One problem with simple ideas is that their interaction with other aspects of life can lead to the most straightforward concept becoming convoluted and, in some cases, unworkable.
Paying for advice out of a product through adviser- charging and consultancy-charging could both fall into this category.
For some time, an informed majority of advisers have realised that the deduction of advisory charges from bonds, particularly offshore bonds, under a platform should actually form part of an individual’s 5 per cent withdrawals from a taxation perspective.
Where a person is not making any withdrawals, this does not seem a major issue, although it does mean you are compressing the availability of tax-free withdrawals for that individual.
This problem was subject to discussions between the Association of British Insurers and HM Revenue & Customs. However, HMRC decided not to grant any concessions in this area. This will drive more people to consider whether a cash account for fees is going to be the inevitable conclusion.
But for those focusing on pension contracts, I would argue the position is even more serious.
It is clear that it is technically possible to take an adviser or consultancy charge from a pension contract and, if this is done, it is essential you refer to the HMRC’s Technical Manual, in particular the section on member benefits, as it explains adviser and consultancy-charging in detail from a scheme administration perspective.
The technical note explains that the fees in respect of a member’s costs for pension advice could be paid from the pension plan itself. HMRC also confirms in these technical notes that this would not be regarded as an unauthorised member payment. It adds the important proviso that the fees are paid as a result of a genuine commercial remuneration agreement in respect of pension advice given in relation to that pension.
However, it is just not possible for that financial advice to be extended to cover products such as Isas, even though they relate to the individual’s retirement planning. More important, the costs for implementation would not be covered by any description of pension advice.
The notes go on to give an example where, as part of giving pension advice, an adviser recommends a client to switch from one fund to another within a pension scheme. The adviser then implements a recommendation on behalf of the member to switch and the adviser charges the client for undertaking that implementation work.
In this circumstance, the charges for implementation would not be seen as anything other than an unauthorised withdrawal by that member and taxed accordingly.
This obviously makes life extremely complicated when using adviser-charging in respect of pensions but things actually get worse if we now focus on consultancy-charging.
In the eyes of the HMRC, consultancy-charging is simply a label change for adviser- charging in group schemes. HMRC has made it clear to me that it sees no difference in consultancy-charging and adviser-charging with regard to unauthorised payments.
Taking the example of someone who is paying for advice in respect of their group personal pension, the cost for that advice could be deducted from their contract without any problems.
However, the cost for implementation cannot and, given that many employee benefit consultants are not giving advice but simply setting schemes up, this means consultancy-charging does not work for group schemes where no advice is delivered.
Even where advice is delivered, it is not going to be possible for charges in respect of other services to be taken from the individual’s account. It is not even possible to take it from the contributions made by the employer, as those contributions are again going into a personal pension.
This means the employer will have to pay directly or, alternatively, legacy schemes will be given a further reason to continue.
This is not necessarily going to fit in with what I believe the regulator was intending.
Even in schemes where advice is being delivered, what happens where the individuals who join are a percentage of those eligible? And for those who receive advice but do not join, who meets the cost of their advice?
From my reading of this technical note, it cannot be deducted from the plans of the individuals who do join because the advice being delivered is not to the benefit of the planholder but to the benefit of the non-planholder or his employer.
Consultancy-charging or adviser-charging and personal pensions, individual or group, is going to be very complicated.
It is simply not possible to operate bundled charging in this area. This then leads to the situation where someone could find themselves in a position to deduct the adviser charge on the pension contract but then face the fact that any charge for pure advice will be subject to VAT. Any unauthorised withdrawal is subject to a 55 per cent unauthorised payment charge.
Many will suggest the solution is simple – just take two cheques and, for smaller firms where the directors are the advisers, that is fine but what if you are an network? Do you trust all advisers in a two-cheque process? I think not and so for pensions, adviser-charging fails.
For many providers, the idea of checking what the adviser charge is for will be highly problematic and will lead to them possibly not offering it for pensions or requiring a sign-off from the adviser to keep them insulated from any complaint if the clients becoming subject to an unauthorised withdrawal charge.
If HMRC does not review its position, the impact of consultancy-charging is even worse. As many businesses in the group market operate on a no advice model, this means payment out of the pension fund cannot work as they cannot debit pension plans where they give no advice.
Were the ABI and or the FSA representatives that took part in these discussion with HMRC ignorant of this or did they think we could all kid on that it was a deduction for pure advice at all times?
Any payment for pure advice not taken from the pension would become subject to VAT, the very thing that the recent agreement with the HMRC sought to avoid. Who said the HMRC was one body?
The sooner professional practitioners are involved in these meetings the better.
Robert Reid is managing director of Syndaxi Chartered Financial Planners