Transfer advice – the impact of ongoing charges

It is pretty clear that the FCA is concerned about contingent charging – at least on pension transfer advice. The FCA proposed a ban in CP19/25. That consultation is now closed and the outcome is anticipated in the first quarter of 2020.

However, the understandable focus on contingent charging has led to little attention being given to the very strong indications that the FCA is also seriously concerned about the impact of ongoing charges. This aspect is referred to 13 times in CP19/25. The thrust of those mentions is reflected in the extracts below: 

“… we are also consulting on proposals to address the conflict of interest created by ongoing charges …” 

“Some of the responses to the Committee’s inquiry also pointed to the longer-term conflict of interest created by ongoing charges over the course of a 20 to 30-year retirement when a consumer transfers from a DB to DC scheme.” 

“… reduce the bias in relation to ongoing charges …” 

“… is necessary to protect consumers from being advised to transfer into destinations that are too complex for their needs and perpetuate the need for unnecessary ongoing charges that ultimately reduce consumer’s income in retirement …” 

“Once funds have been transferred from a DB scheme, the advice required is, for the most part, no different from that given on standard DC pension funds. The issue of consumers paying too much in ongoing charges arises because usual charging percentages are applied to the much larger pots seen in DB transfers.”

The impact of ongoing charges – an example
CP19/25 has some interesting examples of the significant adverse impact of ongoing charges, in particular, the example calculation on page 26 of the paper, which found that typical ongoing charges could represent between 44% and 61% of the member’s pension income.

We have seen cases where a primary reason for transferring is that the client did not need all the income that the DB scheme would provide and objected to paying income tax on excess income. At face value, that sounds perfectly credible and rational, however …

… it is obvious that avoiding the income tax comes at the price of accepting adviser and other charges. It is interesting to see how the two scenarios compare when the position is actually modelled. The rational conclusion could well be different.

The FCA’s example was based on the average transfer value of £350k, representing a DB pension of around £1,000 to £1,200 per month. The figures below ignore investment growth for immediate purposes. Initial charges are also ignored but would make the case even more markedly! 

Ongoing adviser charge at 1% = £3,500

The equivalent scheme pension might be around £12,000 per annum. Assuming all the pension is taxable would result in a tax charge of £2,400 at 20% That is £1,100 less than the adviser charge! 

Of course, in reality there would be plan/fund/platform charges in addition to the adviser charge. The overall annual cost might well be 2-2.5%. Assuming 2%, the client would be paying charges of £7,000 p.a. (ignoring growth) instead of the £2,400 income tax at 20%.

If the client were to be resident in Scotland and taxed at the highest rate possible – 46%, higher than the rate for the rest of the UK – the tax at £5,520 would still be lower than the charges. And we should remember that many clients can mitigate their tax bill but no client can mitigate adviser and product charges.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

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Our View

It is often said that you can prove anything with numbers. In other circumstances the numbers would be different, and some combinations of transfer value, pension and tax rates could lead to a different conclusion.

The point is that it is important to explore the options thoroughly and, where necessary, challenge the client’s ojectives and objections. That challenge is often lacking, with options not explored in detail, discounted after only lip service consideration or not examined at all.

In this case, in the absence of any lateral thinking and arithmetic, the adviser probably genuinely believed that the income tax saving was a good reason not to take the scheme benefits. And the client was probably happy to have achieved a bit of tax planning. The problem is that a modicum of simple arithmetic could have shown that the looking only at the ‘saving’ in tax was too narrow a consideration and a broader examination of the situation could have informed the client to reach a different decision.

Action Required By You

  • Remember that what a client wants and what is in the client’s best interests are not always the same thing;
  • Challenge the client to ensure robust, quantified objectives are identified and expectations are managed as appropriate;
  • Explore the pros and cons of ALL options thoroughly before concluding the optimum solution;
  • Contact ATEB for further assistance with ensuring recommendations and compliant and suitable.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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