Many in the industry hoped the changes to adviser remuneration resulting from the retail distribution review would have minimal tax implications but they were disappointed. The tax changes look to be wide-ranging and may affect the number of products offered.
Fortunately, some of the hidden tax costs of the RDR can be mitigated if advisers and providers act now. For example, the effect on pension policies can be managed. Currently, tax relief for pension contributions is obtained on the premium, including the adviser charges. If, after the RDR, the pension arrangements are set up so that the individual pays the adviser directly, there is a significant cost.
Constructing pensions so that adviser fees are paid from the pension will mitigate the 100 per cent increase in the cost of adviser charges some taxpayers would suffer. HM Revenue & Customs has confirmed this will not trigger any tax liability on the policyholder or insurer and so management and product teams of life offices will now need to address the structure of their pension policies to remain competitive.
The UK life policy sector will be significantly affected by the RDR and related tax changes. Adviser charges will not be deductible for most life offices following the RDR, which will, in effect, increase the adviser charges payable by 25 per cent.
Onshore bonds will also be less competitive as a result of changes to tax structures, which could reduce new business volumes. Life groups should be assessing their post-RDR business volumes and looking to offer replacement products where appropriate.
The implications for adviser-charging and VAT are complex. There is a current exemption for intermediation of financial products, which, in practice, has applied where an adviser receives commission from a product provider. The move from commission to a fee-based structure will result in advisers having to determine the VAT liability of their services, which should be ascertained by a customer’s intention at the outset of the engagement. Where a client intends to buy a product, advisers may treat their services as VAT-exempt.
Advisers will need to obtain and keep the documentation required to support the VAT treatment. Careful consideration also needs to be given to the VAT liability of ongoing fees and the procedural and VAT systems changes that will be required before the RDR.
The tax implications will also have a significant impact on system requirements and product providers should factor these into their timetables now.
The RDR brings a greater number of possible tax outcomes than anticipated and unless the position is actively managed, this could be costly and lead to products becoming uncompetitive.
Neil Rolfe is an associate partner and Andrew Bailey is a partner at Ernst & Young