The upcoming Inheritance Tax (IHT) changes to pensions have triggered a fundamental review of retirement and IHT planning strategies. In this article Quilter explores the regulatory framework and tax considerations appliable to adviser charging in the context of registered pension schemes both before and after a client’s death.
The conventional wisdom of drawing pensions last is no longer effective for IHT. The need for fresh advice in this area is self-evident, and of course, advice must be paid for.
The Retail Distribution Review (RDR) has been in operation for circa 14 years. It applies to those advising retail clients in the UK on retail investment products. Amongst other requirements, this introduced the concept of adviser charging and banned the payment of commission.
Product providers have certain obligations around adviser charging but are permitted to offer facilitation of this charge through their products. Further details can be found in FCA Handbook – COBS 6.1A Adviser charging and remuneration.
Adviser charging for a client
As part of RDR, HMRC reviewed the pension tax rules around the facilitation of advice charges. These are summarised here:
- A pension scheme may facilitate a payment to a financial adviser for pension-related advice given to the member of the pension scheme.
- The advice can cover areas such as fund choice, asset allocation, tax, retirement options, and income planning (e.g. flexi-access drawdown, lifetime annuity, scheme pension), as well as associated implementation and administrative work.
- These payments are treated as authorised, provided they arise from genuine commercial arrangements and the fees are appropriate for the service delivered.
- If the charges are excessive, not commercially justified, or relate to advice beyond the pension scheme (for example ISAs or other non-pension assets), the excess or non‑pension-related portion will be treated as an unauthorised member payment (flat 40% charge).
Note: the facilitated adviser charge must relate to the member. Unauthorised payment charges will arise on the member if the charge is being made in respect of someone else e.g. their spouse, civil partner, close relative etc. Even if the advice relates to the spouse’s pension.
Introduced on 6th April 2017, the Pension Advice Allowance (PAA) permits a member (including in their role as a dependant, nominee or successor) to request a pension scheme to make one payment of PAA in a tax year.
The maximum amount of each payment is £500, and it must be paid from a money purchase arrangement (or hybrid arrangement) directly to the financial adviser providing the advice. Only three such payments can be made in the person’s lifetime.
The PAA was designed as a targeted intervention to give access to advice at key decision points. The £500 cap is modest compared to the cost of full financial advice, so the PAA:
- Works best as a contribution toward advice, rather than fully covering it.
- Often supports focused or one-off advice sessions.
There has been limited take up to date. Although the intention was the PAA could be used with pensions that didn’t support adviser charging, currently only a few Defined Contribution (DC) workplace pension providers actively support this.
PTM142000 – Other authorised payments: specific member payments – HMRC internal manual – GOV.UK
Adviser charging immediate post client death
On death, the existing client agreement ceases. There is no authority to continue to deduct advice fees from the deceased’s pension. As a result, these charges should cease immediately. The implications of not stopping these will mean they are considered unauthorised payments by HMRC.
If the deceased’s legal personal representatives (LPRs) require support with administrative tasks such as obtaining pension values, or advice on administering pensions during the estate administration period, it is acceptable to charge for these services.
If a service is provided, there needs to be a LPR and/or beneficiary agreement in place for each client, and the fees will need to be settled outside the deceased’s pension.
However, it would be possible to use facilitated adviser charging for the beneficiary within their pension wrapper once a beneficiary flexi-access drawdown has been set up.
Professional advice fees would be a legitimate expense for LPRs to incur but they would not generally be deductible for IHT purposes. This is because only debts incurred up to the date of death are allowed to reduce the taxable estate. Further details can be found here: IHTM10361 – Deductions from the estate: introduction – HMRC internal manual – GOV.UK
Conclusion
There is no doubt facilitated adviser charging is an important and well-established process. It enables greater access to financial advice for clients who would not have the ability/appetite to pay these directly.
However, care is needed with the overlapping regulatory and tax rules. As always, good audit trails will make this task easier.
Main image: Charges, jakub-zerdzicki-heiYgqp0Tsk-unsplash
