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