare for the new requirements this July

Business Focus 17-19 Pensions Clients’ retirement plans impacted by the cost-of-living crisis

34-35 Tax How advisers can help UK adults understand their taxes

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36-38 Funds How to find investment value in 2023

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39 Tech Refresher

20-22 Economy The difficult economic backdrop affecting clients and businesses

44-45 Advice process The POWER panel proposes a new way to engage clients

23-25 Mortgages Will 2023 see a revival of the mortgage market?

46 Education We meet the Education Champion of the Year 2022

News & Opinion

26-31 Tax planning Key tax planning opportunities following the Autumn Statement

47 Learning Updates from the PFS on members' continuing professional development

04-05 Opinion Events, learning and benefits PFS members can look forward to in 2023

32-33 Fraud An increasing number of financial scams is a growing concern for retirees

48 Tech Q&A

06-09 News UK and regional news from the PFS

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50 The Big 10 Test your knowledge with our Q&A

40-41 Events The return of the PFS graduation ceremony

CONTACT US

Personal Finance Society 20 Fenchurch Street, London, EC3M 3BY Tel: (020) 8989 8464 Fax: (020) 8530 3052

Cover illustration: Solji Lee

Personal Finance Professional is the magazine of the Personal Finance Society (PFS). Members receive a copy as part of their membership. The cost to non-members is £7 per copy.

Views expressed by contributors or advertisers are not necessarily those of the PFS. The PFS will accept no responsibility for any loss occasioned to any person acting or refraining from action as result of the material included in this publication. Reading issues of Personal Finance Professional can be included as part of members' CPD requirement (35 hours per year).

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EDITORIAL Editor: Luke Holloway luke.holloway@cii.co.uk Contributing editor: Liz Booth DESIGN Art editor: Yvey Bailey Picture editor: Claire Echavarry Production: Jane Easterman Printing: The Manson Group

PUBLISHER Redactive Publishing Ltd, 9 Dallington St, London EC1V 0LN ISSN 1754-8055 © Personal Finance Society.

For sales and advertising please contact us on pfs-sales@redactive.co.uk or 020 7880 7661

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MEMBERSHIP

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WHAT’S ON THE HORIZON?

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Megan Webb reveals what members can look forward to this year ith spring on the horizon, now is an excellent time to look ahead at some of the key activity and initiatives involving members across 2023.

Volunteers from our PFS regions will guarantee you a warm welcome at one of our 75 PFS Local Conferences taking place across the UK this year.

Held in three blocks – spring, summer and autumn – each conference will focus on topical updates from subjectmatter experts.

thepfs.org | Personal Finance Professional | SPRING 2023

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MEMBERSHIP

During the spring period, expect updates on: ● What the Consumer Duty means for research and due diligence. ● Investment planning in the new tax environment. ● Financial planning essentials for small businesses, and much more.

We have also freshened things up with some subtle changes throughout the day, including: ● A friendlier feel, with more of a workshop style (say goodbye to ‘death by PowerPoint’).

● Instant polling, which creates natural talking points, making it easier for you to talk with other delegates. ● Designated times for ‘lunch and learn’ and ‘conversations over coffee’ slots. ● A real sense that this is your community of good practice.

ROADSHOWS THAT DELIVER Alongside our PFS Local Conferences, you are invited to attend any of our 12 Accumulation & Investment Roadshows and six Retirement and Later Life Roadshows. These will explore the latest thinking around each area, while providing practical planning points and actions to support advisers in continuing to deliver better consumer outcomes.

Our in-person events are supplemented by a varied programme of digital events, available to watch live or on demand at a time that suits you. Forthcoming events are always listed in the PFS member newsletter, with the following taking place later in February: ● Adviser pain point: First conversations with clients. ● Goodbye greenwashing, hello greenproving. ● Raising awareness of economic abuse and transforming responses to it.

POWER UP The Financial Planning Practitioner Panel is working hard to shape another year of inspiring financial planning content for the profession on PFS POWER. Head over to www.pfspower. org to check out the latest POWER

EASY ACCESS TO KEY BENEFITS

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Get more from this article by visiting: thepfs.org/events Local conferences, roadshows, digital events thepfs.org/connect The Connect eMentoring platform

pfsfestival2022.org Festival of Financial Planning 2022 pfsawards.org Personal Finance Awards 2023/24

podcasts, articles and weekly webinars, covering every aspect of financial planning. There’s plenty to catch up on in the on-demand library too.

Elsewhere, our paraplanning community is delivering a series of ‘paraplanner lab’ sessions on the first Wednesday of each month. These onehour virtual workshops welcome all paraplanners to hear from a variety of experts, participate in open discussions and network with peers. To book, follow the links in your PFP newsletter.

PROUD PROFESSION Looking further ahead, the PFS’s annual conference will return on Thursday 2 November 2023 – save the date now. The Festival of Financial Planning 2022 was enthusiastically received by the 2000-plus delegates who attended and highlighted that the desire to network and catch up with old friends at large-scale face-to-face events remains strong.

We are committed to delivering another informative and inspiring event for planners, paraplanners, compliance specialists, mortgage advisers, support teams and business leaders.

It is also important to recognise and celebrate the best our profession has to offer and we will be looking forward to presenting the Personal Finance Awards 2023/2024 later in the year.

They are an opportunity to showcase high standards and the invaluable work of our profession in supporting consumers with financial reliance and independence.

Finally, throughout 2023 we are seeking to grow the number of mentees and mentors on Connect – our e-mentoring platform – as well as build the number of active relationships. Whether you are seeking support to develop your career, or have knowledge and experience you can share by giving back, this remains a satisfying way of engaging with other personal finance professionals. ●

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Megan Webb is programme development & partnership manager of the PFS SPRING 2023 | Personal Finance Professional | thepfs.org

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02/02/2023 08:28

NEWS

R E G U L AT ION

PFS PUBLISHES CONSUMER DUTY GOOD PRACTICE GUIDE FOR FINANCIAL ADVISERS

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In support of the Financial Conduct Authority’s (FCA) flagship regulatory reform, the Consumer Duty, the PFS has created a good practice guide for personal finance firms.

The Consumer Duty began with a campaign by the Financial Services Consumer Panel to create a statutory ‘duty of care’ in January 2017.

Marking a crossroads in the way financial services works in the UK, the Consumer Duty lists four outcomes, against which firms should judge their impact on consumers. They are: ● Price and value. ● Consumer understanding. ● Products and services – ensuring products are designed properly for their target market.

Consumer support – ensuring claimants don’t face unnecessary barriers.

Dr Matthew Connell, director of policy and public affairs at the PFS, said: “There is no greater discipline for a professional than sitting in front of a client for an annual review and explaining how their

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R E G U L AT ION

PFS RESPONDS TO FUTURE DISCLOSURE FRAMEWORK DISCUSSION The Financial Conduct Authority (FCA) has published its Discussion Paper on a Future Disclosure Framework.

In response, Dr Matthew Connell, director of policy and public affairs at the PFS, said: “The PFS welcomes the FCA’s review of the disclosure framework. The EU disclosure regime for investors did not work well for consumers for two reasons. Firstly, it was not based on rigorous consumer research, so the content and format of the information given to investors was not based on what

Tweet Tal k

investors needed to know, when they needed to know it, or in the best format to engage consumers.

“Secondly, the disclosure information for consumers also relied on a high degree of wishful thinking about the power of distributors over product providers. This is because issues around standardisation of information from investment houses were not addressed properly by EU regulators.

Instead these issues were left to distributors to resolve. For example, regulators did not

investments have performed.

“The Consumer Duty recognises the unique position advisers have in assessing value for clients, saying ‘the adviser can often also have the clearest oversight of the customer’s overall position and an overview of the total proposition’.

“Our good practice guide sets out the regulator’s expectations and is designed to start a conversation about how advisers can discharge the Consumer Duty in a practical and achievable way.”

To read the full good practice guide, visit: https://bit.ly/3DfKgm1 Read our article on the Consumer Duty on page 14 of PFP

establish proper, standardised approaches to transaction costs within investment funds and instead left it to distributors to request information from providers that those providers were unwilling or unable to deliver.”

Dr Connell concluded: “The new rules must also be based on rigorous consumer research built around the real-life interactions that consumers have with advisers and investment providers and should recognise changes in technology that can improve both the presentation of information to consumers and the ability of advisers to keep records.”

The discussion period ends on 7 March 2023.

To find out more and contribute to the discussion, visit: https://bit.ly/3Jjpfe8

@elliotguthrie

@IFA_Dan

@phoenixibiza1

Great weekend in London graduating from @pfsconf as a Chartered financial planner, a nice way to celebrate five years of study, 22 exams (not counting a few resits!) and an estimated 1,830 hours of study

Fantastic to talk to @spallister1 after just a “few” years. A great opportunity to raise awareness of My Personal Finance Skills and talk through the good and bad times which shaped my outlook

Thank you @pfsconf and Alison @bankofengland for the opportunity to host the quarterly MPR. Valuable insights

thepfs.org | Personal Finance Professional | SPRING 2023

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02/02/2023 08:28

NEWS

EVENTS

PFS HOSTS FIRST GRADUATION CEREMONY SINCE 2019 The PFS once again welcomed members to a graduation ceremony for those qualifying as Chartered financial planners, Associates or Fellows of the PFS in the period 1 July 2019 to 30 June 2022.

The graduation ceremony was the first since 2019, as the Personal Finance Society paused ceremonies due to the Covid-19 pandemic.

The graduation took place on Friday 11 November across two ceremonies in Westminster’s Central Hall. Of those in attendance, 51% graduated as Chartered financial planners, 1% graduated with an Advanced Diploma in Financial Planning, and 48% graduated as Fellows of the PFS.

The PFS would like to congratulate all the graduates on their qualifications and new designations. Watch the video below for some graduation highlights and find out what it means to some of the graduates to achieve these qualifications.

For further qualification opportunities from the PFS, visit: https://bit.ly/405Lslx To see a list of those graduating at the ceremony and watch highlights of the day, visit: www.thepfs.org/105702 Read our feature on the PFS graduation on page 40 of PFP

AWA R D S

These then proceed to judging panels who deicide category finalists.

Criteria for entrants includes: ● Completed a CII qualification as part of an apprenticeship standard or framework. ● Passed overall apprenticeship standard or framework. ● In 1,000 words, explain how your nominee has made a positive contribution to their profession and wider society while completing an insurance or financial services apprenticeship in the last three years – up to 31 December 2022. The judges will be looking for quantifiable accomplishment, creativity and innovation, and demonstration of standards, professionalism and trust.

Nominations are open and close on 12 May 2023.

To enter, visit: https:// forms.office.com/e/ Dawu1bV2Lk or follow the QR code, right. ●

CII APPRENTICESHIP AWARDS The Chartered Insurance Institute (CII) is delighted to announce the CII Apprenticeship Awards celebrating the achievements of exceptional apprentices from across the UK in seven categories – including four categories in the financial services profession – with cash prizes for each award funded by the Education and Training Trust.

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WHO CAN APPLY? The CII Apprenticeship Awards are open to all apprentices in England, Northern Ireland, Scotland and Wales that meet the criteria. ● CII qualifications must have been completed as part of the apprenticeship standards and frameworks. ● Nominations are welcome from employers, training providers and apprentices themselves. ●

FINANCIAL SERVICES CATEGORIES ●

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Financial Adviser Apprentice of the Year – Level 4 (£800).

Financial Services Administrator Apprentice of the Year – Level 3 (£500).

Mortgage Adviser Apprentice of the Year – Level 3 (£500).

Paraplanner Apprentice of the Year – Level 4 (£600).

HOW WILL THEY BE JUDGED? ●

All applications will be examined to find the highest scoring category entrants for each standard.

@FTAdviser

@LIFTFinancial

It will not only be advisers who are expected to promote better consistency and certainty going into 2023, but regulation and the FSCS levy should also follow suit, says Matthew Connell of the PFS

Today Ed attended the @pfsconf graduation ceremony, celebrating his qualification as a Fellow of the PFS and his Chartered status. Well done, Ed, we’re so glad the ceremony could finally take place after the events of the last few years

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02/02/2023 08:29

NEWS

DI V E R S I T Y

CII GROUP REPORTS NARROWING GENDER AND ETHNICITY PAY GAPS

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The CII Group has reported declines in its median gender and ethnicity pay gaps. The group’s median gender pay gap stood at 9.31% in 2022, the lowest since the organisation began reporting in 2019. Its median ethnicity pay gap fell to 9.9%, from 14.1% in 2021, the first year it reported this statistic.

The organisation’s gender pay gap data is based on 203 individuals employed by the CII Group in April 2022, while the ethnicity data reflects information provided by 177 individuals at that time.

The organisation also published data that shows an increase in its mean gender pay gap to 21.19%, reflecting fewer males employed in lower- and middle-quartile pay roles. The figure remains lower than the 28% differential the organisation reported

in its first statistics in 2017. The CII Group’s mean ethnicity pay gap nearly halved year on year, falling to 13.1% in 2022.

Mean and median data on the CII Group’s pension gap shows an increase in

2022 compared to 2021. The figures used in this calculation include both employer and employee contributions.

Alan Vallance, the CII’s CEO, said: “We choose to publish this data despite our headcount being below the required reporting threshold, because we believe it is the right thing to do. It is reassuring to see further improvement in these latest figures, while recognising that small changes in our employee composition can make a significant difference to these important measures, which we must bear in mind when making historical comparisons.

“There is clearly more to be done and we will continue to take positive action in collaboration with other organisations to improve diversity across our sector.”

M ORTG AG E S

FCA SETS OUT HOW MORTGAGE FIRMS SHOULD BE SUPPORTING BORROWERS The Financial Conduct Authority (FCA) has set out ways that mortgage firms can help customers worried about or already struggling with their mortgage payments as a result of the cost-ofliving squeeze.

The FCA said it expects firms to support their customers in a range of ways that meet their needs. It has published guidance setting out the options firms can use to help their customers to manage their monthly mortgage payments, alongside new information for borrowers affected by rising prices.

The FCA’s draft guidance sets out the flexibility firms must show in supporting customers who have missed monthly

mortgage payments, or who are worried they may not be able to make payments in future. It covers options such as extending the term of their mortgage, switching to interest-only for a temporary period, moving to a different interest rate or making reduced monthly payments for a temporary period.

The regulator stressed that mortgage borrowers should carefully consider any steps they take and customers who can keep up with their payments should continue to do so.

The FCA says it is closely monitoring the mortgage market and will continue to act so consumers get the support they need.

thepfs.org | Personal Finance Professional | SPRING 2023

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02/02/2023 08:30

NEWS

L E A R N I NG

CII PILOTS NEW FORM OF FINANCIAL PLANNING ASSESSMENT The Chartered Insurance Institute (CII) is piloting a new form of assessment for the R06 Financial Planning Practice unit.

The Shaping the future together consultation gave members and other key stakeholders the opportunity to feed back on the CII’s proposed plans, as well as the services it delivers and how the professional body can best meet their needs and expectations in the future.

The CII is conducting this pilot as the majority of financial planners who took part in the Shaping the future together consultation said they wanted more flexibility and realistic assessed tasks to some assessments.

In place of the scheduled written exams, the professional body is piloting coursework assessments for the R06

Financial Planning Practice unit of the CII Level 4 Diploma in Regulated Financial Planning.

The format of the coursework assessments for R06 will be assignments based on client case studies.

Gill White, chief customer officer at the CII, said: “The assessment is designed to meet the same syllabus learning outcomes and assessment criteria as the current R06 exam, and meets the Level 4 qualification descriptors set out by education regulators. The assessment criteria include a requirement for analysis and justified recommendations, which are appropriate to assess in longer responses such as case study-based assignments.

“We worked with practitioners within the profession, advisory groups and the PFS board to discuss how these skills are demonstrated in a professional context, to design the coursework assessment approach and tasks.”

A review will be undertaken later this year once the pilot is completed and feedback from candidates has been received.

The CII will then decide during 2023 whether assessment for the R06 Financial Planning Practice unit will switch from written examinations to coursework and agree the timetable for any changes.

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P E N S ION S

FCA CONFIRMS PLANS TO DELIVER REDRESS TO MORE THAN 1,000 FORMER BSPS MEMBERS The Financial Conduct Authority (FCA) has published final rules for a redress scheme for former members of the British Steel Pension Scheme (BSPS) who received unsuitable advice to transfer out. The FCA expects that more than 1,000 consumers will receive redress as a result.

Firms will have to review the advice they gave and pay redress to those who lost money because of unsuitable advice.

Dr Matthew Connell, director of policy and public affairs at the PFS, noted: “We recognise that a significant number of BSPS members were given unsuitable advice and that the FCA is right to set up a Section 404 scheme to ensure that redress is paid to those members who qualify for it. It

is right to take steps to ensure that firms have the resources to pay compensation.

“We should remember that the FCA estimates that more than half of transfer cases were found to be suitable, in spite

of a chaotic transition process to the new British Steel pension arrangements, in which key information was only given to members in a piecemeal way by the BSPS. “This figure is in stark contrast to Financial Ombudsman Service (FOS) uphold rates for BSPS complaints, which were running at 98% at the beginning of 2022.

“It is important that FOS judgments follow the approach set up by the FCA for the Section 404 scheme. If a complaint to the FOS at the end of the process is almost certain to be upheld, then ultimately consumers will end up paying a compensation bill that is not justified by the facts.”

SPRING 2023 | Personal Finance Professional | thepfs.org

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R E G U L AT I O N

In this issue, Dr Matthew Connell takes a look at pension income advice and BSPS retention rules THEMATIC REVIEW OF PENSION INCOME ADVICE

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CEO

BSPS RETENTION RULES EXTENDED In January, the FCA published a policy statement, PS23/1, confirming that the temporary British Steel Pension Scheme (BSPS) asset retention rules will be extended so that they continue to apply until firms have resolved all relevant BSPS cases that are subject to the rules of the BSPS consumer redress scheme, as well as other relevant BSPS cases outside the scheme.

The FCA said: “This intervention will help ensure that the firms responsible for giving bad BSPS advice meet the cost of the redress liabilities that arise and reduce the risk that the firm fails, with costs being passed to Financial Services Compensation Scheme (FSCS) levy payers.

Accordingly, the intervention increases the likelihood that the ‘polluters’ that cause consumers harm and give rise to redress liabilities meet the cost of those liabilities. Where firms do fail, the intervention is designed to increase the likelihood of an orderly wind-up of the firm, reducing the impact on FSCS levy payers.”

The FCA also published a Dear CEO letter, which sets out its expectations of firms that have either received proceeds from a BSPS transfer or continue to be involved in managing the transferred assets, under the BSPS consumer redress scheme.

The Financial Conduct Authority (FCA) has launched a thematic review assessing the advice consumers are receiving on meeting their income needs in retirement.

It described the review as “a piece of discovery work to explore how financial adviser firms are delivering retirement income advice and assess the quality of outcomes consumers are getting”.

The FCA will be looking at the quality of both initial and, NEW FINANCIAL PROMOTIONS RULES where relevant, ongoing advice.

A new authorisations ns gateway is being The FCA went on to explain in that its wider introduced, which will mean firms Assessing Suitability Review 2 had been paused need to apply to the e FCA if they wish to allow resources to be concentrated centrated to continue or start approving financial on its response to Covid-19. The review promotions for unauthorised uthorised persons. continues to be on hold while le the new Currently, any authorised orised person thematic review focuses on the more can generally approve ove financi nancial ancial specific issue of how the retirement irement promotions for unauthorised uthorised income advice market is functioning. nctioning. persons.

The FCA said it “will also focus cus The FCA published da on how firms are responding g to consultation paper (C (CP22/27) CP22/27) changing consumer needs ass a in December 2022, w which hich result of the rising cost of living”. includes proposals ving”.

The FCA will begin the review on how it intends view in Q1 2023 and aims to publish a report to operationalise the e setting out its findings in Q4 gateway, including 4 2023.

The results will also feed into proposals on assessing o ing the FCA’s supervisory work applications and regulatory reporting. gulatory repo porting. ● connected with the Consumer Duty.

Dr Matthew Connell is director of policy and public affairs The FCA said: of the CII “Firms selected for the review can PFS ONLINE POLICY CONTENT expect to be contacted early Briefings, updates, research papers and much more are available for download at: www.thepfs.org/insight in 2023.”

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WHAT’S ON THE RADAR?

Dear

thepfs.org | Personal Finance Professional | SPRING 2023

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In 2023 you can look forward to nearly 100 CPD events across the UK, including: 75 PFS LOCAL CONFERENCES

12 ACCUMULATION AND INVESTMENT ROADSHOWS

6 RETIREMENT AND LATER LIFE ROADSHOWS

Find out more and book now at thepfs.org/events

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R E G U L AT I O N

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CUTTING THE RED TAPE Dr Matthew Connell provides an update on changes to the UK’s financial services regulations post-Brexit

n December 2022, the UK government introduced its package of ‘Edinburgh Reforms’, which it said would “turbocharge growth and deliver a smarter and homegrown regulatory framework for the UK – that is both agile and proportionate”.

The argument is that the EU’s primacy in setting out financial services legislation left UK regulators simply as supervisors, not rulemakers.

As HM Treasury said: “This constrained the regulators’ ability to determine the most appropriate regulatory requirements for UK markets.” Returning the power to make rules to UK regulators will allow the UK “to seize the opportunities of EU exit

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R E G U L AT I O N

and secure the UK’s position as a global financial hub”.

There is certainly merit to this argument – rules established at the EU level often mean committees of politicians were drafting detailed, prescriptive rules that, for example, required advisers to take on responsibilities to monitor their clients for money laundering even though the risks were very small. There was relatively little consumer research or piloting of new rules, which meant that many measures developed at EU level were a shot in the dark.

As a result, the government has been able to remove some of the worst mistakes of EU financial regulation of the last 20 years, including an overhaul of the Packaged Retail and InsuranceBased Investment Products regulation, which instituted a system of disclosure for investors that was introduced with very little consumer testing, and produced documents that are hard to read and comprehend.

It also made changes to the Markets in Financial Instruments Directive (MiFID) regulations to scrap the ‘10% drop’ rule. The PFS has campaigned for this rule to be scrapped, as it requires firms to inform investors when the value of their portfolio falls by more than 10% – encouraging clients to focus on falling markets at a time when most may well be best advised to ride out the volatility.

On the fund management side, the government has produced proposals for creating investment vehicles – long-term asset funds – which are designed to increase investment in illiquid assets by creating longer redemption periods (of at least 90 days) than exist for normal mutual funds. This is designed to create an

For many working in financial services, this more pragmatic approach may be welcome, given the disruption caused by some more intrusive reforms in the past, but pragmatic reforms are not likely to radically change the experience of investors investment vehicle that has high standards of governance and consumer protection without creating systemic risks that might come if investors were able to withdraw their investment without notice.

The Treasury has also created proposals for a new tax regime for qualifying asset holding companies in certain fund structures.

The Chancellor has sought to reinforce the message of growth and trade in a letter to the FCA’s CEO, Nikhil Rathi, stressing: ● “The importance of the government’s agenda to encourage trade… and to promote inward investment into the UK.” ● “The government’s commitment to ensuring that the UK is attractive to internationally active financial services firms and activity.” ● “The government’s support of innovation and new developments in financial markets and active embracing of the use of new technology in financial services, such as crypto technologies, artificial intelligence and machine learning.”

PRAGMATIC APPROACH There are, however, two features of the review that may cause scepticism about a tsunami of growth being unleashed by the reforms.

First, these are reforms being carried out by a new government that is already in the second half of its electoral term. As a result, the reforms have largely been hoovered up from a

range of ongoing reforms and tweaks to the system, rather than being a radical package based on a fundamentally new approach to markets and regulation.

For many working in financial services, this more pragmatic approach may be welcome, given the disruption caused by some more intrusive reforms in the past, but pragmatic reforms are not likely to radically change the experience of investors.

Second, the idea that EU regulations were holding back UK growth means that the reforms tend to reflect the sprawl of EU financial regulation, as the government repeals or replaces unwise decisions here and there, while the majority of EU rules, including rules on compulsory professional indemnity insurance, which have held back the growth of the financial advice profession for several decades, will remain for the foreseeable future.

One legal firm commenting on the package of reforms in the asset management sector complained that “the UK government appears to have had a failure of ambition that may see the sunlit uplands of a truly competitive UK funds industry remain tantalisingly out of reach for future generations”.

History will tell whether these reforms are a pragmatic leg-up for the investment sector, or a big missed opportunity for economic growth. ●

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Dr Matthew Connell is director of policy and public affairs

SPRING 2023 | Personal Finance Professional | thepfs.org

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R E G U L AT I O N

DUTY BOUND Dr Matthew Connell reports on the latest developments on the road to implementation of the Consumer Duty

CAMERON LAW / IKON IMAGES

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he Financial Conduct Authority’s (FCA) launch of the final Consumer Duty rules and guidance in July 2022 was greeted with a huge amount of interest. It was the first major piece of regulation to come out after the pandemic and significantly increased the scope of conduct regulation, especially in the areas of communication and service for consumers.

Although the launch of the Consumer Duty rules feels relatively recent, we are already halfway along the road to implementation for all products and services that are on sale or open for renewal. Firms must be fully compliant for these products and services by July 2023. By July 2024, the Consumer Duty will apply to all closed products and services.

One question firms can ask themselves is whether they are applying the same consumer support standards to deliver good consumer outcomes as they are to generate sales and revenue

R E G U L AT I O N

So, what should firms have already done in preparation for the Consumer Duty and what should they be doing in the spring to ensure they are meeting the FCA’s expectations?

WHERE FIRMS SHOULD BE NOW In July 2022, the FCA said it expected firms to have an implementation plan ready by the end of October. Although this plan did not have to be an exhaustive list of actions needed to comply with the Consumer Duty, it should have set out an overall approach to the four key consumer outcomes: ● Products and services. ● Price and value, where “firms should avoid designing products and services to include elements that exploit consumer lack of knowledge and behavioural biases to increase the price paid”. ● Consumer understanding. ● Consumer support – this requires firms to “enable consumers to get what they paid for… without unreasonable barriers”.

As we move into the second half of the implementation period, it is important for firms to have evidence that they have considered what they need to do to meet the new standards, that they have documented who is carrying out specific actions to meet those standards and how far along they are to completing those actions.

PRODUCTS AND SERVICES For products and services, a useful place to start is the product intervention and product governance sourcebook (PROD) rules. The FCA says: “The PROD rules apply to investments [and] insurance... Our proposals aimed to provide a level playing field in all sectors, raising standards in those sectors to which the current rules do not apply… We agree it would be proportionate for firms to comply with the existing rules to satisfy this outcome, as we consider the existing rules meet our expectations.”

As a result, a review of a firm’s existing compliance with PROD rules is an essential part of preparing for the Consumer Duty. The review could be based on this high-level steer from the FCA: “Advisers (as distributors) will need to consider, among other things, the rules around information sharing between distributors and manufacturers. For example, advisers will need to gather information from manufacturers on the products on which they intend to advise; and they should consider how best to feed information back to manufacturers on how the product is meeting the needs of the target market to help with the manufacturer’s regular product reviews. These information flows may be made more effective by contractual provisions between advisers and manufacturers covering the exchange of relevant information.”

Where firms can show that they have considered their responsibilities under the PROD rules in the run-up to the Consumer Duty and they have taken action to ensure that the “information flows” are still working to product good consumer outcomes, they can be confident that they are in a strong position to comply with the products and services element of the Consumer Duty.

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PRICE AND VALUE The price and value element is likely to be a more demanding challenge for firms. Firms should bear in mind that the Consumer Duty does not apply at the level of the individual client, but on the level of client segments. The FCA says: “Our expectations apply based on what is reasonable. We do not expect firms to exhaustively segment their customer base to identify differences in outcomes between all possible groups of customers.”

The key evidence that firms need to be ready to present for the price and value element of the Duty is: ● How they segment their clients. ● Which goods and services are →

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relevant to those clients and which are not. ● What kind of monitoring takes place to ensure that clients are being put into an appropriate segment.

For example, many clients – perhaps the vast majority of clients – need ongoing advice to adapt to their changing circumstances and to a changing economic and fiscal environment. However, the FCA will expect firms to be able to explain why a certain proportion of clients need ongoing advice and, if the proportion is 100%, the FCA will be looking for a very robust explanation.

As the FCA says in a recent Dear CEO letter: “Consumers should receive a value for money service where an ongoing service is offered.

The new Consumer Duty requires firms to ensure the service offered is appropriate for the client’s circumstances, is delivered within the terms of the agreement and is at a cost that is fair value. We are concerned firms are not adequately considering the relevance, nature and costs of these services for all their clients.”

communicate in response to this information.

CUSTOMER SUPPORT Finally, the customer support element is a key element of the Consumer Duty, and arguably expands the scope of FCA regulation further than any other aspect of the principles and rules.

However, it suggests: “One question firms can ask themselves is whether they are applying the same consumer support standards to deliver good consumer outcomes as they are to generate sales and revenue.”

Given the importance of vulnerability in delivering good outcomes on consumer understanding, it is important that firms of any size ensure that they have access to diverse perspectives on consumers’ experience.

As the FCA says in its recent letter to CEOs in the advice sector: “We recognise the sector has taken some steps forward on diversity and

inclusion. But there is much more that needs to be done to create truly diverse and inclusive organisations that meet the diverse needs of those they serve.”

For the smallest firms, this may not mean recruiting new members of staff, but it could mean seeking out perspectives on investment and retirement from a wide range of different groups, for example investors who are experiencing issues with their mental health.

The Consumer Duty covers every aspect of firms’ contact with clients and so preparing for compliance can be daunting. However, if firms think carefully about every aspect of the Consumer Duty and take steps to address the issues raised, they will be in a much stronger place to show that they have complied with its principles

by July this year. ● Dr Matthew Connell is policy and public affairs director of the CII

CONSUMER UNDERSTANDING The consumer understanding principle will also require thought and attention from firms. The FCA has made it clear that this does not mean firms must “verify that all individual consumers have in fact understood the information provided”. However, it does expect firms to “test, monitor and adapt communications to support understanding and good outcomes for customers”.

Firms should be able to show evidence that they have designed a system for testing consumer understanding – especially for consumers who may be in a more vulnerable situation because of health, life events, low levels of financial or emotional resilience, or low levels of financial capability.

They should also be able to show that they at least carefully considered the way they

KEY MILESTONES

1

2

3

4

5

27 July 2022:

31 October 2022:

30 April 2023:

31 July 2023:

31 July 2024:

Final rules and guidance published

Firms agree implementation plans

Manufacturers complete reviews to meet the outcome rules

Rules start for open products/ services

Rules start for closed products/ services Source: FCA

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PENSIONS

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ILLUSTRATIONS: SOLJI LEE

The cost-of-living crisis and politics are playing havoc with many people’s retirement plans, as Liz Booth reports

he number of people receiving the state pension in the UK has risen by 1.1% to 12.5 million, according to the Department for Work and Pensions – something that is of little surprise as the baby-boomer generation retires.

But retirement is a difficult choice for many in the face of the cost-ofliving crisis and a changing political appetite on pension payments.

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PENSIONS

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And for those with a private pension, it is still not as straightforward as it once was. In November last year, BDH Sterling noted: “The effect of the cost-of-living crisis could mean £2.5bn of ‘lost’ pension contributions. This is the startling figure revealed in the latest Retirement Report published by Scottish Widows.”

The report also reveals that: ● 11% of UK adults have already cut back or stopped their pension contributions. ● If the average reduction of £47 each month is maintained for a year, it could result in more than double that amount being lost at retirement. ● The cost of not raising contributions again after the current crisis ends could mean ‘lost’ contributions of £7,000.

Despite those figures, it is clear retirees need another income beyond the state pension. A recent Pensions and Lifetime Savings Association report says pensioners need at least £12,800 a year to live with dignity and cover basic needs – an extra £2,000 on top of the state pension.

Last year, the average cost was £10,900.

All incomes are under pressure. It doesn’t matter what type of household or how the income is earned – salaries, pension plans, savings, investments, or an annuity

UNDER PRESSURE Simpson Financial Services is among the financial planning experts warning that individuals who choose to retire now will need higher levels of savings to see them through.

“The cost-of-living crisis will affect everyone at every stage of life, because incomes are remaining static while the costs of goods and services have gone up,” the firm’s experts say.

“All incomes are under pressure. It doesn’t matter what type of household or how the income is earned – salaries, pension plans, savings, investments, or an annuity.”

The UK is not alone in its pension woes – in France there is an expected €13.5bn (£11.9bn) shortfall by 2030 unless changes are made and, controversially, the government is trying to raise the retirement age from

62 to 64. And in Germany, people already have to wait until they are 67 to receive the state pension.

The US is no better off. Nicole Lehman of Clever, a US real estate data company, says a new study shows “the average American retiree has $170,726 (£139,962) saved for retirement – about 10% less than the $191,000 (£156,583) they had at the start of 2022”, adding: “This is just 31% of the $556,400 (£456,142) that experts recommend.”

Back in the UK, the government has already confirmed plans to raise the age threshold for receiving pensions in the next couple of years. From 2028, someone will become a state pensioner

once they reach 67 years of age, for those born on or after April 1960.

Furthermore, there will be a gradual increase to 68 between 2044 and 2046 for anyone born on or after April 1977.

Under the Pensions Act 2014, the government is legally obligated to review the state pension age on a regular basis. In the government’s first review in 2017, it was found that the next review should debate whether the increase to age 68 could be brought forward to 2037-2039.

According to the law, the next review of the state pension age must take place in early 2023 and be published by 7 May 2023 – watch this space.

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POLITICAL CONCERNS The triple-lock was introduced to the UK state pension in 2010, to guarantee that the state pension would not lose value in real terms and that it would increase at least in line with inflation.

The three-way guarantee was that each year, the state pension would increase by the greatest of the following three measures: average earnings; prices, as measured by the Consumer Pricing Index; or 2.5%.

In November 2022, Rishi Sunak confirmed the triple-lock would continue, but for how long remains a politically contentious issue. The government has said it will stay in place until at least 2024.

As experts have been pointing out, if pensions increase again in 2024 in line with inflation, pensioners could receive more than the existing personal tax allowance threshold (which is frozen for some years to some). This would mean pensioners paying income tax on a portion of their pension – an administrative nightmare for them and the tax authorities.

Demographics play a huge part in this conversation and there are signs that life expectancy has stalled – something that would legally oblige the government to change tack on the pensionable age.

But there are other factors at play too. During the Covid-19 pandemic, many people chose to retire early on a lifestyle basis. That was a choice for the comfortably off, it appears. The Office for National Statistics (ONS) shows that in the period from 10-29 August 2022, based on adults aged 50 to 65 in Great Britain who have left or lost their job since the start of the pandemic and not returned to work: ● The majority (66%) owned their homes outright and were more likely to be debt-free (61%), compared with those who left their job since the pandemic and returned to work (42% debt free). ● Financial resilience varied by age: those aged 50 to 54 were significantly less likely to be

38% OF THOSE IN THEIR LATE 50S OR EARLY 60S IN THE UK ARE OPTING TO PUT OFF RETIREMENT FOR AT LEAST ANOTHER YEAR Source: L&G

debt-free, excluding a mortgage (49%), compared with those aged 60 to 65 (62%) and more likely to have credit card debt (39%, compared with 24%). ● More than half (55%) of those aged 60 to 65 were confident or very confident that their retirement provisions would meet their needs, compared with just over one-third (38%) of those aged 50 to 54. ● Age was also a factor when considering whether to return to work; the younger cohort were more likely to say that they would consider returning to work (86% for those aged 50 to 54, 65% for those aged 55 to 59, and 44% for those 60 to 65).

● Adults aged 50 to 59 were more likely to report mental health reasons (8%) and disability (8%) as a reason for not returning to work, when compared with those aged 60 to 65 (3% and 3%, respectively). ● Adults aged 50 to 59 (14%) were also more likely to be currently looking for paid work, compared with adults aged 60 to 65 (6%).

However, that takes us back to the point about the cost-of-living crisis.

The Financial Times was among those reporting that, by the end of 2022, and according to the ONS, the number of people over 65 in work or looking for work hit close to 1.5 million during the summer – the highest level on record – before falling slightly of late.

DELAYING RETIREMENT Research from Legal & General confirms that 38% of those in their late 50s or early 60s are opting to put off retirement for at least another year, following the pandemic and current economic conditions.

Legal & General research also shows nearly one million people are considering annuities for the first time to guarantee stable incomes, avoid market volatility and make the most of higher rates.

However, misconceptions about the product are still high, as 44% of people want a guaranteed income in retirement but less than half recognise an annuity as a potential solution.

However, Lorna Shah, managing director of retail retirement, Legal & General Retail, stresses: “Despite annuities becoming more popular, we still need more awareness of the flexibility of fixed-term annuities and the benefits of enhanced annuities. Our research shows there is still a lack of understanding about what an annuity is and what it can offer.

This means people risk having an ‘either, or’ approach to funding their retirement, when in fact a blended approach might be more suitable.”

A further opportunity for financial planners to show their value. ●

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Liz Booth is contributing editor of PFP

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ECONOMY

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S

trikes, strikes and more strikes.

When broadcasters start issuing monthly calendars with strikes on every day, you know there’s a problem.

That is the situation in the UK as 2023 gets underway. Whether it is Royal Mail, the rail services, teachers or the NHS – everyone seems to be intransigent.

Sadly, at the time of writing, it seems there is little progress and it is all having a negative impact on the economy. Combined with the winter weather, high cost-of-living and

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ECONOMY

been found at national level to replace Russian oil supplies, while even gas supplies are being successfully replaced from “friendly” countries, meaning wholesale energy costs will drop – hopefully followed by retail costs soon after.

NOT OUT OF THE WOODS

ECONOMY BITES ALICE MOLLON / IKON IMAGES

As 2023 begins where last year left off, with widespread strikes, high energy costs, bad weather and a cost-ofliving crisis, Liz Booth looks for signs of recovery energy cost rises, it is a pretty grim picture all round.

Many clients of financial planners are financially sound and probably among the best placed to weather such a perfect storm. And there are also some green shoots of optimism.

In the US, inflation is still increasing but the rate of increase has slowed.

There is a feeling that interest rate rises have done their work and that the economy will start to recover.

In the UK, there are tiny but hopeful signs. House prices actually rose in December after a few months

of declining prices and analysts are saying that inflation may have peaked, as rising interest rates may have done their job. But they are cautious, warning there will be some way to go before people feel confident about spending money.

Added to that, the FTSE100 was actually the world’s best-performing stock index in 2022, despite all the doom and gloom, delivering a 0.9% gain in 2022 – a tiny amount but at least positive compared to the 20% drop in global markets as a whole.

Alternative energy sources have

However, in the meantime, it seems there is still some pain to go through.

Mortgage holders, for example, are set to lose up to an eighth of their income on mortgage rate rises in the coming months, according to the Resolution Foundation, with three million households set to renew their existing mortgage arrangements in the next year and with some predicting that rates will effectively triple for up to 800,000 homeowners.

Added to that, credit card debt grew by £1.2bn in November, according to the Bank of England – the highest monthly increase since back in 2004.

That debt grew even though retail spending was down, suggesting, according to Ashley Webb of Capital Economics, that people are using credit to tie them over through the rising costs, such as for energy bills.

All in all, it paints a picture in which financial advisers should be more valued than ever, with clients seeking reassurance that their money is being managed in the best possible way.

There is often debate about how often clients need contact – this, according to the experts, is something that could possibly be reviewed now.

Is an annual meeting or call still appropriate? Should the touchpoints become more frequent?

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HOLD YOUR NERVE Many financial experts are suggesting that investors should hold their nerve and not sell out or make rapid decisions that ultimately might prove costly as the recovery happens.

A prime example of that is the housing market, where rising prices put paid to the idea that we were about to see the market spiral out of control. But as

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ECONOMY

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they say, one swallow does not a summer make – and the doommongers could be proved right. Either way, this is not necessarily a moment to dump assets or stock – unless it’s essential.

Joseph Hill, senior investment analyst at Hargreaves Lansdown, sums up the state of the economy: “The real income of most consumers has been squeezed, forcing them to cut back and prioritise. Forecasts show high inflation will erode average real pay and cut living standards by 7% in the two years to the end of March 2024 – wiping out the previous eight years of growth.”

Clients are very likely to include SME business owners and the strikes may be having a very direct impact on their bottom line. A Simply Business survey of more than 600 small businesses found that more than one in 10 had been affected by the rail strikes. Of those, almost 40% said they’d made it harder to plan in advance, while more than a fifth said they have had fewer customers on days when strikes took place.

Do they have the right insurances in place to support them? They may well be at a crisis point both financially and emotionally.

After the torrid experience of business interruption (BI) insurance claims during Covid-19, many business owners will have been talking to their insurance brokers about what is covered. Generally speaking, BI covers the operating expenses for a business due to problems covered by the policy, which are generally theft, wind, fire, lightning and falling objects, or in other words, physical triggers.

Strike insurance has to be bought separately but, as one definition puts it: “Strike insurance is a type of policy that covers the financial losses to a business owner if their employees go on strike, stage a walkout, or organise some other type of interruption that shuts down business operations. If a strike

Forecasts show high inflation will erode average real pay and cut living standards by 7% in the two years to the end of March 2024 – wiping out the previous eight years of growth continues, the strike insurance company pays the business owner to cover the income lost from being temporarily shut down.”

No mention, therefore, of lost income from strikes at external businesses that then directly impact others – something clients may need to be checking with their insurer.

RISING INSOLVENCIES That brings us back to Hill, who warns: “In a typical recession, companies can be expected to make less profit and pay often falls.”

Advisory firm Cork Gully is predicting insolvencies will rise to 6,300 in Q1 of 2023 and to 6,400 in Q2, before falling slightly later in the year. It adds: “Businesses in consumer-facing sectors are expected to see the highest number of insolvencies in 2023, as they see demand decline amid the cost-ofliving crisis. This could also impact

city centres with large retail and hospitality industries.”

This confirms the picture being painted more broadly of city centres becoming ghost towns on certain days of the week as people work from home to avoid rail strikes.

As a financial adviser, you are not a counsellor or psychiatrist but a touchpoint might make all the difference – particularly if it comes with sound financial planning advice. Looking back at previous financial disasters when some individuals felt things were so bad that they took their own lives, almost always there was a friend or work colleague who wishes they had reached out because a simple call could have helped.

Checking in can make a real difference, particularly when it comes with sensible financial advice. ● Liz Booth is contributing editor of PFP

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M ORTG AG E S

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REBUILDING THE MORTGAGE MARKET Aamina Zafar reports on a market still recovering from the disastrous mini-Budget and rising interest rates

he start of this year has heralded a new dawn for the mortgage market, which is slowly recovering from a torrid final few months of 2022.

This positive projection comes from Karen Noye, financial adviser at Quilter, who anticipates an upturn in fortunes.

“The start of 2023 is starting to look a little less bleak than the back half of 2022,” Noye says. “While the increasing rates will still be causing huge pain for millions, there

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does seem to be more light on the horizon, with rates set to drop by the end of the year.”

However, she predicts high interest rates will only gradually improve as we move towards spring.

“It is still difficult out there and it is unlikely to get much better before spring,” she says. “While it is difficult to predict the future, it is clear that higher rates are here for the foreseeable future and therefore, for some clients who perhaps are happy to take more risk, now might be the time to take a two-year tracker with no penalties, giving clients flexibility to refinance. This gives people that are a little braver the chance to take a rate that might rise in the short term but avoids locking in to an unnecessarily high rate now.”

Interestingly, Saira Haider, director at Mansion Mortgages, says that although business has slowed since September 2022, things are beginning to look up as borrowers become accustomed to higher rates.

She says: “Things have slowed down since September but we are seeing clients becoming more accepting of the higher rates, obviously not at the rate it was before but back to slow and steady. We are able to service existing clients better, which means product transfers and remortgages are up.

We have 30% purchase clients currently, compared with more than 60% before. We foresee spring markets will stay the same, but we are hoping that markets move in a positive direction as that is seasonally peak time for people to move.”

at London Money Financial Services says: “I think that as a result of high interest rates, we will see the demand for new purchases of property, particularly BTLs, fall. In turn, we’ll also see existing landlords look to sell up as they see that returns are highly diminished and in some cases are

PROPERTY PROBLEMS It is not only homeowners that will continue to feel the pinch in the short term.

Adviser Jiten Varsani says higher interest rates may also see demand for buy-to-lets (BTLs) fall and force existing landlords to sell some of their property portfolio as their returns plummet or even turn negative.

The mortgage and protection adviser

negative. This in turn should see a fall in asking prices. This can be a real benefit for first-time buyers (FTBs).”

Overall, mortgage lending is expected to fall by 15% in 2023, in a return to pre-pandemic levels, according to UK Finance forecasts.

Despite the higher rates predicted

SDLT RATES FOR A SINGLE PROPERTY Property or lease premium or transfer value

SDLT rate

Up to £250,000

Zero

The next £675,000 (the portion from £250,001 to £925,000)

5%

The next £575,000 (the portion from £925,001 to £1.5 million)

10%

The remaining amount (the portion above £1.5 million)

12%

Source: UK Gov

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ISTOCK

M ORTG AG E S

until at least spring, many borrowers may need to remortgage. Sadly, the high cost-of-living means many customers will be in arrears, as they struggle with high heating and electric bills during the winter, soaring food prices and potentially eyewatering monthly mortgage bills.

But Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, believes even this will not be as bad as some pundits have predicted. Even the Bank of England figures from Q3 2022 show that the value of outstanding balances with arrears fell 1.4% during the quarter and accounted for 0.78% of outstanding balances – the lowest since recording started in 2007.

She says: “The ONS separately tracks the proportion of people who say they are behind on rent or mortgage payments and only 2% are. This has fluctuated between 2% and 5% since they started measuring it in March, so it doesn’t indicate a flurry of new arrears.

“If you are in arrears it can be incredibly difficult to remortgage, but it’s not always impossible.”

This is why Varsani argues that the role of the adviser will be fundamental in the coming months to ensure borrowers can survive turbulent times.

He says: “The role of an adviser will be key at this time. We need to guide clients where we can. That means help with budgeting and prioritising spending in the right way. Sometimes, an external person is best placed to highlight some home truths about monthly spending cuts. Our advice should also be focused on how to reduce mortgage payments where possible. For example, overpayment using savings and/or extending mortgage terms. This is of course subject to this being suitable advice for the client.”

This is echoed by Liz Syms, vice-chair at the Society of Mortgages Professionals and chief executive officer of Connect for Intermediaries.

She says: “Advisers can assist when reaching out to existing customers by educating them on the increased

The key thing is to ensure that customers understand that getting advice will potentially give them more options to improve or stabilise their position importance of maintaining their credit to secure the best mortgage rates when their deal comes to an end. Where arrears are unavoidable, the adviser may still be able to assist clients by understanding the range of lenders that can consider credit blips. A rate transfer will often still be an option. The key thing is to ensure that customers understand that getting advice will potentially give them more options to improve or stabilise their position.”

TAXING TIMES The high interest rates are not the only things shaking up the mortgage market.

In September 2022, the threshold at which stamp duty land tax (SDLT) became payable rose from £125,000 to £250,000, the nil-rate threshold for FTBs relief rose from £300,000 to £425,000, while the maximum value of a house that could benefit from FTBs relief rose from £500,000 to £625,000. In November, Chancellor of the Exchequer Jeremy Hunt announced that these changes would be temporary and revert back to the old thresholds in March 2025.

Commenting on how these changes will impact borrowers, Syms says: “Unlike during the lockdown, I don’t see these SDLT changes having a massive impact. The saving may help a few more FTBs onto the ladder a bit quicker as there is less money to find for the purchase, but it does not affect the affordability, which has become a bigger issue with the higher rates.”

A similar notion is echoed by Coles,

who says: “There will be less tax to pay on transactions in the interim, although the window is long enough not to have spurred a flood of sales in the same way as the short-term SDLT holiday during the pandemic. We are likely to see people bring purchases forward as we get closer to the deadline.”

There is no doubt that the biggest shakeup in the mortgage market came in the wake of the controversial mini-Budget by former Chancellor Kwasi Kwarteng, which spiked interest rates and saw multiple lenders pull mortgage products. Even now, mortgage deals remain significantly more expensive than before the chaos kicked off.

Varsani says this shook consumer confidence and it is still struggling to recover. He says: “Consumer confidence is shaken. The public has got very used to the low rates over the last decade. They do not understand why rates have suddenly increased so sharply. They will feel the impact of these increases on mortgage repayments, along with any other borrowings they may have.

“Some good news is that the pace at which lenders are changing products has eased. In turn, this has calmed the market somewhat and eased the time-sensitive burden advisers found themselves in.

Additionally, we are seeing lenders bring back some previously withdrawn product ranges.”●

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Aamina Zafar is a freelance journalist

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TA X

Niki Patel highlights key changes and tax planning opportunities for clients following the Autumn Statement think it’s fair to say 2022 was a year of confusion. A year with three Prime Ministers, four Chancellors and an abundance of financial statements.

Compared to the drastic announcements on 23 September 2022 in the Government’s Growth Plan, the Autumn Statement was somewhat restrained. That said, prior to the Autumn Statement, it was clear that personal tax and business tax would rise. As a result, the Autumn Statement confirmed a series of tax increases that will take effect during the following two tax years, which will, of course, have a financial impact on individuals and businesses.

In this article, I focus on what was announced and outline some of the potential planning opportunities that could be considered for your clients.

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INCOME TAX The basic rate of income tax will remain at 20%, the higher rate will remain at 40% and the additional rate will remain at 45%. The basic rate of tax applicable to dividends will remain at 8.75%; the higher rate will remain at 33.75%; and the additional rate will remain at 39.35%. →

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TA X

AUTUMN STATEMENT:

The income tax personal allowance (PA) will remain at £12,570 until 5 April 2028.

The higher rate threshold will also remain at £50,270 (made up of the £37,700 threshold plus the PA of £12,570) until 5 April 2028.

However, it was announced that the income tax additional rate threshold will be lowered from £150,000 to £125,140 from 6 April 2023. Most individuals are entitled to a PA, a personal savings allowance (PSA) and a dividend allowance. However, the PA of £12,570 is reduced by £1 for every £2 where an individual’s adjusted net income exceeds £100,000 (broadly net income less any gross pension contributions to a registered pension scheme or charitable donations).

This means that once income exceeds £125,140 it is totally lost. For every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in income tax, while another £20 is lost by the tapering of the PA (i.e. £50 of lost PA, taxed at 40%) which effectively amounts to a 60% tax rate on income within this range. →

XXXXXXXXXXXXXXXXXXL / IKON IMAGES

Y E S E KNG

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LIZZIE ROBERTS / IKON IMAGES

A H C

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TA X

In addition, it was announced that the dividend allowance will reduce from £2,000 to £1,000 from 6 April 2023 and to £500 from 6 April 2024. There were no changes announced in respect of the PSA, which will remain at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

Freezing the PA and tax bands further will mean that millions of individuals will end up paying more income tax. Further, reducing the additional rate threshold, combined with the current freezes in the PA and the higher rate tax band, will move more people into higher rate tax brackets. An individual earning £150,000 in the current tax year could be just over £1,240 (around £1,243) worse off from 6 April 2023, because an extra 5% of income tax will apply to the amount of their income that falls between £125,140 and £150,000; they could be even worse off if receiving dividend income.

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Planning ● In terms of general planning, investing couples should aim to use their dividend allowances and PSAs in full (and ensure that they do not lose out on the ability to transfer the transferable marriage allowance where eligible to do so). ● Individuals should also try to arrange their investment holdings in such a way to ensure they fully use both PAs and starting/basic rate tax bands. ● Individuals should continue to maximise contributions to ISAs, particularly where dividends are likely to exceed the dividend tax allowance (reducing to £1,000 from 6 April 2023) and/or the higher rate tax threshold. They could also give consideration to investing into venture capital trusts (VCTs) – which pay tax-free dividends – and investment bonds (for tax-deferral). ● Consider redistributing investments between couples to potentially reduce the rate of tax suffered on income and gains. No income tax or capital gains tax (CGT) liability will arise on transfers between married couples or civil partners living together, or where the asset to be transferred is an investment bond.

However, any transfer must be made on an outright and unconditional basis with ‘no strings attached’.

This effectively means investments must be fully transferred, with no entitlement retained by the transferor. ● Where possible, couples should try to ensure that they both have adequate pension plans in place to provide them with an income stream in retirement, which will enable them to use their PA. Due to these changes, advising clients to carry out planning, for example, where possible, timing income to fall into the current tax year, maximising the use of pension contributions and/or making gift aid payments, can help save on tax.

Example: Evan has earnings of £115,500 in 2022/2023. This means that, without any planning, his PA would be reduced to £4,820.

This is calculated as follows: £115,500 - £100,000 = £15,500 £15,500/2 = £7,750 £12,570 - £7,750 = £4,820 His income tax liability would therefore be as follows: Income £115,500 Less PA (£4,820) £110,680 £37,700 x 20% £7,540 £72,980 x 40% £29,192 £36,732 If he were to make a gross personal pension contribution of £15,500 (£12,400 net), this would mean that his adjusted net income would reduce to £100,000, so he would benefit from a full PA and, in addition, the basic rate threshold would be extended from £37,700 to £53,200, providing him with higher rate tax relief on the contribution.

Income £115,500 Less PA (£12,570) £102,930 £53,200 x 20% £10,640 £49,730 x 40% £19,892 £30,532 The difference in the tax bill of £6,200 (i.e. £36,732 - £30,532) simply illustrates the further 20% tax saving on the pension contribution (£15,500 x 20% = £3,100), plus the higher rate tax saving on retaining the lost PA (£7,750 x 40% = £3,100). In addition, the pension contribution has benefited from £3,100 basic rate tax relief at source.

Therefore, the total tax relief on the £15,500 contribution is £9,300, an effective rate of 60%.

NATIONAL INSURANCE In the Growth Plan, which was announced on 23 September 2022, the previous Chancellor reversed the National Insurance increases of 1.25% that took effect from 6 April 2022. This means the rates from 6 November 2022, for employees, are 12% between the primary threshold (PT) and upper earnings limit (UEL) and

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2% above, and 13.8%, for employers, above the secondary threshold. Unlike most of the Growth Plan announcements, this change remains in force.

The lower earnings limit (LEL) remains at £6,396 for 2023/2024 and the small profits threshold (SPT) remains at £6,725 per annum.

The UEL and upper profits limit (UPL) will be fixed at their current levels until 5 April 2028.

From July 2022, the National Insurance PT and the Class 4 National Insurance lower profits limit (LPL) were increased from £9,880 to align with the PA of £12,570 and will be maintained at this level until 5 April 2028.

The government will fix the level at which employers start to pay Class 1 National Insurance for their employees (the secondary threshold) at £9,100 until 5 April 2028.

According to HMRC, the employment allowance means that 40% of businesses do not pay National Insurance and will be unaffected by this change, and the largest employers will contribute the most.

The Class 2 lower profits threshold (LPT) will also be fixed until 5 April 2028 to align with the LPL. The Class 2 rate will be £3.45 per week, and the Class 3 rate will be £17.45 per week.

Planning ● Consider salary sacrifice for pension contributions. Using salary sacrifice means that both the employee and the employer pay less National Insurance, so further savings can be achieved.

Example Clara’s employer offers her a salary sacrifice arrangement.

She decides that, from 6 April 2023, she is going to sacrifice £30,000 of her salary for an employer pension contribution of £30,000 in 2023/2024. By reducing her income to £100,000, she will benefit from the full PA. Her post-tax salary will reduce from £79,178.40 to £67,049.40, a reduction of £12,129 (£30,000 salary reduction minus a tax and National Insurance saving of £17,871) in return for pension contributions of £30,000. In addition, her employer may be willing to pass on some or all of their National Insurance savings and further enhance the pension contributions (see table 1 on the right).

CAPITAL GAINS TAX The capital gains tax (CGT) annual exemption (AE) is currently £12,300, but will reduce to £6,000 for 2023/2024 and further reduce to £3,000 for 2024/2025.

The rate of CGT payable will depend on the individual’s other taxable income. Gains falling within the basic rate tax band are taxed at 10% and any amount falling above that will be taxed at 20%. This means that use of the AE in the current tax year can save up to £1,230 for a basic rate taxpayer and £2,460 for a higher/additional rate taxpayer.

However, these savings will reduce to £600 for a basic rate taxpayer and £1,800 for a higher/additional rate taxpayer

TABLE 1 Before

After

£130,000

£100,000

£0

£12,570

£130,000

£87,430

Tax at 20% on £37,700

£7,540

£7,540

Tax at 40% on £87,440 / £49,730

£34,976

£19,892

Salary PA (reduced by £1 for every £2 of income) on income between £100,000 and £125,140) Taxable income

Tax at 45% on £4,860

£2,187 £44,703

£27,432

12% National Insurance between £12,570 and £50,270

£4,524

£4,524

2% National Insurance between £50,270 and £130,000/£100,000

£1,594.60

£994.60

£6,118.60

£5,518.60

Total tax and National Insurance

£50,821.60

£32,950.60

Net income

£79,178.40

£67, 049.40

Plus pension fund

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£30,000

from 6 April 2023.

Gains incurred on residential property that are not covered by the private residence exemption are taxed at 18% for a basic rate taxpayer and 28% for a higher/ additional rate taxpayer.

Planning: ● Consideration ought to be given to maximising use of the current AE of £12,300 before it reduces to £6,000 from 6 April 2023, as the AE cannot be carried forward. ● A spouse/civil partner could make an outright and unconditional transfer (as mentioned above) of assets into their partner’s name to make use of their AE on subsequent disposal. This will mean that, between them, they can realise capital gains of £24,600 in 2022/2023 and £12,000 in 2023/2024. ● Such a transfer should not generally give rise to any inheritance tax (IHT) consequences or CGT implications.

Indeed, it may even be worthwhile transferring an asset showing a gain if the asset is to be sold, if it would mean the surplus capital gain is taxed at 10% rather than 20%. ● Making use of losses. Current year losses must be deducted from capital gains of the same tax year, before deducting the CGT AE amount. However, where the loss is a → SPRING 2023 | Personal Finance Professional | thepfs.org

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carried-forward loss, the taxpayer need only use so much of the loss that reduces the taxable gain by an amount that leaves the CGT AE amount intact. Any balance of losses can be carried forward. Using losses in this way can therefore be tax-efficient, particularly for those who are higher/ additional rate taxpayers and therefore pay CGT at 20% (or 28%), and will become even more attractive when the AE reduces to £6,000 in 2023/2024.

Example Ahmed, a higher rate taxpayer, has a share portfolio with gains of about £42,000 which he is looking to sell to help pay for home improvements. He has not made any capital losses in the current tax year but has brought forward losses of about £20,000.

Before

After

Capital gain

£42,000

£42,000

Less AE

(£12,300)

(£6,000)

Less brought-forward loss

(£20,000)

(£20,000)

Taxable gain

£9,700

£16,000

Tax at 20%

£1,940

£3,200

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Depending on how much Ahmed currently needs, better planning may be for him to sell a sufficient number of shares to use his AE of £12,300 in the current tax year and then sell the remaining shares next year to maximise use of both AEs and carried-forward losses.

Remember that individuals have up to four years after the end of the tax year that they disposed of the asset to report the loss to HMRC via their self-assessment tax return, or if they do not complete a return they can write to HMRC instead.

CORPORATION TAX As previously confirmed, the planned increase in corporation tax to 25% for companies with more than £250,000 in profits, and close investment holding companies, will go ahead.

From 1 April 2023, the 19% rate will apply to the first £50,000 of profits and a marginal rate of 26.5% will apply to any excess up to £250,000 (£50,000 @ 19% + £200,000 @ 26.5% = £62,500 = £250,000 @ 25%). The 19% rate will not apply to close investment-holding companies. So, for close investment-holding companies and companies with profits of more than £250,000, the rate of corporation tax will be 25%. (Note, however, that the 19% rate can apply to a property letting company with profits of up to £50,000.)

Planning: Advisers should always seek to be at the heart of planning for SME owners in relation to their business and personal tax planning. These changes will offer great opportunities to collaborate with the client’s accountant, opening a broad discussion around remuneration and other profit extraction strategies, as well as sale and succession planning. ● Deductible contributions to registered pension schemes and relevant life policies will become even more attractive, providing greater advice opportunities. ● Companies looking to dispose of chargeable assets within the next few years should consider bringing forward the date of the disposals to before 1 April 2023 to benefit from the lower rate. ●

INHERITANCE TAX There were no fundamental changes announced in the Autumn Statement in relation to IHT, although the nil rate band and residence nil rate band will now remain frozen at £325,000 and £175,000 respectively until the 2027/2028 tax year – so a further two years. This will no doubt mean that more and more individuals will be brought into the IHT net, so planning in this area is likely to become of more importance. Remember that the residence nil rate band is tapered by £1 for every £2 where the total estate exceeds £2m, so individuals ought to consider their own circumstances and consider whether they can plan to prevent any lost residence nil rate band.

Planning: ● From a general IHT planning perspective, the primary starting point for anyone who is wishing to carry out IHT planning is to consider using their exemptions, such as the annual exemption, small gifts exemption, gifts in consideration of marriage, normal expenditure out of income exemption, gifts to qualifying charities, political parties, etc. ● Individuals can also consider making outright gifts either to another individual or via an absolute trust. The gift will be a potentially exempt transfer for IHT and will generally fall out of account once the donor has survived seven years. ● In cases where individuals wish to retain control and flexibility, they could consider setting up a discretionary trust. However, to ensure no lifetime IHT is payable, the individual can only settle up to their available nil rate band, taking account of any chargeable lifetime transfers in the seven years prior to creating the trust. Remember that a discretionary trust is subject to the ‘relevant property regime’, so exit (when capital is appointed out of the trust) and periodic (ten-year anniversary) charges apply.

Although, in practice, with careful planning it is possible to mitigate these charges. ● There are also a number of other types of trusts that are widely available for IHT planning purposes, which can be used where the individual may wish to retain access if they

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●

require, for example, a loan trust and a discounted gift and income trust. Advice should be sought to determine which (if any) of these options are likely to be suitable.

Those who have received an inheritance within the last two years could consider entering into a deed of variation, provided all of the relevant conditions are satisfied.

Broadly, the variation must be made within two years of death, it must be in writing, it must contain a statement that Section 142 of the Inheritance Tax Act 1984 applies and it must not be for consideration.

PENSIONS Investing in a pension is a tax-efficient way of saving for retirement and also provides other tax benefits, as illustrated above. Therefore, it is vital for individuals to maximise pension contributions where possible.

Planning: ● The carry-forward rules allow unused annual allowances to be carried forward for a maximum of three tax years.

Thus, 5 April 2023 is the last opportunity to use any unused allowance of up to £40,000 from 2019/2020. ● Those caught by the tapered annual allowance, with sufficient carry forward, may be able to make additional pension contributions to reinstate their full annual allowance for tax year 2022/2023 by reducing their threshold income to £200,000. This would mean that more pension savings may be possible. ● Pension contributions can also help families recover their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000 in 2022/2023 and 2023/2024. Child benefit is totally lost when income reaches £60,000 in 2022/2023 and 2023/2024. ● Individuals could consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings.

The government will add £720 basic rate tax relief. Such payments would normally be gifts for IHT unless covered by an exemption.

TAX-EFFICIENT INVESTMENTS For all individuals, it is important to consider making use of tax-efficient investments where possible.

Individual Savings Accounts The maximum ISA subscription limit is £20,000. This means a couple could, between them, invest £40,000. A child aged 16 or 17 can invest £20,000 in a cash ISA in 2022/2023 and 2023/2024.

While no tax relief applies on an ISA subscription, income and capital gains within the ISA are free of tax. This means that for those whose dividend income could exceed their dividend allowance of £2,000, decreasing to £1,000 from

6 April 2023, tax freedom on dividend income within the ISA will save tax.

Where a spouse/civil partner has died during the 2022/2023 tax year, owning an ISA, it is advisable to check whether an additional ISA allowance exists.

Growth-oriented unit trusts/OEICs Rates of income tax are higher than the current rates of CGT, so it can be advisable, from a tax perspective, for a higher/ additional rate taxpayer to invest in collectives geared towards capital growth as opposed to income. This would enable the individual to make use of their annual CGT exemption on a later encashment.

Single premium investment bonds Bonds (onshore or offshore) are non-income producing investments, so are useful investments to defer tax payable by use of the 5% cumulative allowance. This can be valuable for a higher/additional rate taxpayer, especially where they are likely to pay a lower rate of tax in the future.

Enterprise Investment Scheme (EIS) For tax year 2022/2023 and 2023/2024, an investment of up to £1m or £2m (provided anything above £1m is in knowledgeintensive companies) can be made to secure income tax relief at 30%, with tax relief being restricted to the amount of income tax otherwise payable by the investor in that tax year. The relief can be carried back to the previous tax year. In addition, unlimited CGT deferral relief is available, provided some of the EIS investment potentially qualifies for income tax relief. Although investors considering deferral should remember that CGT rates may increase in the future.

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Venture Capital Trust The VCT offers income tax relief for tax year 2022/2023 and 2023/2024 at 30% for an investment of up to £200,000 in new shares, with relief restricted to the amount of income tax otherwise payable by the investor in that year. Dividends and capital gains generated on amounts invested within the annual subscription limit are taxfree, so, again, these investments may appeal to higher/ additional rate taxpayers. And, given the decrease in the dividend allowance from 6 April 2023, this could make VCT investments more attractive.

SUMMARY While there are numerous tax planning options that can be considered, approaching the end of the tax year provides a good opportunity to ensure clients have maximised use of the allowances and exemptions available to them. It is also the ideal time to fully review their overall financial planning needs to ensure they are on target to meet any short-term and long- term objectives ahead of the new tax year. ● Niki Patel is a tax and trust specialist at Technical Connection SPRING 2023 | Personal Finance Professional | thepfs.org

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SCAMS

SPOT THE WARNING SIGNS 32

Alison Steed reports on the red flags advisers and their clients should look for as financial scams continue to rise

inancial scams are on the rise, with about 70% of adults noticing an increase in the number of financial scams in the past six months.

The research, from Fidelity International, also found that almost two thirds (64%) of people are concerned about what to do if they are targeted by a financial scam. Scams are coming at us from every angle (see graph) – email is the most prevalent (accounting for 55% of scams) but social media, text message, phone scams and even doorstep scams all need to be watched for.

Scams can cover a wide range of financial products too, everything from pension to investment frauds, and even romance scams where a criminal will ‘groom’ a vulnerable person and leech money from them in a variety of ways.

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Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says: “Scammers are the ultimate shapeshifters, able to change their methods to take advantage of the latest issues at rapid speed.”

The cost-of-living crisis is leaving more people financially vulnerable as they struggle to pay their bills, which offers fertile ground for fraudsters as anxious people are more likely to fall for cons through desperation.

“Attackers often use investment, pension or other savings-related scams which aim to get unsuspecting people to hand over their hard-earned money,” says Debbie Barton, group financial crime director at Quilter.

“They can appear perfectly legitimate, with websites, testimonials, chatbots and marketing materials.”

Certain age groups are more likely to be targeted, with the over-55s seen as “particularly attractive targets” because they can access their defined contribution pensions flexibly from this age, says Tom Selby, head of retirement policy at AJ Bell.

TANG YAU HOONG / IKON IMAGES

TYPES OF SCAMS Pensions have always been a target of fraudsters but the problem got worse after the advent of pension freedoms.

Morrissey says: “Pensions and investment scams often come about with an ‘out of the blue’ contact from someone. They could be offering a free pension review or the opportunity to invest in some high-performing investment. The scammer will often adopt pressure tactics to get you to act quickly – they don’t want to give you the time to think things through.”

Being rushed is a red flag, as a genuine and reputable financial adviser would not expect you to hurry your decision. But as fraudsters become more sophisticated, they have taken to cloning legitimate firms to lure victims into thinking they are dealing with a bona fide investment or pension firm,” says Selby.

He adds: “They will often follow investing trends, with cryptocurrencybased scams particularly prevalent in

recent years. If you are at all uncertain about who you are dealing with, check your firm’s details on the FCA register and contact them through a channel you trust.”

The more traditional pension scams, where savers are offered ‘early access’ to their retirement pot, have not gone away, says Selby, and with these you not only lose your pension but also face the possibility of a tax charge from HM Revenue & Customs.

WHAT MORE CAN BE DONE? The amount of legislation designed to prevent scams, particularly around online scams, is currently very limited. The Online Safety Bill, which will require “social media sites and search engines to stamp out fraudsters and scam adverts on their platforms, including financial scams, among many others”, says Barton, has been delayed due to the three changes of Prime Minister in a matter of weeks last year.

But Barton adds that we are now beginning to see gradual progress with the remaining stages of the Bill due to be completed in early 2023.

However, there are also some new ways scams are being addressed. For example, the Banking Protocol, a UK-wide scheme developed by UK Finance, National Trading Standards and local police forces, offers a lifeline to victims of fraud, says Barton.

She adds: “The scheme trains customer-facing staff to spot the warning signs that suggest someone may be falling victim to a scam, before alerting local police to intervene and investigate.”

Financial firms also have a responsibility to help prevent fraud and help their clients avoid becoming a victim, for example by clearly listing their official web addresses and contact details “to help clients identify a fraudulent impersonation”, says Barton.

She adds: “Likewise, if a client believes they have been targeted, they should have the ability to report it directly to the firm and to have access to support should they need it.”

However, no matter what legislation is in place or how much help there is out there, the best way to avoid a scam is by being more aware of how to spot them in advance. This includes the offer of high ‘guaranteed’ investment returns, which typically do not exist.

Morrissey says: “If something sounds too good to be true, then it often is. And while many people don’t want to appear rude, the best approach is to terminate contact with the scammer as soon as possible – even if it means just putting the phone down on them.”●

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Alison Steed is a freelance journalist

RISE OF SCAMS Percentage of consumers who have seen an increase in scams in the last six months by method of communication Email

55% 52%

Text Message Social Media

46% 44%

Phone call Post Face-to-face/doorstep

24% 20%

Source: Fidelity International

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TEACHING TAX 34

As new research shows significant numbers of UK adults do not understand the tax they pay, Liz Booth uncovers a huge opportunity for financial planners to engage with their clients on tax literacy

W

hen it comes to understanding and managing our finances and taxes, a new study has revealed that women lag behind men by a worryingly high margin.

Research from tax-refund firm, Tommy’s Tax, has found that levels of tax knowledge in the UK are generally low across the board, with 36% of British adults admitting that tax is the one topic in life they understand least. Alarmingly, this figure rises to 44% for women, while falling to 29% for men.

Hazel Bowen, a director at Coutts and winner of the 2022 Chartered Financial Planner of the Year award, was unsurprised by the figures: “As a Chartered financial planner, I have met many individuals – men and women – who do not understand the tax they pay, how it is calculated, or the opportunity to reduce tax.

She believes: “The key issue is inadequate financial education at school. Without this, many individuals

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will not consider the need to understand their tax and will lack the confidence to explore it.

“For women specifically, some of the knowledge gap will be a consequence of historical gender norms that would typically see men earning more and handling strategic financial decisions for the household, which would lead to women having less exposure to discussions around financial planning and tax.”

Her views are supported by a recent survey from GoCardless, which revealed that 85% of British adults believed that the UK education system should teach more people about how to manage their money.

It also follows comments from UK Prime Minister Rishi Sunak, who suggested maths should be on the curriculum for all school-goers up to the age of 18 – whether this will ever happen, or if financial education would be a significant part of the learning, is uncertain.

The experts from Tommy’s Tax add: “These figures stress the imminent need to bridge this financial literacy gap in the UK.”

IMPROVING KNOWLEDGE

DONNA GRETHEN / IKON IMAGES

46% OF UK PAYE WORKERS HAVE NO IDEA WHERE TO START WHEN IT COMES TO A TAX REFUND 44% OF MEN AND 49% OF WOMEN

In terms of what financial planners can do to help support women and get better levels of understanding, Bowen stresses: “Engagement in financial discussions is key to improving knowledge. The way we articulate the benefits of financial planning will directly impact this.

“Research has shown that women are typically motivated by tangible goals, such as providing for their family, financial security and independence, rather than by the general pursuit of wealth. Reflecting this in the way we promote our services and our approach to client meetings should engage more women and help increase knowledge.”

The Tommy’s Tax study also found that 50% of Brits state that the cost-of-living crisis is crippling their personal finances and that any refund

would be a “lifesaver” – this figure increases to 54% of women and falls to just 46% of men in the UK. Currently, there are mounting external pressures delaying the process for millions of taxpayers across the board, warns Tommy’s Tax. “From the rising number of unregulated, non-HMRC-registered firms who charge enormous fees for tax refunds, to new data revealing that callers with tax queries now wait four times as long to get through to HM Revenue and Customs compared to five years ago, there is a clear desire from Brits to seek assistance following a recent string of tax changes and audits.”

STRUCTURAL ISSUES According to SmartPurse, almost two thirds of women in the UK considered their financial planning to be poor or average when it came to sorting the next 12 months, five years, or decade.

“Women face a multitude of structural issues, such as the gender pay gap and the pensions gap. We can clearly see these issues trickle down into financial literacy and, more specifically, knowledge relating to tax,” adds the Tommy’s Tax report.

With the average tax refund for Brits totalling £1,518, alongside recent reports that they are set to fork out an extra £1,800 in rising costs by next year, it is clear that tax literacy has the potential to provide a critical lifeline to those struggling amid the cost-ofliving squeeze, it concludes.

Tommy McNally, CEO of Tommy’s Tax, says: “Sadly, it appears clear from our research that some women may feel less confident when it comes to managing their personal tax affairs than men. There must be equal access to education around tax, ensuring that some groups of society don’t miss out “Taxes can be boring, confusing and anxiety-inducing, but when armed with adequate and informed knowledge, it could make a real difference to people’s lives.”●

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Liz Booth is contributing editor of PFP

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TIME TO FIX UP?

L

Dewi John examines the prospects of bonds in 2023 ast year was a particularly bloody one for fixed income. It followed a miserable period for bond investors, with many who were constrained to invest in the asset class getting negative real yields (after inflation), thus guaranteeing losses. Some investment strategists had gone so far as to throw in the fixed-income towel, looking instead, for example, to real estate for yield.

Then things got much worse for fixed-income investors, as rising rates destroyed valuations. ‘Safe haven’ sectors were heavy losers during 2022, such as the IA Sterling Corporate Bond Sector (-16.1%) and UK Gilts (-23.8%).

The worst-performing fund classification, however, was one that you might have thought would weather the storm: index-linked gilts – or ‘linkers’ – something that, given the name, should be a good hedge when inflation is running in double digits. This would be a mistake, as the IA UK Index Linked

Gilts was the worst performing during 2022, losing 35.6%, even falling behind beleaguered equity tech funds.

This is because linker performance is affected by two rates: inflation and the Bank of England’s bank rate. If the latter rises, then the price of the linker, like any other bond, will fall. The larger the duration, the greater that effect.

Current base rates are 3.5%, up from their low of 0.1%. In November 2022, the Office for Budget Responsibility predicted that the bank rate would rise to 4.8% in the

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BONDS ARE BACK This year, however, sees asset managers bullish on bonds. The J.P. Morgan Asset Management Investment Outlook 2023 says the company is “more excited about bonds than we have been in more than a decade”, while Charles Schwab reckons “2023 looks to be the year that bonds will be back in fashion with investors”.

Yields have rebounded during the year. What’s more, bonds are an asset class with a tendency to mean revert and there’s a big negative gap to revert.

For instance, looking at the aggregate returns on Lipper’s classification for UK corporate bonds since the global financial crisis, the strongest return was in 2009, when these funds delivered 14.9%, following the previous year’s loss of 10%.

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CHART 1: third quarter of 2023 and 4.5% a year later. But as rate-watchers will know, Office for Budget Responsibility predictions and reality are not always the same thing.

This has a particularly egregious effect on UK linkers, as they have a much longer average duration than, for example, the much bigger US inflation-linked market, or Treasury Inflation-Protected Securities. The UK linker sector has an effective duration of 17.9, while its Global Inflation Linked Bond counterpart has an average of 7.5 and was down by much less during last year.

UK corporate bond fund returns, 2008-2022 20 15 10 5 0 -5 -10 -15 -20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Refinitiv Lipper

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It is, of course, dangerous to read too much into a relatively short time series and there are many other things in the mix. One difference between 2009 and now is that the inflationary environment is very different, with the world then just about to embark on a decade and a half of artificially low rates, reinforced by the fresh-out-ofthe-box policy of quantitative easing.

Rates may have further to run in 2023 and any further rate rises will have a negative impact on bonds’ performance until the rate cycle peaks. The Fed has signalled further rises, while the market seems more sanguine. I can claim no great insight here, but perhaps “don’t buck the Fed” may still be reasonable advice.

That said, the worst of the pain is likely behind us, as governments and companies are issuing bonds with higher coupons and the bloated principals of the previous decade have deflated, offering better value and higher yields.

small share of total credit to nonfinancial firms.”

Rising default rates are nevertheless a concern and consensus would seem to be that this is not the time to be going overweight on high yield.

Certainly, as noted by FTSE Russell analysts regarding the collateralised loan market, financing conditions are expected to remain tight and volatile for much of 2023, with some sectors vulnerable to increased default risk because of the difficulty in passing on the rising cost to customers. Market stress and recession may therefore push speculative-grade corporate default rates to more than double next year.

That would likely apply to high-yield bond as well as debt markets.

That’s likely less of an issue for investment grade funds, but we are seeing them reverse the trend in recent years of moving down the credit spectrum in search of yield.

For example, GBP corporates bonds’ exposure to BBB-rated credit – the lowest investment grade rating – went from an average of 42.3% in 2018 to 49.9% in 2021, before falling slightly to 48.3% last year. US dollar and euro corporate funds have made a similar transition, from about 49% BBB to 55%, then to 48.7% and 52.2% respectively last year. However, BBB remains by far the largest credit allocation across all three regions (chart 2).

The case for fixed income has certainly strengthened, with yields offering an interesting return for the first time in years. What’s more, equities will likely struggle in recessionary conditions, making bonds relatively more attractive. But if rates have further to rise, then bonds will have more to lose. And with defaults increasing, shunning riskier credits seems wise. ● Dewi John is head of research in UK and Ireland at Refinitiv Lipper

BEWARE ZOMBIES That’s the case for the defence, if you will. There’s one particular niggle, however: zombies. These are companies with interest-coverage ratios below one over a defined period. For years, we’ve been hearing of the proliferation of such entities: companies only kept going through cheap money. But 2023 may be the year that the zombie chickens come home to roost, as borrowing costs return to something approaching historic norms and major economies flirt with recession.

Some estimates put zombies at roughly a fifth of the US’s 3,000 largest publicly traded companies, carrying about $900bn (£730bn) of debt. On the other hand, the Fed (remember those guys I just recommended not to buck?) reckons: “Zombie firms are not a prominent feature of the US economy.

Among both private and publicly listed firms, zombie firms are few in number and generally small; they are mostly concentrated in the manufacturing and retail sectors and account for a

CHART 2: GBP, US dollar and euro corporate bond fund credit exposure, 2022 60 50 40 30 20 10 0 % Quality Not Rated

% Quality/A

Bond EUR Corporates

% Quality/ AA

% Quality/ AAA

% Quality/B

Bond GBP Corporates

% Quality/ BB

% Quality/ BBB

Bond USD Corporates Source: Refinitiv Lipper

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TAPERING OVER THE CRACKS? Technical Connection examines the tapered annual allowance

GARY WATERS / IKON IMAGES

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he tapered annual allowance was introduced to restrict the amount of tax relief granted for high earners in 2016/2017. From 2020/2021, there were substantial increases in the income thresholds, meaning far fewer clients are now impacted, but for those calculating carry-forward allowances from the tax years 2016/2017 to 2019/2020, the lower thresholds still apply.

For tax year 2020/2021 onwards, the tapered annual allowance affects those who, in any tax year, have both threshold income over £200,000 and adjusted income of more than £240,000.

For tax years 2016/2017 to 2019/2020, the tapered annual allowance affects those who in any of these tax years had both threshold income over £110,000 and adjusted income of more than £150,000.

The starting point for the calculations is net income, which is broadly an individual’s taxable income left after deducting any reliefs due. For a full list of reliefs due, please see Section 24 and Section 24A ITA 2007. It should be remembered that this income is very different from ‘relevant UK earnings’ because it includes everything subject to income tax such as pensions, savings and rental income, as well as dividends.

Threshold income is: ● Net income for the year (taxable income minus allowable reliefs). ● LESS contributions made under relief at source. ● LESS payments received from lump sum death benefits. ● PLUS salary-sacrifice arrangements if started or increased on or after 9 July 2015.

Adjusted income is: ● Net income for the year (taxable income minus allowable reliefs). ● PLUS personal contributions made under net pay arrangements.

PLUS contributions to overseas schemes, if non-dom and receiving tax relief. ● PLUS (deemed) employer pension contributions. ● LESS payments received from lump sum death benefits.

This looks simple enough but getting accurate data before the end of the tax year can be difficult. This is especially hard for defined benefit schemes. In the case of those, the personal contributions are what are paid to the scheme, but the deemed employer contributions are in fact the pension input amount for the scheme, less contributions paid by the individual. This means they bear no actual connection to the amount paid.

Generally, should there be no salary sacrifice to take account of, the difference between the two figures will be the Pension Input Amount for the year.

Once these two figures are established, and both exceed the relevant limits, then you simply take the excess over the adjusted income, divide by two and deduct from the £40,000. For the tax years 2016/2017 to 2019/2020, there was a minimum annual allowance of £10,000 for those with adjusted income of £210,000 or more. For subsequent tax years, this minimum is £4,000 for those with adjusted income of £312,000 or more.

It is worth noting that any changes to contributions paid will mean that the calculation needs to be redone.

For example, additional personal contributions could bring an individual out of the tapered annual allowance by reducing their threshold income. However, extra employer contributions, or increases in salary sacrifice, could mean bringing someone into taper or a further reduced annual allowance. ● ●

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Technical Connection

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02/02/2023 11:22

P F S G R A D UAT I O N

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LEADING THE WAY As the PFS graduation ceremony returned at the end of last year, Luke Holloway met a pair of professionals recognised for their achievements

n late 2022, the PFS was delighted to once again welcome graduates to a ceremony for those qualifying as Chartered financial planners, Associates or Fellows of the PFS between July 2019 and June 2022.

Having been put on hold due to the pandemic, the graduation was the first since 2019 and was held across two ceremonies in Westminster’s Central Hall.

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More than half of those in attendance graduated as Chartered financial planners, with just less than half being honoured as Fellows of the PFS. Two graduates who collected both Chartered and Fellowship awards on the day were Matt Begley and Alan Hoskings, both of Harris Begley Financial Planners in Cornwall, England.

“It has taken years of hard work, studying and exams, but I am really proud of what we have achieved,” Hoskings tells us. “As a financial planning professional, clients expect you to be qualified but we have shown the willingness to go above and beyond, and be the best of the best.

“I absolutely love what I do and I want to do it to the best of my ability” he says. “I want people to know that they are dealing with somebody who is at the top of their game.”

“Becoming a Fellow really sets you apart,” adds Begley. “It is respected among your peer group, demonstrates your dedication, shows your value and really boosts your self-esteem. People see you in a different light.

“Everything we have studied is relevant, even if, when you are studying it, you think it might not be. As I’ve become more qualified, I’ve moved into new areas and can deal with more complex cases,” says Begley.

paths crossed in 2017 and Hoskings began working at the firm Begley had founded.

Having completed their Diploma and Advanced Diploma, they were both awarded their PFS Fellowship in 2019.

“This is far and away the best qualification across the profession – I think it puts you head and shoulders above the rest,” says Hoskings. “If you are serious about having a career, not a job, this is the route to take.”

Begley agrees: “Other qualifications have their place but throughout the profession, the level of the PFS qualification is deemed to be superior as well as more difficult to achieve.

“From a business point of view, I will not recruit someone who has not got a PFS qualification. The difference in knowledge and technical capability is clearly visible.”

In March, the pair plan to visit a local school in Truro during a careers event to tell students about a potential career in financial services.

Their achievements have even encouraged other team members to begin further qualifications with the PFS. “By the two of us leading by example, we have now seen others across the business push on and want to become Chartered,” says Begley. “Some are quite new to the profession and are already focused on achieving Chartered status, while others want to expand their knowledge into new areas – it is great for our firm and ultimately for our clients.”

To find out more about PFS qualifications, visit: www.thepfs.org/qualifications ●

This is far and away the best qualification across the profession

FELLOW JOURNEY

ALAN HOSKINGS AND MATT BEGLEY

The pair have both worked in various areas of the financial services sector for more than 20 years and were each already on their journey through professional qualifications when their

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Luke Holloway is editor of PFP

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For financial intermediary use only. Not for use with customers.

Retirement Income

Fiduciary Duty over there Consumer Duty over here…

Does it amount to the same thing?

We all know that what happens over here often mimics what’s already happened ‘over there’. Over there being the US of A of course. So, when I became aware of a bit of a spat between some high-profile personalities in the US financial planning community it piqued my interest.

Guy Anderson, Director Retirement Income Distribution

One of the central characters in this story is a certain Ken Fisher who has built a significant wealth management business bearing his name over there. He also has a small footprint over here.

is to focus on the asset column on the left and growing those assets over time. You can’t really argue with that when a client’s goals and objectives are largely focused on still accumulating wealth.

In a lengthy but well-constructed article published on the US website Advisor Perspectives in February1, David Macchia [author, public speaker and founder of Wealth2k® and The Income for Life Model®] makes his case for why he believes Mr Fisher failed in his fiduciary duty towards some of Fisher Investments clients. The reason for failure is cited as his personal dislike and refusal to even consider, let alone recommend annuities as part of a retirement income plan.

But when someone moves into the life stage where their assets need to support their lifestyle, some advisers recognise that the focus should shift to the right of the balance sheet and become more about liability (income) management than asset management.

It’s probably worth mentioning at this stage that at the heart of both the fiduciary duty in the US and the developing Consumer Duty here, are the dual tenets of impartiality and acting in a client’s best interests Although David Macchia makes many interesting points, I’ll leave it to those who go and read his article to come to their own conclusions on whether they believe he is right or not in his assertions.

The lens you choose to look through For this article I wanted to focus more on some of the other comments in David’s article [and other related social media2] around which lens would someone more intuitively look through when assessing and advising a retirement client on their needs and objectives, and whether it’s the lens you choose to look through that could potentially lead to questions over impartiality.

Much like the number of eyes we’re blessed with, there are only two lenses through which to assess and advise private clients.They link to the domestic balance sheet which, like any other balance sheet, has assets on the left-hand side and liabilities on the right. The default lens, supported by current regulation both here and in the US,

David Macchia and others would argue that many advisers in the US, maybe including Mr Fisher, remain rooted to looking through the asset lens in retirement and may, as a result, be doing some of their clients a disservice, especially during these times of capital asset volatility and mean reversion in markets.

Exactly which clients could be disadvantaged is also driven by this asset lens/liability lens concept. When it comes to client segmentation, a firm that is fully wedded to looking at everything through the asset lens will probably have segmented their services, and therefore their clients, based on the amount of assets they have (funny enough).

This often results in segments defined by various precious or semi-precious metals. It would typically lead to all clients with similar wealth being offered similar solutions, irrespective of their retirement income needs.

Income-to-Assets-Ratio A firm or an adviser, who recognises that they should look at their retirement clients through the liability lens, will be more aware that it’s the liabilities a given amount of assets need to support that are more important than the assets themselves. David Macchia talks about this as the ‘Income-to-Assets-Ratio’™ in another article3

Call 0345 302 2287 or visit justadviser.com

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A DV E RT I S E M E N T

Fiduciary Duty over there and it gives rise to three liability driven client segments in his model. He named them Underfunded clients, Overfunded clients and Constrained clients. In this approach to client segmentation, a client could have significant wealth, yet still be classed as a Constrained client due to their ‘Income-to-Assets-Ratio’™ He argues that the failure of those advisers, who look through the asset lens, to be open minded about guaranteed income solutions [that can provide more sustainable income whilst reducing volatility and dampening sequence risk], could disadvantage these Constrained clients the most.

By way of a definition, David Macchia suggests that any retiree requiring their assets to support spending of in excess of 3% pa would be classed as a Constrained client.

in a client’s best interests, it might be timely for those who are responsible for advice policy to reflect on the factors that drive their advice and client segmentation.

A good place to start might be to ask the following types of questions within your business, with particular focus on your retirement income proposition:

1.

Are we wedded to viewing everything through the asset lens, even for our retired/retiring clients?

2.

What lens have we looked through when we’ve segmented our retirement clients?

3.

How many of our retired clients could be classed as Constrained?

4.

Are we allowing personal or commercial biases to shape our advice and solutions?

5.

Are we confident we can evidence that we are truly impartial and always put client interests first?

Acting in a client’s best interest Advisers here in the UK have long had to adhere to the FCA conduct of business rules. It could be argued that a lot of what is coming within the Consumer Duty should already be seen as ‘business as usual’. But as a greater focus will inevitably be applied to impartiality and acting

If you’d like to know more, we’d love to talk to you.

Please get in touch with your usual Just contact, or go to justadviser.com and search ‘meet the team’, call 0345 302 2287 or email support@wearejust.co.uk.

https://www.advisorperspectives.com/articles/2022/02/09/the-trial-of-ken-fisher-for-crimes-against-annuities

1 2

https://www.linkedin.com/feed/update/urn:li:activity:6967208467723915264/

3

https://www.wealthmanagement.com/retirement-planning/tragic-politicization-annuities

FOR MORE INFORMATION Call: 0345 302 2287 Lines are open Monday to Friday, 8.30am to 5.30pm Email: support@wearejust.co.uk Or visit: justadviser.com Please contact us if you would like this document in an alternative format.

Please note your call may be monitored and recorded and call charges may apply.

JM 01374

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ne of the essential skills to develop as a financial planner is the ability to tailor your messages to your audience. The problem is that we become so accustomed to technical terms and financial jargon that we use every day that sometimes we miss that our clients fail to understand us. This informational asymmetry makes it difficult for them to relate what we are talking about to their personal experience.

During the two decades I worked directly with clients as a financial adviser, I covered an extensive cross-section of the community – from dockworkers to doctors, actors to engineers – all with varying degrees of existing knowledge and experience. Still, in almost all cases, I found that they had huge gaps in their financial understanding. They lacked the requisite domainspecific knowledge that would allow them to deal with all their

financial affairs. They were outside their comfort zones and they needed qualified, professional help.

I found that one of the most effective ways to connect with people, put them at ease and help them understand what I was trying to do for them was to meet them where they were at. Specifically, I would start the conversation with what was familiar to them in their world, as that was where they were the most comfortable.

This idea – meeting them where they are – was one of the most powerful lessons I learnt from one of my early mentors. It is the ability to connect the financial points you are trying to make with something they are familiar with in their profession. Then, you can accelerate their journey to understanding. But creating the correct analogy or extended metaphor takes a little imagination.

PLANNING YOUR TRIP Let me give you an example. At a recent family wedding, I had a long, pleasant conversation with my nephew, Dan, who has been a commercial airline pilot for a few years. We got onto the subject of finances and his admission that he should be doing more to prepare for the future. “But,” he said, “I just find it all so confusing; I just don’t know where to start or who to trust.” Does that sound familiar?

THIS IS YOUR CAPTAIN SPEAKING David Jones explains why good financial planning is just like flying a plane

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A DV IC E P RO C E S S

ISTOCK

The more you can tailor your messaging by building on what is familiar to them, the more successful you can be

“It’s much more straightforward than you might think,” I told him. “You need to take a structured approach.

In fact, planning your financial David Jones future is very similar to what you do for a living.” you to deal with unexpected emergencies “Really? How?” he asked. along the way. But the key thing, like on the “Well, before you even take off on plane, is to ensure you put enough fuel in the any flight, what’s the first thing you tank. “In a financial context, that’s your must do?” commitment to saving regularly enough,” I “File in a flight plan” continued. “But even if you do save in a “And what’s on the flight plan?” highly disciplined way, it’s unlikely that you I asked. will be able to achieve the sort of returns you “All the information like the starting need for a successful outcome without point, the destination airport, proposed investing some of your funds in the route, the number of passengers, the fuel stock market.” you’ll need, hazards you need to consider, “But that’s the scary bit, isn’t it?” Dan weather, contingency plans.” complained. “You can lose so much money if “Right! Just like a financial plan,” I said. the stock market crashes.”

“You need to know where you’re starting “Well, yes and no,” I replied. “Again, your from, where you’d like to get to, over what world gives us another great analogy. Every time, how much fuel – I mean savings – you day you are flying people around the world are going to need and some contingency and, if you were to survey the people planning in case it doesn’t work out exactly onboard, what are you going to find? Some of as anticipated. If you work with a good them have a fear of flying.” financial planner, they take the time to “True.” understand your desired destination and put “Then, during the flight, you experience together the plan to give you the highest some turbulence. What does that do for our probability of getting there.” aerophobe? It confirms all their worst fears about getting on the plane in the first place.

CHECKING THE FUEL GAUGE But for you, as a pilot, is turbulence a “Now, let’s think about your office. By which problem?”

I mean the flight deck. Whenever I’ve looked “No, it’s just a normal part of flying,” through the cockpit door and seen all those replied Dan. “Most of the time, you aren’t instruments you must deal with, I find it really dropping much, it’s just the sensation scary. There’s just so much information you that makes it feel like you are. Like on a need to process. How do you even know rollercoaster at the fairground.” what you need to look at? You must have a “So, what do you tell people?” compass, an altimeter, an attitude indicator “When the seatbelt sign is on, stay in your and airspeed – I know they are all important, seat with your seatbelt fastened.” but what’s your most crucial dial?” I asked.

“Because?”

“That would be the fuel gauge,’ he said “Because the people who are going to without hesitation. “In fact, after get hurt, or who are going to hurt others, taxiing, take-off and landing, most of the are going to be the ones out of their seats,” work we do during a flight is spent on fuel he said. calculations and contingency planning, as most of the time, the aircraft is on autopilot.

TRUST YOUR PILOT But, of course, there are always times when “Yet again, Dan, had just described the we have to make adjustments.” typical investing journey. Along the way, “Again, just like financial planning,” clients are going to experience turbulence I said. “You can plan the best flight ever, but – or volatility – and as financial experts, we the plane isn’t going anywhere unless you know to expect it and deal with it. But to have enough fuel to get you there and allow the uninitiated, it’s scary and confirms all

their worst fears, especially about crashing. The answer, again, is to stay in your seat, and the one thing that can help here is the reassuring voice that comes over the intercom: ‘This is your Captain speaking; just a little turbulence folks, things could be a little bumpy for a while, so we do ask that you stay in your seats while the seatbelt signs are on.’”

The same thing applies when the markets are looking scary – the voice of calm and experience makes all the difference.

“So, Dan,” I said, “if you think about financial planning like your day job, you’ll find it easy to grasp. In simple terms: have a plan, put fuel in the tank, don’t worry about turbulence because it’s all part of the journey and work with someone who understands the importance of regular communications and calm reassurance. And that is the point. Just as I wouldn’t expect to fly myself on holiday, you shouldn’t expect to do this all on your own. A good planner will help you get where you want to go.”

As a financial planner, you invest a lot of time and energy to acquire the specialist information you need to be a consummate professional.

However, it is not just knowledge for knowledge’s sake. To be effective, you need to be able to apply that knowledge to your client’s unique situation. The more you can tailor your messaging by building on what is familiar to them, the more successful you can be.

Originally featured on pfspower.org, visit the website for more articles, podcasts and webinars.●

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David Jones is head of UK and Ireland adviser group and vice-president of Dimensional Fund Advisors

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CHAMPIONING THE CAUSE Vilma Marques attends the PFS Festival of Financial Planning and meets our Education Champion of the Year 2022

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CAN YOU TELL US BRIEFLY ABOUT YOUR JOURNEY SO FAR?

A

s many of our members know, the return of the Festival of Financial Planning in autumn was a huge success, providing an engaging and energised space for the financial planning community to meet, collaborate and network, as well as to celebrate the incredible work being done across the profession.

The event also included the prestigious Personal Finance Awards 2022, which recognise exceptional PFS members who go the extra mile. During the festival, I met with the Education Champion of the Year 2022, Daniel Williams, to talk about his involvement in the My Personal Finance Skills programme.

Our interview follows below.

My first few sessions were delivered remotely, which allowed me to hop onto the session from the office, deliver them and then get back to the day job. Since then, I have delivered in-person sessions across the region.

Financial education is the cornerstone of financial success

WHY DID YOU DECIDE TO BECOME AN EDUCATION CHAMPION? I first heard about the initiative at a PFS conference. I remember thinking ‘that sounds like a fantastic thing to do and I wish that I could be part of it’.

At that point, I felt that I was too young in my career to get involved, but looking back I wish I had started sooner.

I joined the initiative because I thought it would allow me to use my knowledge and skills to help the next generation to achieve their financial potential and make consistently smarter financial decisions.

Daniel Williams

I must admit, I do have a favourite presentation, which is ‘Staying safe from scams’. It is an area where I am passionate about raising awareness and it is such a great forum to start the conversation about how to keep yourself safe from a young age.

For people who can’t conduct inperson sessions, it is great that schools are still happy for us to deliver the sessions digitally, but I enjoy being in the classroom when I can.

WHY IS IMPORTANT TO PROVIDE FINANCIAL EDUCATION TO YOUNG PEOPLE? Financial education is the cornerstone of financial success but it is lacking in the curriculum. Young people are asked to make difficult financial decisions on a regular basis at an ever-younger age, without the skills or knowledge to be able to make consistently good decisions. It is often not until they are much older and speaking to financial professionals like you and I that they start to gain valuable financial knowledge. By giving them those skills at a younger age and equipping them with a framework to make smarter decisions, in my opinion we are effectively supercharging the next generation.

WHAT ADVICE WOULD YOU PASS ON TO ANYONE INTERESTED IN VOLUNTEERING? This is a fantastic way of giving back to the community, at the same time as building your skills and network.

It is completely flexible and can work around your diary – if you are available, you can accept a request, but if it doesn’t work for you, other Education Champions around the country can pick it up.

All the materials are provided for you – it is just a case of turning up and doing your thing.

To find out more about the My Personal Finance Skills initiative, email: vilma.marques@cii.co.uk ● Vilma Marques is education programme executive at the PFS

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02/02/2023 08:43

LEARNING

TAKING A BITE OUT OF CPD Simon Webster gives members an update on bitesized learning and other forms of CPD that the PFS offers

T

he PFS is aware that learning styles are always evolving and aims to provide flexibility within its continuing professional development (CPD) rules around bitesized learning. There are many different ways members can undertake CPD. Here, we explore those, along with common examples of how grouped activities can also count.

This is particularly timely given the Financial Conduct Authority’s recent decision to remove the minimum 30-minute time requirement for structured CPD activities for regulated investment advisers.

ALAMY

CPD SCHEME RULES Our existing CPD scheme rules already provide this flexibility for members.

As a reminder, the scheme caters for all qualified members, irrespective of their specialism, discipline or geographical location. Your commitment is: ● Complete a minimum of 35 hours' compulsory CPD each year, of which at least 21 hours must be structured. ● 35 hours is the minimum required – in practice, the figure may exceed this as the actual requirement will be determined by an individual’s development needs in any 12-month period. ● For an activity to be eligible, it must be a minimum of 30 minutes

in duration (a batch of different activities of less than 30 minutes each undertaken to meet a specific development need can be combined and recorded together).

GROUPED ACTIVITIES The activities you choose to group together as part of your learning and development will vary from person to person, but common examples include: ● Undertaking 20 minutes of preparation for a meeting with a client on a new product or regulation and then taking 10 minutes after the meeting to check your understanding before following up on any specific questions that you were not able to answer fully in the meeting. ● Reading an article on management skills, which took five minutes but highlighted a need for further knowledge and development. Then, meeting the development need by watching a 10-minute video on the topic and discussing the techniques you learned with your manager for 15 minutes, including how they could be applied on the job, before spending 10 minutes reflecting on the outcome of what has been learned (perhaps including some commitments on implementing the knowledge in practice). ● Attending a conference where a topic was discussed as part of a 15-minute

interview-style presentation, then testing your knowledge on the topic by taking a 20-minute online course with a multiple-choice test at the end. ● Your company or network might ask you to complete a series of mandatory tests on an annual basis. Where these tests contribute to the same development need, these bitesize learning sessions can be grouped together to meet the minimum 30 minutes per CPD activity.

An example is completing three 10-minute online learning sessions on cybersecurity.

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EVIDENCING GROUPED ACTIVITIES For the grouped activities to be successfully claimed as structured CPD, your CPD record must clearly include: ● The development need. ● Details of the activities undertaken to meet that development need. ● The time taken on the activities. ● The date(s) the activities were undertaken. ● A reflective statement detailing the extent to which the activities contributed towards meeting the development need.

Whatever role you have within the profession, undertaking regular CPD is likely to be an important part of your professional development. Keeping up with industry trends, talking with others and attending training events or webinars can all help to make you a better professional in 2023 and beyond. ● Simon Webster is membership marketing manager at the CII

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TAX PLANNING

A QUESTION OF TRUST Q

In May 2009, my client, who is still alive, gifted £125,000 directly to her son. Then in June 2013, she settled £150,000 into a discretionary trust (Trust 1) and in August 2014 she settled a further £150,000 into another discretionary trust (Trust 2).

Would the initial gift to her son have any effect on the periodic charges on the two discretionary trusts?

A

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An outright gift to an individual is treated as a potentially exempt transfer (PET) for inheritance tax purposes. The gift generally falls out of account once the donor (your client in this case) survives seven years. This means that where a PET is made before a chargeable lifetime transfer (CLT), as in this case, you would only deduct it from the available nil rate band if the donor dies within seven years. This is because the PET would fail and become chargeable.

Although in this case the donor, your client, is still alive so the PET can be ignored.

For the purposes of the 10-year anniversary periodic charges on the discretionary trusts, the available nil rate band applicable to the trust would be reduced by CLTs made in the seven years prior to creation of the trust.

So, for Trust 1, as there had not been any previous CLTs, the available nil rate band applicable to the trust would be £325,000.

Then for Trust 2, the available nil rate band would be £175,000 (£325,000 - £150,000), i.e. the current nil rate band reduced by the CLT (transfer into Trust 1) made in the seven years prior to creation of the trust.

(Note: this assumes that the donor had used their annual IHT exemption, so the full £150,000 is a CLT).

→ Taken from the Technical Connection Techlink Professional question bank.

To find out more, visit: www.techlink.co.uk/techwise

Q

My client is aged 77 and is thinking of making personal pension contributions as part of their inheritance tax (IHT) planning. Is this possible? If so, what are the pros and cons?

A

Your client is no longer eligible for tax relief on personal pension contributions as they have reached the age of 75. In addition, many personal pension providers will not accept non-relievable contributions to their relief-at-source schemes.

Where a scheme will accept contributions, the potential benefit will depend on the income tax position of the likely beneficiary. The pension death benefits will be subject to income tax at the beneficiary’s marginal rates. If they are basic rate taxpayers, they would be taxed at 20% on the death benefits rather than 40% IHT. However, if the client has surplus income they could instead use the normal expenditure out-ofincome exemption and potentially pass on the funds entirely tax-fee. The £3,000 annual IHT exemption may also be available.

VALERO DOVAL / IKON IMAGES

In this issue, Technical Connection tackles questions on discretionary trusts and IHT

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STUDY ROOM

The CII Financial Assess training package tests your knowledge of key financial topics QUESTION 1

QUESTION 5

QUESTION 8

Which of the following is identified by the FCA as a main driver of customer vulnerability?

Health Benefits Wealth Accommodation

A maturity claim may apply on what type of life insurance policy?

Critical illness insurance Term insurance Whole of life Endowment

What is the average figure released with new lump sum lifetime mortgages? £89,960 £133,770 £144,800 £162,840

QUESTION 6

QUESTION 9

Why might interest rates be a factor when an insurer prices a whole of life insurance policy?

High interest rates lead to higher administrative costs Claims tend to rise if interest rates are rising Insurers rely on receiving interest on their investments to help them meet future liabilities People are less inclined to want life insurance if interest rates are low

How is the refund of personal contributions from an occupational defined benefit pension scheme taxed for a basic rate taxpayer?

Tax is deducted at 50% on all of the contributions Tax is deducted at 20% on the first £20,000 and 50% on the balance Tax is deducted at 20% on all of the contributions Tax is deducted at 20% on the first £10,000 and 50% on the balance

QUESTION 2

50

How is a scam through an ‘international SIPP’ likely to be perpetrated?

The scheme claims to liberate pension funds before age 55 The scheme is not registered in the UK The scheme is UK-registered and promotes inappropriate overseas investments The scheme looks like a QROPS but is not recognised by HMRC

QUESTION 7 QUESTION 3 Which of the following is a monitoring and governance requirement under the Consumer Duty?

Monitor and regularly review the outcomes customers are experiencing Monitor and regularly review sales and cancellations Monitor and regularly review profit Monitor and regularly review losses

Investment shortfall is the risk that an investment return will not: At least match overall market performance At least match the amount of the original investment, allowing for inflation Represent a net profit Achieve the investment goal

QUESTION 10 A client has been asked to pay an additional fee to their lender to secure a 92% loan to value mortgage. What must this fee be called?

Higher lending charge Mortgage guarantee premium Procurement fee Top-up fee

YOUR SCORE »

QUESTION 4 How many Cross-Cutting Rules are part of the Consumer Duty?

One Two Three Four

1–3 POOR 4–6 GOOD

7–8 VERY GOOD 9-10 EXCELLENT

ANSWERS 1A The FCA lists four key drivers of vulnerability: health, life events, resilience and capability.

2C A scam through an international self invested pension plan (SIPP) is likely to involve inappropriate overseas investments, with the scheme itself looking legitimate, which makes prevention particularly difficult when

there may well be a statutory right to transfer.

3A The Consumer Duty rules require firms to monitor and regularly review the outcomes their customers are experiencing.

4C The Consumer Duty is made up of one new Consumer Principle, three Cross-Cutting Rules and four Outcomes.

5D When an endowment policy 8B £133,770 is the average amount matures, it becomes the subject of a borrowed for new lump sum lifetime maturity claim. mortgages, with lending having risen by 6C Sustained low interest rates may 40% since 2021. mean prices have to rise to compensate 9B Tax is deducted at 20% on the first £20,000 and 50% on the balance, for lower investment returns.

7D Shortfall risk means that the regardless of the individual's personal required funds will not be generated. tax rate.

10A This must be referred to as a higher lending charge.

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