Jayne Gibson is a professional financial planner, a pension transfer specialist and the Managing Director of Insight.Out Financial. Below, Jayne speaks to Finance Monthly about defined benefit schemes and the challenges they can come with them, as well as the one thing she would change about them if she could.
Tell us about Insight.Out Financial and your professional career?
We are a friendly and approachable company with a wealth of expertise in pension transfers, personal & corporate financial consultancy. We make our experience and knowledge very accessible to our clients with our empathetic approach, but most importantly - our charges are transparent, fair and reasonable.
I started the company in August 2015 with the aim of building a business that is customer-focused and provides exception standards of service and advice, with professional ethics at the core of our proposition. We are based in Belfast, Northern Ireland, however we have a UK-wide clientele, and regularly visit all regions in Britain.
I have been a Pension Transfer Specialist since 1998, and have extensive experience in advising on occupational pension schemes, including Defined Benefit, Defined Contribution, as well as more specialist pensions for small business owners.
I am one of the first Chartered Financial Planners in the UK and am also a Fellow of the Personal Finance Society since January 2006, as well as a Chartered Fellow of Chartered Institute of Securities and Investments since 2012. I have continued with my studies, being awarded a Masters in Financial Planning & Business Management in 2012. I am currently working towards a PhD, with a focus on building consumer confidence in the financial planning profession.
What attracted you to the defined benefit pension schemes field?
I have been advising on Pension Transfers for more than 20 years. When I first started, there were very few advisers qualified to advise on pension transfers and a lack of knowledge and understanding of the value of the benefits offered and the impact for members of occupational schemes. The main reason for this was the highly complex legislation in place at the time, which was different depending on when a member joined and left a scheme. Pension simplification in 2006 did bring the personal pension and occupational pension regimes in closer alignment, and over the next 10 years, successive legislative changes, culminating in the pension freedoms legislation in 2016 have meant that more and more people need advice.
The advice for many of my clients with defined benefit schemes is life-changing. It is the biggest financial decision they will ever have to make, and will have the biggest impact on their, and their family’s future lifestyle. Changing demographics mean that the traditional “one size fits all” approach for most defined benefit schemes is less and less relevant. More and more people are looking for a different solution and wanting to shape their own personal retirement.
How do defined benefit pension schemes work?
Defined benefit schemes, often referred to as ‘Gold Plated Pensions’ are offered by companies for the benefit of their employees. Traditional style schemes provide a fraction of a member’s salary at retirement for each year they have been in service. For example a 60th scheme would provide 1/60th of a member’s final salary, multiplied by the number of years they had worked for the business:
For example:
John has worked for his employer for 27 years and is due to retire at the age of 65 with a final salary of £26,000. His pension income is calculated as 27/60ths x £26,000 = £11,700. The pension of £11,700 is payable from John’s 65th birthday and will increase in payment in line with inflation. It is guaranteed to be paid for the rest of John’s lifetime.
At retirement, most schemes will offer an option to take a cash free lump sum. This can be paid as a lump sum in addition to the pension, or by commutation where part of the income is given up in return for a lump sum. The maximum lump sum available is calculated using HRMC formula of (20 x pension) @ 25%, or another method set down in the scheme rules. If an alternative method is used it cannot exceed the HMRC maximum amount. A commutation rate is then applied to the lump sum to calculate the amount of pension that is given up in exchange for the lump sum required. The scheme actuary will set the commutation rate and this can vary greatly from scheme to scheme. Most public sector schemes use a standard 12:1 rate, however private sector schemes have more flexibility and may choose a rate which more closely reflects the cost of the pension given up.
For example:
John has an option to take a cash lump sum by giving up some of his pension. The maximum lump sum he can take is calculated at (£11,700 x 20) @ 25% = £58,500. If he wishes to take the full lump sum, he will have to give up a proportion of his pension. This is calculated using a commutation rate of 12:1. His reduced pension is calculated as follows, £58,500/12 = £4875, £11,700 - £4875 = £6,825 pa.
Many schemes will also provide death benefits for a surviving spouse or in some cases, other financial dependent. This will generally be in the form of a spouse or dependent’s pension, calculated as a percentage of the member’s pension. There are many variations to the formulas used by schemes to calculate these benefits and the eligibility criteria applied by each scheme when assessing a survivor’s entitlement to benefits, it is essential for members to fully understand these, especially where their circumstances are not straight forward. Some schemes will only pay death benefits to a legal spouse, where others have a more generous approach and will consider a life partner, where financial interdependency can be established. It is also important to understand that spouse benefits are not a contractual entitlement and are paid at the discretion of the trustees. Spouse benefits can be reduced and even stopped in some circumstances, e.g. where the spouse remarries or is even co-habiting.
For those in same sex marriages, and civil partnerships, it is especially important to understand the scheme’s eligibility criteria. Under current legislation, there is no compulsion on schemes to change their scheme rules to accommodate changes in legislation. Where rules have been amended, in some cases this will only date back to the date the relevant legislation came into force.
Most schemes will also guarantee to pay the member’s pension for a minimum period of time, generally 5 years but could be as much as 10 years. This in effect means that the member’s full pension will be payable for at least the period of the guarantee period. Any outstanding payments are paid as a lump sum and any spouse pension will commence in payment.
For example:
John retired at the age of 65 and unfortunately passed away after two years. His nominated beneficiaries will receive a lump sum of 3 x £6,825 = £20,475, plus John’s wife will start to receive a pension of £5,850 pa (50% of the unreduced pension), which is payable for her lifetime.
Most public sector schemes such as NHS, Teachers Pensions and many local government pension schemes, conform closely to this format, however since 2014, many have changed to a career average basis (CARE) to calculate benefits. Members earn a fraction of their earnings for each year which is increased in line with government published rate of inflation. These are accumulated each year to arrive at final pension entitlement. One of the biggest differences is that transfers are not available from unfunded schemes (e.g. NHS, Teachers schemes) unless going to another defined benefit scheme. Generally local government schemes do still allow transfers to a flexible pension plan.
Private sector schemes are much more varied and it is much more important to fully understand the benefits a member is entitled to. Each scheme will have their own individual combination of benefits covering the whole spectrum of how benefits are accumulated, how they increase in deferment for leavers and in payment from retirement, death benefits available, and entitlement to early or late retirement. Private sector schemes are also more susceptible to financial insecurity of the sponsoring employer.
What are the typical challenges that clients approach you with in relation to transferring their defined benefit pension?
Many clients are now much more aware of the options that are available from personal pensions with the introduction of pension freedom legislation. There is now much more coverage in the media, and availability of information via internet, informing consumers of the benefits of flexible benefits in retirement, and current high transfer values has prompted a huge increase in enquiries for advice.
The main areas of concern are:
- Flexibility & control – Many more people have a different outlook on retirement rather than working to 65 and then stopping there. People would like to consider winding down or even the possibility of a career change from a stressful job to something more enjoyable. Pension freedoms offers many more options that may be more suitable, however these are not available through a defined benefit regime.
- Availability and value of death benefits - Demographics have changed significantly in recent years and the traditional model, based on nucleus family, no longer works for many people. Families often have complex relationships where it may not be easy to identify financial dependency for one individual. Scheme rules vary significantly and the availability of spouse pension, or dependent’s pension is generally at the trustee’s discretion rather than an automatic right. This is specifically relevant for anyone in same-sex marriage or civil partnership as schemes do not have an obligation to change the rules to accommodate these arrangements, and even where they do on some occasions this will only be backdated to when the law was changed therefore people who believe they are entitled to benefits may not actually receive what they expect.
- Pension taxation considerations - pension taxation has changed considerably over the last 10 years, most significantly with the introduction of the lifetime allowance and annual allowance regime. Individuals, even with relatively modest earnings but a long career or people who have large increases in salary in a particular tax year could see themselves faced with a tax bill because their annual allowance has been calculated in excess of the £40,000 limit. Anybody with a pension benefit in excess of £50,000 per annum in a final salary scheme will face an income tax charge when they take their benefits. While it’s important to understand and quantify the implications of taxation, this does not always lead to a need to transfer benefits from a defined benefit scheme, and is only one of the factors taken into account.
- Financial security of the scheme - financial security is probably one of the most topical issues in relation to defined benefit pension schemes. With recent highly publicized failures such as BHS, Carillion and most recently - British Steel, this has become a matter of great concern for many people in final salary schemes. It is important to understand that where the scheme may have a deficit, the long-term financial standing of the scheme is based on the sponsoring employer’s ability to continue funding the scheme. The employer also has a legal requirement to make provision in their accounts for any shortfall in the scheme and agree a funding schedule with The Pensions Regulator which has to be approved and details published to members.
What can happen to scheme members’ defined benefit pensions if their employers become insolvent and the scheme doesn’t have enough funds to pay their benefits?
As mentioned above all schemes are backed by an employer’s covenant, and there is a charge over the employer’s assets effectively, which can be called on to meet scheme deficits. Where the employer fails and there are insufficient assets available, then there is the option of going into the Pension Protection Fund (PPF). This is a government-backed scheme funded by other occupational pension schemes and provides a level of protection for members where the sponsoring employer has gone into liquidation or otherwise failed. There are some limitations on the benefits that will be provided, in that only 90% of the benefit is guaranteed, and there is a cap on benefits which is, £39,006.18 (equating to £35,105.56 when the 90% level is applied) per year, from 1 April 2018. This is set by DWP. It is important to note that the government does not underwrite any guarantee provided by the scheme, on the compensation paid by the PPF is limited by the funds available.
What would you say are the specific challenges of assisting clients with defined benefit schemes?
One of the main challenges is helping members to properly understand the benefits they have accrued in the scheme and their value, and to dispel some of the myths and misconceptions that are prevalent at this time. It is essential to show the benefits in a proper context, and how these compare with the alternatives available. One of the ways we do this is by using cash-flow planning to project future inflows and outflows and compare this with the financial impact the members’ financial resources. This helps to show how achievable or not the retirement plans are, and to look at all the potential ‘what if’ scenarios, especially early mortality, poor investment performance and potentially running out of money if they were to transfer the benefits.
Another challenge is to explain the loss of guarantees, on the impact of charges and investment risk. It can be difficult to see past a large lump sum and consider the actual income benefits that the plan provides. When dealing with individuals who have little or no investment experience, and possibly, this will be the first time they have dealt with financial adviser sought advice of any kind, it is important to ensure that explanations are provided in a manner that the individual can understand and that the gravity of the loss of guarantees is properly explained and demonstrated.
In the progression of your career, how are you developing new strategies and ways to help your clients?
Our approach for dealing with all our financial planning clients is the same regardless of whether or not they have a defined benefit scheme. We take a holistic approach which takes into account the stated objectives and all the financial resources. We then complete our financial analysis which establishes their needs. In this way, we not only consider what the client wants, but what they actually need in order to achieve their goals in the future.
We have developed a very detailed, client-centric process, which focuses on communication and providing high levels of professional service to our clients to achieve their ultimate goals. We continually review and amend processes to ensure continued delivery of the promised services and to improve these where we can, and we are always investigating new and better ways to improve communication with our clients.
We are also embarking on a research programme to develop a specific investment strategy to match the flexibility and challenges provided by pension freedoms and flexible drawdown.
If you could, what would be the one thing you’d change about defined pension schemes?
It would be a great improvement for members of defined benefit schemes if there was more clarity in relation to what they should expect from financial advisers in the provision of advice. Also, clarification the obligations of trustees to provide the information required to enable financial advisers to properly assess the members’ benefits as part of this process. Currently, the Financial Conduct Authority regulate financial advisers as set out the standards for the provision of advice, and The Pensions Regulator sets out the obligations for trustees in terms of the provision of a statutory cash equivalent transfer value and the information it needs to be provided with that. There are no specific rules or guidelines laid down for trustees in relation to the information that they should provide to financial advisers, and on occasions this can cause problems and delays in obtaining the information in a timely manner.
Also, from a members’ point of view, more availability of partial transfers from defined benefit schemes will be greatly advantageous. Currently, while the legislation allows this, there is no obligation on a scheme to offer this to members.
What is your overall piece of advice for Finance Monthly’s readers in regards to defined benefit schemes?
Take time to understand the value of the benefits you have, in the context of your own personal circumstances. It’s important that individuals fully appreciate the exact benefits that they, or their family will be entitled to during their lifetime and in the event of death. Being offered a large lump sum of money can seem very attractive, however that money could run out at some point is important to ensure that they have a plan B that is realistic and feasible if this happens.
Do you have a mantra or motto you live by when it comes to helping your clients with defined benefit schemes?
This is the biggest financial decision they will ever have to make and it will have an impact on the rest of their and their partner/spouse lifetime. It is a huge responsibility on the shoulders of the adviser to provide proper and accurate advice, as there is no going back once this decision has been made.
Analysts currently expect the Bank of England to hike interest rates in May, but some are opposed, claiming the market is misjudging the BoE’s plans. Bond market guru Mohamed El-Erian says the potential rate hike is "far from a done deal."
Last week the BoE left interest rates on hold, adding to suspicious they may raise them in May. After all, the BoE has been hinting at increased rates since last November’s hike.
This week Finance Monthly asked experts: What are the indications? What's the BoE's plan? What are your thoughts on future implications?
John Goldie, FX Dealer & Analyst, Argentex:
Carney and Co. were not expected to spring any surprises last week, opting to keep interest rates on hold again, much as the consensus had suggested. While the vote to retain the current status of the asset purchase facility was unanimous, there were dissenting votes from serial hawks, McCafferty and Saunders, who saw that the time was right for the Bank to raise interest rates to 0.75%. Many of the major banks have brought forward their forecast for a hike to May, though Bloomberg's interest rate probability tool sets this likelihood still at only around 65%. Commentators are certainly warming to the idea, but most believe that it will be almost another year before a subsequent hike is carried out.
This may be underestimating the path of inflation, wage prices and - importantly – overstating Brexit concerns. Carney has repeatedly suggested that Brexit remains one of the greatest challenges to their forecast models, however, the price action in Sterling already belies a growing optimism, or acceptance, that the economic impact of the 2016 referendum is far less negative than suggested by the major players prior to the event. With a transition agreement in place, a move into the critical trade negotiations is a huge step forward even if it brings us to a position with the greatest potential for deadlock.
With headline inflation remaining high and now wage prices heading in the same direction, the UK's second hike in just over a decade will indeed come next time around. Furthermore, with a May hike enacted, the door will then open for a second hike of the year in Q4, an eventuality that the market is yet to price in. With Brexit concerns reducing on the growing optimism that a transition agreement will provide the time and space for a trade arrangement to be thrashed out, the prospect remains for Sterling to trend higher in the weeks and months to come.
We have been bullish on GBPUSD for more than a year now and even with such a consistent trend higher in the last 12 months, the pound remains historical cheap by nearly any measure. There will be times when negotiations with the EU falter, and with it Sterling will stutter, but with a focus on the policy outlook from the central banks and a long-term chart to hand, the medium-term future continues to look bright for the pound.
Samuel Leach, FX trader and Founder, Samuel & Co. Trading:
When the BoE begins to hike interest rates the main concern I see is the impact this will have on over indebted consumers. I have been paying close attention to UK unsecured consumer debt, which is currently at all-time highs of more than £200bn. Furthermore, the annual growth rate in UK consumer credit is 10% a year which is considerably higher than household income growth (2%), therefore a very concerning place to be. These are unsustainable levels now and an interest rate hike could tip these consumers over the edge. Particularly, those on interest rate tracker mortgages. This will then have a ripple effect on businesses as consumers rein in spending to pay off their debts.
For entrepreneurs it is damaging because funding is an issue as it is, let alone with higher interest rates as it will put off potential investors. The first thing businesses cut back on is risky investments and purchases, so entrepreneurs and small businesses will see the biggest brunt of it in my opinion. For the financial markets we should see strength come into GBP. That, combined with the soft Brexit announcement we had earlier last week could push GBP back towards 1.5 – 1.6 against the USD.
Markus Kuger, Senior Economist, Dun & Bradstreet:
The Bank of England vote to hold interest rates is not surprising, as recent figures indicate a moderation in inflationary pressures. However, with wage growth finally picking up, our analysis suggests that interest rates are likely to increase later in 2018, despite the tepid real GDP growth figures.
Based on our current data and analysis, we are maintaining a ‘deteriorating’ risk outlook for the UK but this could change to ‘stable’ depending on the outcomes of the EU summit this week. If the 28 EU leaders agree on the much-needed transition period until December 2020, the risk of a hard Brexit in March 2019 will drop significantly. That said, implementation risks remain high and the long-term future of EU-UK trade relations are still unclear. Against this backdrop, a careful and measured approach to managing relationships with suppliers, customers, prospects and partners is key to navigating through these uncertain times.
Jonathan Watson, Market Analyst, Foreign Currency Direct:
The Pound spiked up following the latest UK interest rate decision which saw GBPEUR and GBPUSD touch fresh levels as the recent improved expectations were realised. Whilst Inflation had fallen slightly lower than expected it remains above target and rising wage growth too has given the Bank of England a freer hand in raising interest rates.
Rising growth forecasts for the UK also add to the increasingly rosy picture for the UK, progress on Brexit with the agreement of the transitional phase has also added to the buoyant mood. Whilst the current stance of the Bank is for a rate hike in May any serious changes in economic data could derail that.
A rate hike in May is now very likely but with that looking so likely, the Pound may not move much higher. The next 6 weeks of economic data ahead of the decision on May 10th will now be pored over for any signs of either caution from, or indeed signs of further hikes down the line. It would seem likely that with the UK and global economy forecast to grow further in 2018 and 2019, the Bank of England will continue to need to manage rising Inflation as the economy grows.
In my role as a specialist foreign exchange dealer my clients have been quick to utilise the forward contract option to lock in on the spikes and moves higher for the Pound. Whilst the longer-term forecast has improved lately, the uncertainty over Brexit and the fact the UK remains behind other leading economies in the growth stakes, indicates a risk averse approach. Locking in the higher levels still remains the most sensible option to manage your currency exposure and volatility from the Bank of England and interest rate changes.
Robert Vaudry, Investments Managing Director, Wesleyan:
With two members of the Bank of England’s monetary policy committee voting to raise interest rates it is becoming more likely that at least one increase will take place this year, probably as early as May.
Whether the era of ‘cheap money’ has finally come to an end remains to be seen. Any rise will be welcomed by savers who will potentially see an increase in rates on saving accounts, but the cost of borrowing will increase too. Those on variable mortgages could experience higher interest rates for the first time and need to understand the financial implications this could have. However, it is important to remember that even with the interest rate rises expected, interest rates remain low by historical measures and below the rate of inflation.
It’s also important to not become complacent and we’d advise everyone to remain mindful that there may be uncertainty in the months ahead, especially as stock markets remain volatile.
If you have thoughts on this, please feel free to comment below and let us know Your Thoughts.
With this week’s market commentary from Rebecca O’Keeffe, Head of Investment at interactive investor, Finance Monthly learns about global markets, the US-China trade war and about recent activity in the M&A sphere.
A turnaround in Asian markets has seen US futures rise and eased the pressure on European equity markets. The last two months have seen global sentiment become more fragile, but the one thing that has kept markets going is the reliance on investors to buy on the dips. The last week had undermined that position in what was a worrying sign for the wider markets, but investors appear to be feeling slightly more resilient this morning.
Steve Mnuchin has taken on the unenviable task of attempting to resolve the trade dispute between the US and China via negotiation – however, he may be trying to reconcile the irreconcilable. The idea that, as one of the largest holders of US treasuries, China will be expected to help finance the growing US fiscal deficit but is also expected to reduce its trade surplus with the US by as much as $100bn to satisfy Trump’s demands appears to be a major contradiction. The question for investors is whether this adds up.
Another day, another flurry of activity in what has become one of the most vitriolic and antagonistic hostile merger bids since Kraft purchased Cadbury in 2010. GKN and Melrose investors have just three days to wait until the final count is in and much will depend on short versus long term investors. This bid has raised several questions about the difference in UK takeover rules versus other European countries and, irrespective of the result, may provide a catalyst for the Government to review the current rules to make sure they have the right balance between competition and protection.
The international community’s anti-money laundering watchdog is on UK soil putting the country through its paces.
Inspections of Britain’s defences against terrorists and money launderers by the Financial Action Task Force (FATF) are relatively rare but hugely important. The last evaluation was in June 2007 and negative findings can severely impact the country’s reputation in the war on terrorist financing and the laundering of criminal proceeds.
During the two-week visit, the UK has to prove to officials from some of the other 36 participating FATF countries that it has a framework in place to protect the financial system from abuse. The top secret inspectors have an “elaborate assessment methodology” but those involved are not allowed to talk publicly about the visit. The results of the inspection will be presented at an FATF Plenary session in October.
Julian Dixon, CEO of specialist Anti-Money Laundering (AML) and Big Data firm Fortytwo Data, comments: “AML supervisors are going to be on high alert this week because it’s not just public sector bodies who are inspected, but private organisations too.
“It’s also extremely timely, given the recent poisoning of ex-Russian spy Sergei Skripal, his daughter Yuliain and a policeman who came to their aid.
Tellhco
“The UK has been accused of being a soft touch for gangsters, politically exposed persons (PEPs) and criminal gangs, a theme that recently entered the popular imagination because of the TV series McMafia, written by journalist Misha Glenny.
“It’s unclear if this still holds true in the UK today, and that’s what the FATF are here to find out.
“It is up to the country being inspected to prove they have the right laws, systems and enforcement in place and the potential for reputational damage is high.
“After a recent inspection of Pakistan, FATF gave the country three months to prove it is doing enough to stay off an international watch list of those failing to curb the financing of terror groups.”
(Source: Fortytwo Data)
According to recent reports, the UK economy is set to grow at a slower pace than any other major advanced or emerging nation in 2018, according to the OECD.
The OECD says UK growth is forecast at 1.3% in 2018 amid a strengthening global recovery. Earlier figures presented a 1.2% growth; however this is still the weakest of the G20.
Consequently, Finance Monthly has asked several experts, market analysts and economists to comment on the news, in this week’s Your Thoughts.
Angus Dent, CEO, ArchOver:
Despite the Office for National Statistics’ cautious optimism about UK productivity in late 2017, the Office for Budget Responsibility (OBR) has refused to upgrade its productivity outlook. It’s just another chapter in a now-familiar story – the Government just can’t jolt the economy out of its lethargy.
If we can’t get out of this rut, we won’t stand much chance of making a smooth economic transition out of the EU next year – we won’t have the leeway to absorb any unexpected shocks. Despite that, Philip Hammond used today’s Spring Statement speech to essentially sit on his laurels and avoid taking any new decisive action.
While the Chancellor rests easy, British business must get to work. Given that the OBR continues to find the government’s position on SME productivity ineffectual, business owners need to take matters into their own hands and look to fund bolder new business projects and models.
They should use alternative financing options to fund new services, hire more staff and improve working conditions. You need money to make money, so UK companies must invest in driving productivity. If the Government won’t do it, entrepreneurs must take the initiative, using tailored financing to secure the tools they need to boost productivity.
Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:
Whilst being rather gloomy in recent forecasts, the OECD (Organisation for Economic Co-operation and Development) are right to single out the UK for a slower pace of growth. The uncertainty created by the Brexit has seen reduced confidence in the UK and held back growth.
Business needs certainty and whatever you think the longer-term outcomes may or may not be, for now there is some mystery in what lies ahead from Brexit for the UK. Since we still don’t know what Brexit will ultimately mean, businesses and consumers cannot easily make long-term decisions. That doesn’t mean they have stopped making any decisions, life is carrying on, just at perhaps a slower pace than would have been before the vote, or upon a Remain vote.
The global economy is, as the OECD states performing better than expected, which is helping support the UK through any difficult period. This doesn’t take away the Brexit disadvantage which is currently hampering not only the longer-term overall economic outlook, but overseas investment in the UK, domestic UK business investment and consumer spending, plus that closely watched barometer of economic strength, GDP or economic growth.
Chris McClellan, CEO, RAM Tracking:
What readers of this article need to ask themselves is if they’re a follower or a pioneer? Yes, we understand that it’s being reported that the UK economy is growing at a slower pace, but what will separate those businesses that struggle from those that thrive, is their mind-set and work ethic.
I firmly believe that growth for a lot of businesses can and will soar this year by making smart, well-informed decisions. Assess not only your immediate but future risks and have well-thought out strategies to mitigate these. Consumers are always going to buy whether it be your product/service or another’s. What’s going to make you stand out is clever thinking - how can you add more value? How can you export or trade with countries in a stronger climate? This flexible approach will not only give you competitive advantage but will widen your business horizons further than just UK shores.
The introduction of trusted sites such as TrustPilot, Facebook and Google (to name a few) together with ‘consumer-power’ should not be overlooked. By focusing on exceeding and delighting your customer’s expectations will result in repeat purchases as well as positive reviews, the power of your business growth lays firmly in the hands of your customers.
At RAM Tracking, we’re increasingly analysing our data and utilising innovative technology to delight our customers and highlight improvements that need to be made quickly. Investment into platforms like Salesforce have helped us become more data focused in a bid to work smarter to save costs but still have the ability to reinvest even when growth is reported to slow down.
If you have thoughts on this please feel free to comment below and let us know Your Thoughts.
The UK’s Finance Bill received Royal assent yesterday, meaning investors can no longer benefit from tax-efficient schemes like VCTs and EIS in low-risk investment. Chris Sutton, Head of Leisure & Hospitality at MHA MacIntyre Hudson comments below.
The Finance Bill has now received Royal Assent and will bring the ‘risk-to-capital’ condition for venture capital trusts (VCTs) and enterprise investment schemes (EIS) into effect. This aims to focus investment into high risk companies striving for long term growth and development and means schemes will no longer qualify if there’s no significant risk that investors could lose more of the capital invested than the net investment return (income, capital growth and tax relief). This measure eliminates the tax advantages sought by some investors in low risk asset-backed funds.
Although this impacts genuine investments made by more risk adverse investors, it also addresses the danger that the schemes are used for tax avoidance purposes.
The leisure and hospitality sector is deemed a high risk business venture and has used EIS to raise funding which can’t be obtained elsewhere for some time. However, there are many asset-backed schemes with exposure to pubs, where the company holds freehold and/or long leasehold premises. Although there is a perceived market risk of downturns in property values, this doesn’t outweigh the tax relief obtained on the original capital investment and these types of schemes are unlikely to satisfy the risk-to-capital condition.
The legislative changes were originally mentioned in November, resulting in significant investments into ‘low-risk’ schemes at an earlier stage in the tax year than seen previously. Downing Pub EIS, for example, has attracted £10m investment in the 2017/18 tax year but has already raised concerns over the proposed changes. It will now have to consider how it builds the business in a higher risk area of the market.
The City Pub EIS - tranche 3 is fully subscribed and its Information Memorandum includes details for the proposed strategy to satisfy the new rules. The scheme will include investments in companies which acquire pub properties not currently trading, or unlicensed premises which require conversion. This increases the underlying risk factor.
Investment options are likely to be reduced from now on and some investors may feel that they have missed the boat.
The effect of Brexit and waning consumer confidence in restaurant businesses is already starting to be felt with chains such as Byron Burger at risk of administration and rapidly closing outlets. These imposed restrictions could further curtail the ability of new businesses within the sector to raise the necessary funds for growth and development.
In the 2018 Spring Statement, Chancellor Phillip Hammond confirmed his commitment to bolster business and stated that there was ‘light at the end of the tunnel’. We will have to see how this plays out in the coming months, but we expect that more funds will seek advance assurance from HMRC on the eligibility of their schemes before seeking further funding from investors.
Global Witness and leading anti-corruption MP Margaret Hodge have recently called on the UK’s Financial Conduct Authority to take action over the role of RBS and Standard Chartered in handling more than US$2 billion of embezzled funds in a major international corruption scandal. The call comes as Global Witness publishes a new analysis of the role of the bankers, auditors and lawyers in enabling Malaysia’s 1MDB corruption scandal that is likely to have robbed the Malaysian people of an estimated US$4.5 billion.
According to the US Department of Justice the billions embezzled from 1Malaysia Development Berhad (1MDB), a government owned-company, by a variety of people were spent on luxury properties, high-end art and lavish lifestyles, as well as payments to the Malaysian Prime Minister Najib Razak. Most famously, money taken from 1MDB allegedly funded the Leonardo DiCaprio film the Wolf of Wall Street.
Global Witness and Margaret Hodge have written to the Financial Conduct Authority (FCA) calling for it to investigate the role of two UK-based banks, RBS and Standard Chartered, for their oversight of their Swiss and Singapore branches’ money laundering controls. Regulators in Singapore and Switzerland have fined the two banks’ foreign branches a total of $12 million for breaches of anti-money laundering regulations in relation to the scandal. Those investigations were completed over a year ago, with Swiss regulators passing their findings to the FCA at that time. However, there has been no sign of any action from the UK authorities.
In response to Global Witness’ findings, prominent Labour MP Margaret Hodge said: “It is time for the FCA to take firm action to hold banks that handle dirty money to account. The FCA must also explain its apparent inaction over this case, when other countries completed their investigations over a year ago.”
The role of the two banks feature in Global Witness’ new analysis of how a range of banks, lawyers and auditors either turned a blind eye, signed off on suspicious transactions or were simply not obliged by the rules to question origin of funding.
“Our analysis shows that the international anti-money laundering system is not working,” said Global Witness Senior Campaigner Murray Worthy. “The 1MDB scandal would simply not have been possible if the system worked; the financial professionals involved would have spotted this dirty cash and prevented the money from being ever being taken.”
The report concludes that for the banks involved in the 1MDB scandal, this was not a problem of inadequate regulations but a failure of bankers to follow those rules. The banks were either simply not conducting the checks that they were required to do, or they were willing to ignore the risks they saw.
Murray Worthy continued: “The UK should not allow banks based here to handle the proceeds of crime or corruption, wherever they operate in the world. The people of Malaysia are now facing a bill greater than the country’s annual healthcare budget as a result of this scandal – and these banks enabled this scandal to happen.”
(Source: Global Witness)
Various expert Partners at Crowe Clark Whitehill, a leading audit, tax and advisory firm, share their expectations below ahead of the UK Chancellor Phillip Hammond's Spring Statement tomorrow.
Dinesh Jangra, Partner, Head of Global Mobility Solutions, calls for measures to help the UK retain and attract talent and investment: “Let there be no doubt, UK PLC will benefit immensely from the world’s best talent being here. The question is what role can the UK tax system play in encouraging this?
Regardless of what is announced in the Spring Statement, Brexit looming in the background and this is causing concerns around the UK’s attractiveness for talent and investment. With that in mind, I would like to see the UK tax system in the area of mobility (expatriate tax breaks) being reviewed to enhance UK attractiveness. The tax effectiveness of non-domicile status has been eroded over time and while we have overseas workday relief and temporary workplace relief, I question if they are enough to continue to attract the best talent to the UK. Often, employers take on the UK income taxes due in respect of employees under tax equalisation arrangements so more UK tax breaks can reduce overall employer tax costs.”
Stacy Eden, Head of Property and Construction, calls for a stamp duty cut and a freeing up of Green Belt land to reinvigorate housebuilding: “An SDLT reduction would free-up liquidity in the market, which will ultimately increase housing transactions and sales, which are currently at extremely low levels. We may even find that it raises more money. There is a broader concern that our tax system is not favourable to property investors and developers, which is not surprising given we have one of the highest property taxes amongst OECD countries.”
“I’m looking out for the Chancellor’s approach to simplifying the planning process. He could reinvigorate UK housebuilding by freeing up more areas of Green Belt land. Investing in planning departments to try and get closer to housebuilding targets is of great importance. We are currently well short of targets and this is contributing to higher house prices in certain areas.”
Rob Marchant, VAT Partner, calls for VAT reform to stimulate the residential build-to-rent market: “It may be an ambitious ask, but I would like VAT changes to encourage the residential build-to-rent market. If rental income were treated as zero-rated rather than VAT exempt, it would allow landlords to reclaim VAT on running, management and repair costs.”
Matteo Timpani, Partner, Corporate Finance, calls for Entrepreneurs Relief to be expanded: “I would like to see the government retain and even expand the reach of Entrepreneurs’ Relief (ER) and other tax reliefs, aimed at rewarding enterprise for UK entrepreneurs.
Recent soundings around restrictions to Enterprise Investment Scheme (EIS) relief and other reliefs designed to foster growth in the UK economy can cause uncertainty among a community of risk accepting entrepreneurs, the success of which, in the mid-market, drives our economy.
The government should be careful not to underestimate how much of an incentive ER is for business owners to drive growth and ultimately create wealth and jobs for the UK economy as a whole.”
Johnathan Dudley, Partner, Head of Manufacturing, calls for clarity around pensions for SMEs: “With Brexit on the horizon and the possibility of yet another general election, what businesses really need is a period of stability and for politicians to provide some certainty.
Provided this ‘certainty’ is forthcoming, I would expect to see further changes to pensions provisions, aid for businesses to strengthen their international trade capabilities and the tightening of provisions to IR35 and tax evasion rules around employment and self-employment.
Many SMEs have invested time and effort into dealing with pension auto-enrolment duties and a relief for these businesses around payroll provision would be welcomed and well deserved.”
Caroline Harwood, Partner, Head of Share Plans and Reward, calls for clarity about remuneration in light of the Rangers EBT case: “During 2017 we saw the introduction of yet more measures to tackle remuneration structures designed to avoid tax, including a charge on all outstanding ‘disguised remuneration loans’ made to employees by Employee Benefit Trusts (EBT) or other third parties, as well as the new ‘close company gateway’.
The Supreme Court decision to favour HMRC in the ‘big tax case’ against Rangers FC brought the ‘redirection principle’ into the foreground, in ruling that payments via EBTs qualified as taxable income. Initially, the interaction between this new case law, the disguised remuneration rules and arranging such salary sacrifice into a pension scheme, was unclear.
HMRC have made statements as to how they expect these rules to interact in certain cases in the future, but formal clarification in the Spring Statement would be welcomed.”
Research from Liberis, reveals that over half of UK businesses are unable to access the funding needed to grow; with the main hindering factor being a lack of education or understanding of their funding options. With falling SME confidence in the economy and mounting concerns over costs given the relative weakness of the sterling, Liberis strongly urges the UK to better support its small business community.
The lifeblood of the UK economy, SMEs contribute more than £200bn a year; with this number expected to grow by almost 20% by 2025. Yet, without a vital cash injection, this 2025 vision will be severely stinted.
Hindering growth opportunities, this lag in SME development may in turn negatively impact the economy. Liberis therefore believes it is crucial to ensure better understanding on how to navigate the perceived minefield of funding options. Small business education is desperately required to increase awareness levels of the process; greatly benefiting both businesses and economy alike. Such movement has been reinforced in a recent report from the British Business Bank, in which the UK Government backed organisation pledges its dedication to a more targeted educational campaign on the topic of SME finance.
While 62% of UK SMEs said they need funding to grow and expand, but 57% of SMEs were unsure which provider to obtain funding from and 53% did not have a set amount in mind when looking to access finance.
Liberis found 22% of businesses require funding to maintain business as usual, while 5% need funding to survive past the first year of business. Speed of funding has been identified as integral to achieving this growth. Other findings of the report showed an increase in the popularity of crowdfunding as a source, with 10% of UK SMEs looking to use this as a means for funding in the next two years.
Commenting on the report, Rob Straathof, CEO at Liberis, said: ‘These findings have opened our eyes to a lack of confidence and awareness among SMEs in how to correctly secure the funding they so desperately need. Funding will continue to be a hot topic for the small business community, but urgent action and collaboration is crucial to prevent resulting damage to the UK economy. Without sufficient financial education and support, the UK’s business ambitions will be severely affected but by ensuring they have the correct financial understanding, we can help secure and strengthen their livelihood; fast-tracking their ambitions.’
Established in 2007, in a space where traditional banking and loan models were finding it challenging to meet the needs of UK SMEs, Liberis provides fair and transparent funding options based on business potential, helping entrepreneurs achieve their goals and ambitions. Through its Business Cash Advance, an innovative form of funding, Liberis links repayments directly to cash flow so businesses only repay when their customers pay them. To date Liberis has helped over 6,000 SMEs, advanced £200m in funding and supported over 24,000 jobs in the UK. Moving forward, the company aims to further empower small businesses, broadening customer reach through strategic partnerships and international expansion.
As you likely already know, China’s e-commerce sector is the biggest in the world right now. Below Finance Monthly speaks to Ronnie D’Arienzo, Chief Sales Officer, PPRO Group, who lists some ways we can all learn from China’s excellent performance in this sphere.
A few weeks back China’s 1.3 billion population celebrated Chinese New Year and the start of the Year of the Dog. The celebrations lasted for sixteen days, starting on New Year’s Eve (15th Feb) to the Lantern Festival on March 2nd. Preparation for the New Year celebrations is known as a ‘shopping boom time’. Many transactions will be completed this week in preparation for the two weeks of celebrations. Interestingly, the majority of these transactions will be completed using local payment methods, specifically e-wallets such as WeChat Pay and Alipay.
The Chinese e-commerce market is booming; research from PPRO Group found the market is worth a staggering $865 billion with growth rates higher than - the total UK e-commerce market. So how can UK businesses take advantage from China’s healthy ecommerce market? PPRO Group has pulled together seven considerations for UK retailers, when looking to attract the attention of the Chinese consumer.
- Each year, Chinese e-commerce grows by more than the total amount of the entire UK e-commerce market
In 2018, Chinese e-commerce will grow by $233.5 billion. That’s $30 billion more than the total value of all goods bought online in the UK.
- Chinese online shoppers spend $208 billion a year using credit cards which UK retailers don’t accept
96% of Chinese credit cards are issued by local schemes and only 4% of all online transactions in China are made using international credit cards, such as Mastercard and Visa. If retailers don’t support local schemes, they’re cut out of a $200 billion market.
- Don’t miss out on $650 billion of online spend using alternative payment methods
Every year, Chinese consumers buy $650 billion worth of goods using local bank transfer apps, e-wallets, cash-on-delivery services and other locally preferred payment methods.
- Every year, Chinese online shoppers spend over $100 billion just on clothes
Fashion is the most popular item for Chinese online shoppers. Each year, Chinese online clothing sales are worth more than the entire UK fashion industry.
- One Chinese e-wallet has more users than there are people in the EU
The Chinese e-wallet WeChat Pay has 980 million users compared to 500 million people in the whole of the EU. In 2017 alone, WeChat Pay was used by Chinese consumers at an average rate of 1 million transactions per minute.
- M-commerce in China is worth $173 billion
Every year, the Chinese spend almost $200 billion from their mobile phones. And with China spending $400 billion on 5G, the number of mobile users is set to rocket in the coming years.
- 40% of all global e-commerce sales are made in China
The Chinese share of all global retail sales is around 30%, but for e-commerce sales, it’s 40%. And that number will grow as more people come online.
Want to sell to the world? Start with China.
The private sector outsourcing market soared to a three-year high in 2017 as businesses signed contracts worth £4.93 billion, according to the Arvato UK Outsourcing Index.
The research, compiled by business outsourcing partner Arvato and industry analyst NelsonHall, found that the total value of contracts signed by UK companies rose 36% year-on-year, from £3.62 billion in 2016 and £1.84 billion in 2015.
Overall the UK outsourcing market saw an increase of nine% year-on-year in 2017, with contracts worth £6.74 billion agreed by the public and private sectors over the period.
A surge in technology investment was behind the strong performance in the private sector, according to the findings. Businesses spent £3.82 billion on procuring IT Outsourcing (ITO contracts) agreements in 2017, more than double the value of deals agreed in 2016 (£1.73 billion).
The analysis shows that companies focused their spending on securing multi-process IT deals, which included new hosting services, equipment, network infrastructure, data centres and application management.
Customer services accounted for almost half (46%) of business process outsourcing (BPO) agreements signed by companies last year. Firms spent a total of £508 million as they looked to deliver improvements in customer experience across traditional and digital channels, according to the findings.
Debra Maxwell, CEO, CRM Solutions UK & Ireland, Arvato, said: “The private sector is increasingly outsourcing more sophisticated work, with firms turning to external partners to introduce new technology and enhance the customer experience.
“This shift towards greater complexity is contributing to more outsourced services being delivered here in the UK. Just two% of private sector deals procured last year will be delivered offshore, compared to 12% in 2016, as outsourcing continues to move up the value chain.”
Overall, fewer deals were agreed across the UK outsourcing market last year, with 98 procured compared to 165 in the 12 months previous, according to the research.
The rise in spending in the private sector market comes as activity across the government market fell year-on-year. Central government departments and councils signed contracts worth £1.82 billion in 2017 compared with £2.59 billion in 2016 – a 30% drop.
Excluding work procured for healthcare, the data shows that the average value of deals signed across government was down 42% year-on-year in 2017
Debra Maxwell added, “In line with calls for a review of the government outsourcing model, the findings show the public sector is already moving away from procuring long-term, high value outsourcing contracts.
“Councils and central government departments are now accessing the technology and expertise they need to deliver a range of functions, from digital service transformation to cyber security, through smaller contracts for productised services.”
Financial services leads private sector growth
The analysis shows that a sharp rise in the value of outsourcing contracts procured by financial services businesses was behind the growth in private sector spend last year.
Companies across financial services agreed deals worth £3.26 billion in 2017, more than treble the total value of contracts agreed in the previous year (£829 million).
According to the research, the growth can be attributed to a sharp increase in ITO spending as firms turned their attention to deals in application management, application hosting and end user computing. The findings show ITO contracts worth £2.70 billion were signed across the sector last year, up from £208 million in 2016.
Pat Quinn, CEO of Arvato Financial Solutions UK & Ireland, said: “Financial services businesses are under pressure to transform, particularly in the wake of high profile security threats and the upcoming GDPR obligations.
“The findings show that a growing number of companies see outsourcing as key to addressing the challenge, delivering the resilient infrastructure and architecture they need to protect against cyber-attacks, keep their data safe and comply with new privacy legislation.”
Alongside financial services, telecoms & media and energy & utilities were the most active sectors in the UK outsourcing market, procuring deals worth £1.08 billion and £279 million respectively, according to the findings.
The research showed that the average value of contracts signed across the private sector more than doubled to £91 million in 2017, from £36 million in the previous year.
(Source: Arvato UK & Ireland)
Average UK current account holder charged £152 last year in overdraft, FX, transaction and other fees, according to analysis from Plum.
Analysis of over 11,000 UK personal current accounts (PCA) has revealed that the average holder was charged £152 in bank fees last year which, if incurred by every one of the 65 million active current accounts in the UK, suggests banks made £9.9 billion from charges in 2017.
The data, collated by Plum, the automated money management chatbot, coincides with launch of its Fee Fighters function, a free tool that enables users to check in exactly what fees they are being charged by their banks. This functionality is made possible due to the implementation of Open Banking, which aims to encourage fair competition and comparison. The European-wide regulation orders banks and credit card companies to share a customer’s data with other regulated companies if requested to do so by a customer, removing the banks monopoly on customer data.
The average £152 paid per year by current account holders includes overdrafts, foreign exchange, and transactions fees, as well other unspecified fees, such as monthly account charges. This £152 average rises significantly when considering personal current accounts with an overdraft function. In this case, total bank charges were closer to £221 per current account holder with those that have at least 1 overdraft transaction per year.
In terms of what charges were applied by the banks, 56% were due to overdrafts, both from planned and unplanned usage. Foreign exchange fees accounted for 11% of the total charges, while late transaction fees made up 6%. Over a quarter, however, (27%) of the total charges were classed as “other” which included monthly account fee, unspecified bank fees, or bank subscriptions. Some of these charges can be fairly high, with an average of £5-£10 charged per bounced back transaction it is not uncommon for users to accumulate these charges without realising it, getting charges up to £75 in “Unpaid Transaction Fees”.
To help consumers be alerted to and understand the culprits of the charges, Plum has developed a free Fee Fighter tool, first of its kind that alerts users to fees. With the implementation of Open Banking, in the coming months Plum hopes to go beyond raising awareness about hidden fees and provide solutions, helping users to identify smarter deals and more cost effective products with alternative providers bespoke to their financial requirements. The tool uses TrueLayer, a secure FCA authorised service, to gain read-only access to a user’s bank account, Plums AI then processes the description of each bank transaction understanding what type of a fee it is and allocates it to a specified category. When banks hide fees in the description of the transaction rather than listing it as a separate line in the bank statement, Plum extracts the fee from the description itself.
Victor Trokoudes, CEO and co-founder of Plum, said: “For too long, banks have been guarding customer data, and have been purposely vague about the true cost of overdrafts, borrowing, and FX. But with Open Banking now a reality, people can see in real time what charges they are being asked to pay by the banks and therefore take control of their money to avoid paying them.
“Enabling people to take control is why we launched Plum and that’s why we’ve created Fee Fighter which, in less than five minutes, helps people find a better deal and avoid fees when it comes to banking. We want to help people stand-up to their banks and demand a competitive deal. The more people that switch, the more that banks will be forced to compete for their business and fight to retain loyal customers. This is just one of the ways that we’re helping people be better off.”
(Source: Plum)
