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Trail blazers

Ongoing charges for advice is heading into the unknown

Many advisers have been changing their business model over the last few years, replacing a series of one-off transactions with long-term client relationships.

Ongoing advice requires ongoing payment, and clients prefer to pay for this through deductions from their invest-ments and pensions. There is no immediate cost and it can be extremely tax-efficient.

The most common way of taking charges for ongoing advice is trail. This can either be a commission, where the amount is set by the provider and included in the product charge, or customer-agreed.

This system works well, although trail commission and the impact it has on product charges is not transparent to the client. After the retail distribution review, everything must be agreed by the cust-omer. But what is less clear is whether customer-agreed adviser charges can simply replace trail payments.

Advice charges taken from a pensions or other investment are currently regarded as an expense of the provider. After the RDR they will be treated as a client expense.

For pensions, HM Revenue & Customs has agreed payments can continue to be paid to the adviser as a scheme adminis-tration member payment, de-fined in the Finance Act 2004 as an authorised payment. Payments can be made out of the pension to cover charges with no tax consequences.

The same is not true for qualifying and non-qualifying life policies, such as invest-ment bonds and maximum investment plans.

Because HMRC considers the adviser charge to be the client’s money, it is viewed as a partial disinvestment. For a qualifying policy, any with-drawal of funds from the policy not in keeping with the qualifying rules will trigger a chargeable event. The policy will almost certainly become non-qualifying as a result.

In the case of a bond, the charge could be withdrawn as part of the 5 per cent tax defer-red withdrawal. But because trail fees are usually calculated on a percentage of the fund value, this could be a problem, as the 5 per cent withdrawal is based on the original purchase price of the bond.

Assuming the value of the bond goes up and not down, the charges will eat up an increasing proportion of the 5 per cent withdrawal limit.
Neither do mutual funds escape. Adviser charges taken from these will constitute a disposal for capital gains tax and may give rise to a CGT lia-bility if the annual CGT allow-ance has been used elsewhere.

An obvious solution would be to create the equivalent of the pension scheme admin-istration member payment within the tax rules for life policies and the CGT regime for disposals from mutual funds. Otherwise, it may be difficult to operate trail payments on new non-pension products taken out after 2012.

John Lawson is head of pensions policy at Standard Life



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