Tax-subsidies on retirement advice; a waste of public funds!

true cost

The Government intends to extend tax breaks on pensions to allow those with pension pots to use them to pay for advice. The details are in this consultation document.

The fundamental premise is that taking financial advice on retirement matters from an authorised adviser is a good thing and should be encouraged with tax-payer money.

There are three fundamental challenges to this premise

  1. Advice has already been subsidised through the commission system on a large amount of money in these DC pension pots
  2. This further subsidy could encourage bad behaviours among advisers
  3. The money being spent,would better be spent simplifying pensions so the need for advice fell away.

  1. The taxpayer has already subsidised advice

Commission was paid on most advised pension products since the seventies and it meant that pension policyholders paid for advice from tax-advantaged savings. There were savings in tax and in VAT. The system of default commissions was banned post RDR and the banning of consultancy charging. Nowadays people have to opt-in to the payment of commissions rather than “negotiate out”.

The reason for this (according to the RDR) was to improve member outcomes, in practice it has also meant that many advisers have left the industry. It’s feared that there is more consumer detriment in not having readily accessible advice than in having funds raided to pay for advice.

In my opinion, the argument that contracts that have already been charged for advice, could be charged again – because the original adviser’s not around to deliver value for money- is totally fallacious. This proposal is an abuse of the tax-payer’s funds.

2. This measure could encourage bad behaviours

I was an adviser for 11 years, the last of them I was a Regulated Adviser. I know the business. Strategists within financial advisory firms will be looking at these regulations and seeing opportunities. The majority will be looking responsibly, but a minority will see this as a thieves charter.

Churn and burn

The measures encourage churning. Financial advisers who are advising on products that do not offer adviser charging are already churning funds to products that are. We see this mostly with workplace pensions, where money is switched out of cheap defaults into expensive alternative investment strategies (from which adviser charges are taken).

The new proposals will encourage advisers to transfer funds from low-cost products into other products that will allow these advisor charges to be taken. The switch of products will create costs which will be member borne, the advice will reduce the potential pension further and the residual investment product has the potential to deliver more “value” to the adviser- especially where the adviser is taking money for managing the product (the vertically integrated master-trust.


De-risking DB schemes

Taken with the increased allowance to employers to offer up to £500 of advice as a non-taxable benefit in kind, the new £500 pension-grab means that an adviser can take up to £1,000 per member without tax-detriment to employer or member.

This makes de-risking of DB plans through advised ETV and PIE exercises very much more financially lucrative to the adviser – and a lot more attractive to the employer (who typically funds advice).

The measure under discussion is effectively a tax-subsidy on the dismantling of DB schemes by financial advisors. High transfer values (occasioned by low bond yields) make the emotional lure of “sexy-cash” irresistible to many. But those who sell their DB pension rights or exchange increases for cash are – ironically – creating the need for more advice.

The advantage for an adviser -who is (under the proposals) able to come back for second and even third dibs of tax-advantaged cash grabs- will prove hugely attractive to advisers and all too easy an option for those with pension pots.


Abuse of the 55% tax rate.

Much of the privately held wealth in pensions is now in pots which are – or will be – above the Lifetime Allowance (at whatever protection level). An easy way of reducing 55% tax problems is for those with these liabilities to pay off taxable funds to advisers.

This will mean that those who need tax-relief most- the pension wealthy will be able to get advice discounted at 55% , while those who are most in need of basic help, may not even get basic rate tax assistance on the money drawn from their pension.

As usual, the pension taxation system, regressive as it is, works against the intentions of Government Policy – which is to deliver advice to the parts of the market for whom it is currently inaccessible -eg those on median and low incomes.

On all three grounds- I see the consequences of the Government proposals as working against the stated aims of the FAMR. I see the proposals as causing yet more product churn, I see further weakening of the DB system and I see the measures being used as a tax loophole for the wealthy and not a tax- assistance for those on meagre incomes


 

3. This is sticking plaster on a festering wound.

The consultation calls for marketing assistance to promote this new measure. I don’t think the IFA sector will have too much trouble promoting this for themselves without further expense of Government money.

The granting of further tax privileges on already tax-priviledged money is an admission of guilt from those who designed our pension system. They are charged with delivering- over decades- a tax and regulatory system so complex that we need advice to take decisions not just on how to save for retirement , but how to spend our savings.

Rather than having a simple system of taxation applying to all, we now have a wide variety of tax treatments applying to differing claims on our retirement savings. The reason we have to take advice is to avoid becoming a tax-muppet. But to give tax back to people paying to reduce their muppertometry is the logic of the madhouse

Instead we should be investing Government funds in creating simple solutions to the problems of spending our money which rely on the payment of regular income streams, rather than the unlimited freedoms which appear to be the current default.

The sooner the Government accept that most people want a simple and easy way of getting a pension when they retire, rather than endless decisions and expensive advice – the better.


In short

If you haven’t read any of the 1000 words above and want a quick soundbite here it is

The proposal to further subsidise advice on retirement savings is ill-conceived and will be ill-executed. The Government is barking up the wrong tree. It should be focussing on making spending our savings better through encouraging better products.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, consultant, dc pensions, de-risking, defined ambition, pensions and tagged , , , , , , , , . Bookmark the permalink.

4 Responses to Tax-subsidies on retirement advice; a waste of public funds!

  1. John Mather says:

    Henry the 55% rate is simply retrospectively applied theft and capping of funds and contributions for the leaders of companies acts to reduce enthusiasm for pension funds with the decision makers. Constant messing with long term contracts every few months is the biggest turn off. An advisers is getting used to being guilty until proven innocent with regulators but anticipation of abuse is in the realms of pre crime science fiction

    Liked by 1 person

  2. Harry Lime says:

    This proposed new allowance is clearly far more about generating favourable PR for the government than it is about allowing people efficient access to advice on their pensions. It looks to me like it will generate a massive amount of administration, probably costing more than the benefit itself. A boondoggle if ever one existed, and I’m surprised more folk are not calling it out as you have.

    With that said, your complaint that it erodes the 55% lifetime allowance punishment bracket is, it has to be said, extremely thin and poorly conceived. For a start, as noted by a previous commentator, this 55% lifetime allowance excess rate is wrong, wrong, wrong anyway, and should be done away with. And secondly, how much impact on the government’s tax take do you really think £500 on a £1m pension pot would actually have? We’re talking here about folk being able to take an extra 0.05% of their pension “tax free”, so up from 25% to 25.05%. No matter whether these people are or are not “pension rich” for some definition of “rich”, for you to complain about that small increase looks petty and mean-spirited from every angle I can find.

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  3. Phil Castle says:

    I would argue that with many older pension plans provided by direct sales outfits, the establishment charges were not just suppose to be for the initial set up, but also for the advice on drawing the benefits at retirement and those providers who ditched their director salesforce/advisers before vesting/crystallisation, especially where a guaranteed annuity rate applied should have to allocate and advice cost/fee to the consumers nominated adviser to make up for the lack of advice within the plan costs now.
    There is precedent for this argument as with some Pearl plans, consumers were allowed to instruct Pearl to pay for independent advice with some of the endowment redress cases and how to resolve their mortgage repayment needs going forward.
    We operate a fee basis where we only charge once for taking on the original funds the client wishes us to invest and then any minor change is just a switch fee wheras I have seen many clients charged the same to reinvest the same open ended investment with a different provider when it could have been a simple “switch” were it on a platform or wrap rather than with a dinosaur life co.

    Liked by 1 person

  4. Alan Chaplin says:

    Agree this is not a very wise approach. Trying to get everyone to take advice is doomed I expect. We should be aiming to have reasonable default options and then those with particular needs take professional advice.

    Having said that, even if you do support a subsidy on advice, this is a very complicated and regressive way to go about it. The more you earn, the less you pay for advice… For a non taxpayer, the cost is £500, for a basic rate payer £400, a higher rate payer £300 and a top rate payer £250. I’ve excluded VAT as I’m not sure if this advice is liable for VAT or not.

    That is before you get to questions over pots with special rules on them e.g. you have a policy with a guaranteed annuity rate so probably shouldn’t take any money from that!

    Liked by 1 person

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