When paying an adviser fee, your clients often have the option of instructing a provider to facilitate payment direct from their investments. Sometimes, selling or disposing of the investment to meet a fee can bring tax disadvantages compared with paying direct. It might create a tax bill or use up part of a valuable tax allowance that the client might otherwise wish to use.
Conversely, it can sometimes convey advantage over direct payment, and this is often the case with pensions.
Taking fees from the pension is normally more eﬃcient since tax relief on contributions eﬀectively reduces the net cost of fees. Additionally, in the retirement phase, fee payments from the pension are normally more tax-eﬃcient than paying the fee from income taken. However, strict rules apply and it is critical to remain within them or serious consequences can unfold.
The underlying tenet of pension legislation is to restrict the types and amounts of payments that can be made from the member’s pension fund. Legislation prescribes a deﬁnitive list of permitted or “authorised payments” and provides that any other payment is by default an “unauthorised payment”.
Authorised payments include what are termed scheme administration member payments. In essence, these are payments by the scheme, in respect of the member, made for the purposes of scheme administration or management. This includes paying fees to advisers but the amount must be reasonable and paid at an “arm’s length” rate.
Meeting the conditions
Payment to an adviser to meet pension advice costs is an authorised member payment as long as it meets the required conditions. There must be a genuine commercial remuneration agreement between member and adviser and the payment must be for pension advice given in relation to that scheme.
The fee must be appropriate to the service provided in respect of the advice given. If fee costs are not genuinely commercial, this will create an unauthorised member payment, the amount of which would be the excess amount over the genuinely commercial cost.
Pension advice means advice concerning or connected with the pension involved and can be in relation to: asset allocation and fund choice; pension provider; pension taxation and checking against statutory limits.
It can cover advice on income optimisation, improving returns and outcomes or risks of choosing the type of pension to be taken. Advice costs also include any associated costs for implementation and administration covered in and arising from the advice given.
The advice must relate to the pension scheme and unrelated advice is not allowable. The fee cannot cover amounts related to wider matters not associated with the pension, albeit they may be relevant in the overall context of retirement planning.
Where adviser fees exceed what is allowable, it constitutes an unauthorised member payment by the scheme and is liable to an income tax charge called the unauthorised payments charge. The person liable is the scheme member at a rate of 40 per cent. The individual must declare the unauthorised payment on their self-assessment return or must otherwise report it to HM Revenue & Customs if they do not receive a return.
Albeit unlikely in the context of fees, the individual may also become liable to an additional unauthorised payments surcharge of 15 per cent. In brief, this is triggered where total unauthorised payments to a member in a given 12-month reference period exceed 25 per cent of the fund values.
In addition to the individual tax charge, the pension scheme may also be liable to a ‘scheme sanction tax charge’ of 40 per cent of the unauthorised payment, which reduces to 15 per cent provided the individual member pays their tax.
Any such unauthorised payments will also likely contravene scheme rules which often allow administrators to demand repayment, and for unauthorised payments tax charges to be paid from the member’s fund.
Circumstances will always arise where it may not be advantageous to facilitate adviser fees from the pension but it will be beneficial to many clients if you stay within the prescribed limits and guidance.
Paul Kennedy is head of tax and trust planning at Fidelity FundsNetwork