14 Aug 2015, 1:55pm
personal finance:
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  • What I learned about financial advice and pension freedoms

    Today I found myself in a place I never though I would find myself – the offices of a firm of Independent Financial Advisers (IFA). I learned a fair amount about regulated financial advice, about regulation, about why I am having difficulty in getting hold of my own money. There’s a lesson in it for people at The Firm saving in AVCs. Like everything else on this blog it is opinion, not advice, if you want financial advice speak to an IFA. I personally found vouchedfor.co.uk easier to use than unbiased.co.uk, but your mileage may vary. I have a very specific and somewhat unusual request

    How do I transfer the DC component of my works pension (in AVCs) into a SIPP so that I can front-run my main DB pension until NRA. That way I can avoid taking an actuarial reduction for drawing the main pension early

    If you look up the glossary for AVC I say it’s like a SIPP for people in DB pension schemes. In terms of what it does, that’s right, but in terms of getting your hands on it early, that’s a maybe. More about that later, but bear in mind the difference means a lot of hurt and possibly a charge on the transfer. For small amounts below the personal allowance you may be able to dodge that (H/T DIY Investor) but the amount I am looking at is more that that. It isn’t quite six figures but it’s more than £30,000, which seems some FCA-mandated threshold where pension people start to jibber and start backing away as soon as they hear this is linked to a DB pension.

    What did I learn about independent financial advice?

    1. It is there to protect you from yourself and making hasty stupid mistakes, not to teach you about finance. I learned diddly squat about finance.
    2. If your IFA steers you towards a percentage of execution fee then you are not rich enough to be there. Basically an IFA’s time is costed at about £150/hour. You need to have investible assets of more than about £500,000 to be worth using financial advice on an hourly paid basis – otherwise the percentage fees range between 2 to 5%. If your business is worth less than about £2000 to the IFA they don’t really want to know. The long-run return on equities is somewhere around 5 to 6% real, if you’re paying 3% to an IFA your ROI is impacted by at least 50%. If you pay them hourly then as long as the percentage fee on your assets is lower you get more of your money back. Unfortunately if you can understand that you probably don’t need an IFA… Before RDR rich people were fleeced to subsidise give the proles financial advice 1. I am a prole – I will never have a networth of a million pounds.
    3. An IFA does not teach you about finance. They are there to tell you if you are being stupid, and possibly show you why. I didn’t get to learn much about that because it appears that front-running the DB pension is not a peculiarly dumb-ass thing to do. I am obviously glad to hear that, though it surprised me that the IFA had never come across the idea before. Ipswich has many residents who work(ed) for The Firm when it was a research facility rather than a jobbing-shop managing outsourced IT crews, these particular residents are no spring chickens because The Firm stopped recruiting that sort of people in the early 2000s and started to taper down in the early 1990s. I am somewhat surprised that more of my erstwhile colleagues didn’t jump to this obvious win and that they haven’t been banging on the doors of the town’s IFAs demanding to defer their pensions for the secure income and front-run their pensions using their AVCs (there is no GAR malarkey associated with The Firm’s AVCs – the main advantage of using AVCs is to get a bigger PCLS).
    4. You must listen between the lines. When doing the equivalent of the finametrica risk profiling I was beginning to answer the question ‘do you expect to need your capital in the near future with a yes. This is the AVC capital, and I think of what I am doing as running down that specific lump of capital. There is a world of difference in the regulatory world between saying I want to get an income from capital and ‘I will need this capital’ even though I am looking to run that flat in five years. If you want flexibility in what you can do Do. Not. Say. Anything. About. Needing. Capital. Just don’t – preferably you are aiming to leave it to your heirs, you have that little need of it. Thus taking an income of £X p.a. over five years from a lump sum of £5X is very, very, different from saying I will need to use this capital of £5X in the next five years. Confused? I was.  I got it right, and my risk profile comes out roughly the same as the finametrica test.
    An Ermine's risk profile - batshit crazy

    An Ermine’s risk profile – batshit crazy

    This was complicated by the fact that I was there to look at a specific part of my assets – this was not a 360 degree review of my financial situation. The whole regulatory system struggles with that, which is a bastard. With this specific piece of money I am a timid mouse – because I expect to consume it all 2. I acknowledge, however, that normally this is a rum way to run a pension.

    What should people in The Firm learn from this?

    This is not advice, it’s my opinion. If you want financial advice speak to an IFA.

    If you are a BRT payer stick with the AVCs, because you can salary sacrifice into the pension scheme, so the taxman doesn’t steal 32% of your money in tax and NI contributions, effectively amplifying every £100 you don’t take home by about 50 % (for every £100 you don’t earn you get almost £150 in the AVCs) as opposed to if you do that with a SIPP where you get £125 in the SIPP. Take the extra in the AVCs and if you do decide to front-run your pension then be prepared to pay the IFA tax. Hopefully by the time you do that it won’t be there – if it is, well, you still saved more in the NI so let it go.

    If you area HRT payer then ideally you would first put money into a SIPP to bring you to the BRT/HRT threshold and then AVC the rest. Unfortunately I don’t know if you can do it that way round, I suspect the AVC would be taken off first. So you need to inform yourself if this can be done that way. It’s a tough call, because if you need to run down a larger AVC pot from age 55 and are not drawing the main pension you will pay more as a percentage to an IFA to take it out – you need to model this with Excel to see where the extra IFA cost of taking the AVCs out crosses the tax advantage you get in the BRT region of your savings. If, on the other hand, you are only pushing your salary down to the BRT/HRT threshold, the forget AVCs and use a standalone SIPP for the flexibility, though bear in mind that the advantage of AVCs was that your tax-free PCLS is bigger if you can wait until you draw the main pension.

    You should also start talking to people about your AVC transfer a year to six months before you are 55 and want to do it.

    What should I learn from this?

    I am grateful for having a decent slug in a DB pension scheme, so if I have this extra grief and cost here then I need to focus on the fact that there are many other problems I simply don’t have in the pensions department. I do not have to worry about outliving the pension. Over periods longer than about 20 years a FS pension does get eroded comparative to other people’s earnings over time; it is the job of my accumulated ISA savings to lean against that sort of wind

    I left work precisely to get away from stupid jobsworths and nitpicking rules. I had a rotten experience of that with Hargreaves Lansdown despite their vaunted reputation for service, and I’m coming round to being prepared to pay about £2000 to get rid of the aggravation because dealing with jobsworths and rules is rules types makes me want to lamp them. Lots of people in the pensions biz seem to be really frightened of pension transfers connected with DB schemes, and fundamentally they want paying to get over/insure against their fear of being sued later on. Such is life. I was vaguely tempted to leave this a year, start using some of the income from my ISA and try again when some of the dust has settled. But I am scared shitless by some of the rest of what Osborne is saying about pensions. I very strongly suspect that in five years time there will be no tax-free PCLS or it will be limited, and some of what they are saying about pensions being no longer tax-advantaged makes me want to shake this down while I can. There will, of course, one day come the evil time when NI and tax are fused and no doubt an upper limit on the amount that can be held in ISAs. But I will do something about the things I can do something about. And maybe I should bear in mind the wise worlds of Thomas Jefferson

    You ask, if I would agree to live my seventy or rather seventy-three years over again? To which I say, yea. I think with you, that it is a good world on the whole; that it has been framed on a principle of benevolence, and more pleasure than pain dealt out to us.

    There are, indeed, (who might say nay) gloomy and hypochondriac minds, inhabitants of diseased bodies, disgusted with the present, and despairing of the future; always counting that the worst will happen, because it may happen. To these I say, how much pain have cost us the evils which have never happened! My temperament is sanguine. I steer my bark with Hope in the head, leaving Fear astern.

    Most of that shit won’t happen. But it’s prudent to favour the bird in the hand… My original plan was to take the 25% actuarial reduction and invest the AVCs to compensate for the loss, but since I am in good health I will probably be better off favouring security over investing raciness, dodging the actuarial reduction and investing only half the AVC fund, and Osborne has made this possible for me.

    Notes:

    1. This is the second hit I have taken from that damn RDR. I don’t particularly think that saving rich people from their own stupidity/laziness is a particularly grand aim, considering the shafting that the proles took, but that’s just the way it goes.
    2. strictly speaking I will probably use half of it and some savings to keep filling my ISA allowance over the next five years, but that’s a different story

    I have a free- standing AVC which I have considered transferring to a better account (SIPP) – BUT – the transfer costs worry me. It looks like another scam – make you pay for IFA advice – make you pay a stinging exit fee to transfer to another provider.
    It just seems to be another way for the finance industry to take chunks of your hard saved money away from you.
    I have a personal stakeholder pension and the company immediately announced that they will not support draw-down as part of the new pension freedoms and that I would have to transfer to another provider if I want this as an option – oh – and take a nice chunk of the money as a transfer fee in the process!!
    People are starting to scream at the pension minister but she is putting her head in the sand and ignoring this new rip-off situation, someone needs to sort this out.
    Pension freedom – more like pension freebies for the finance industry – AGAIN!!

    @sparklebee- I don’t recall transfer fees (not significant ones anyway) either in transferring my AVCs to a SIPP, or in transferring my spouse’s numerous DC pensions into a single SIPP. I think the SIPP provider charges a bit for every transfer in, but less than £100 iirc. Certainly not enough to alter the cost/benefit equation!

    Hi ermine. An interesting tale. I think its worth pointing out that not all AVCs linked to DB schemes will cause the kind of hassle you are facing. I paid into some AVCs linked to my NHS pension. I had no trouble at all transferring them to a SIPP, no advice, nada. I suspect the difference may lie in the extent and nature of the ‘linkage’ with the DB scheme. With my scheme, the AVCs were called ‘free standing’ AVCs, and they were essentially just that – a DC pot with no relationship to my main DB benefits. No facility for using them to increase the PCLS, for example. They were ‘linked’ only in the sense that there was one provider for NHS FSAVCs (Equitable life, for gawds sake!). I just mention this in case other readers with DB schemes and FSAVCs think that they won’t be able to access them without advice. They will need to check the particulars of their own pension scheme.

    Hmm ok I’ve just done some research and my comment above is not quite right. My AVCs were not ‘free standing’ – that would apply to money invested in a pension or SIPP not connected to the NHS. They were actually what’s called ‘money purchase’ AVCs, which I bought through the NHS provider. The rest of what I said is correct, I just got the terminology wrong (in another lifetime I met with an IFA who tried to sell me FSAVCs, that’s how it had got stuck in my head).

    @Red Kite Absolutely agree that people need to qualify their particular situation, and these will vary. The Financial Ombudsman has details on the difference between AVCs, FSAVCs and money-purchase AVCs

    In The Firm’s case, it appears that the AVC supplier (Standard Life) is reasonably happy for people to transfer out. People with moderate amounts of money (up to or slightly over the personal allowance) seem to be able to get their AVCs paid to them if they are over 55; in principle I could too at that stage. In my case it would be barmy because I would have to pay a lot of tax, so I must transfer in to some sort of SIPP to be able to drip it out over five years. It is getting someone who will receive the funds where I am struggling – many providers plain just don’t touch AVC funds, presumably for fear of being sued later because the tax-free PCLS is smaller or guaranteed annuity rates were attached.

    @Sparklebee – it may be worth asking your preferred destination about receiving the FSAVC because they are much more like a DC pension; hopefully they won’t say you need regulated financial advice because it is more a move from like to like.

    @ermine Nice that even with paying off the Financial Advisers you can still make it to your normal retirement date without an actuarial discount.
    Sadly that wasn’t possible for me as my pension was discounted if I retired any time before 62. Younger folks had to take a discount from a “90 factor” which in my case was nearly 65!
    Unilever’s Pension Fund does not offer AVC capability in Canada although I understand they do in the UK. All I had was RRSP headroom. No TFSAs back then either.
    Sometimes an adviser intervention can (hopefully) prevent a catastrophic error such as made by those idiots in Ontario who cashed in a fully funded Defined Benefit Teacher’s Pension and paid tax on some of it – so they could invest in some mutual fund salesman’s products. Better return? – sure.

    15 Aug 2015, 7:38am
    by Cerridwen

    reply

    Interesting post ermine and it is thought provoking that you seem to be fairly unique in your plan to use your Firm’s DB AVCs to fund the time before the pension itself becomes payable. This seems the natural route to take and the fact that folks don’t do it is yet another sign that they just don’t have the right information on how to manage their pension savings.

    I applied to have my CIS FSAVC (around £20,000) transferred into my Fidelity SIPP about 4 weeks ago and, apart from the protracted wait due to the fact that this has to be a paper shifting process and can’t be done electronically, I’m not expecting any trouble or charges from either side. (Famous last words :-))

    My Standard Life AVCs however are paid direct from my salary (I think I still pay NI but not tax although I’ve never been able to work this out – I should take another look at this) and can’t be prised from my LGPS pension and have to be taken at the same time.

    The pension world is certainly a very complicated place. If you want to do something slightly different with your money it seems that the best policy is to do your research and then ask and ask again in case the first person got it wrong. 🙂

    Could you clarify what you mean in the paragraph starting “If your IFA steers you…”. What I take from this is that we have these ways to pay for advice –
    1. Hourly rate, you quote £150 per hour
    2. Percentage of execution fees, you quote 2%
    3. Percentage of size of sum.

    Is this correct or are 2 & 3 the same?

    In my case my IFA is quoting 2% of the value of the pension pot. So is your advice to “walk away”.

    Sorry to be so dumb. Your blog continues to be really useful by the way.

    @conbradley sorry, that wasn’t clear. Although you and your IFA can agree any payment terms mutually agreeable provided it’s supplied to you in writing ahead of incurring billable work, there are three common fee models as I understand:

    for high networth individuals an IFA will work on billable hours model like a solicitor. I inferred that this only really works for people with over £500,000 of investible assets by comparing it with the other model for new work, the going rate for which is about 2 to 5% of the amount transacted (ie buy £100,000 of Vanguard Lifestrategy 100 this way and it will cost you £2,000 in IFA fees over and above any platform costs)

    I inferred the minimum amount required from mine saying they would not look at people with less than £50k of investible assets they want transacted I only want to move £41k of my AVC because we seem to be going into a market swoon and I want to invest the rest because I know I will not touch that for another five years. But I can live with shifting £50k of it. The IFA would take a rake of £1k for this 50k. Looking at other IFAs they tend to want more investible assets or charge a higher fee, hence the guesstimate of they want to see at least £2k for the work.

    For a £500,000 amount the IFA fee at 2% would be £10,000, which would get you 66 hours worth of work on a billable hours basis. I’d venture that they could do the work in less time, though it of course depends on what you want done, so you might want to go the billable hours route, but of course discuss first.

    The last fee model is once you have kicked things off with the IFA, some will look after your portfolio for you on a servicing basis, this seems to be about 0.2 to 1% of assets under management, payable annually. For that you get a nice warm feeling you’re being handheld, but no guarantees on portfolio performance of course 😉

    So is your advice to “walk away”.

    If you are electively using an IFA for something you could do yourself then I would at least suggest reflecting on it. But you have to use an IFA for some things. I will pay 2% and was pointed away from billable hours. I was tempted to take the risk, after all, how hard is this going to be, all I need is the tick in the box, but there is the old principal-agent problem. I would imagine the time required would turn out to be at least £1000/£150 = 6hrs 20 minutes, and I open myself to being charged more just for being a cheeky SOB. But if I could transfer this out myself I would happily do it DIY. Standard Life are happy for me to transfer out, and people with modest AVC pots can simply ask to be paid their AVC as is, but don’t want to receive £50k in one tax year so I need to wash this through a SIPP. It is the receiving SIPP that either won’t touch anything to do with DB, or in the case of HL require me to take regulated finacial advice to cover their backsides in case I sue them in future. I am having to pay for their professional indemnity insurance.

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