This article in NMA last week about the FSA plans to scrutinise which tax wrappers adviser take their fees will no doubt prompt many advisers to ask questions about the best way to take fees through adviser charging.
An unmanned FSA spokeswoman is quoted as saying ‘every adviser has to consider all of the costs involved and all the repercussions for the client, and tax is obviously one of those. ‘If a client is disadvantaged because of the arrangement the payment is facilitated by, [advisers] need to take that into account’
So let’s remind ourselves of a couple of things we (should) already know;
- If you take advisers fees from ISAs, this effectively detriment the client, especially if client could have paid you from a non-tax efficient account.
- While there is a tax advantage in using a pension wrapper for AC, only the proportion of the advice relating to the pension can be charged via that wrapper. Putting all fees for a holistic plan (i.e. including non-pension advice) through a pension wrapper is in breach of HMRC rules.
- Adviser fees taken from life bond forms part of client’s 5% annual tax-deferred withdrawal (and is deemed a return of capital by the HMRC?).
Now, to appreciated the massive problem this creates, let assume you take on a new client with £150,000 held in a combination of tax wrappers. Depending on what proportion is held in each wrapper, the question of where to take take adviser fee from suddenly become a complex web.
|Wrapper Combination||Problem with taking AC||Best Alternative|
|£150,000 Pension Only||Taking adviser fee from pension has tax advantage to client||100% of fee from pension|
|£150,000 ISA Only||Not tax efficient for the client.||Ask for a cheque/DD mandate from client?|
|£150,000 Bond Only||Forms part of client’s 5% annual tax-deferred withdrawal, so not tax-effective for the client||Ask for a cheque/DD mandate from client?|
|£75,000 Pensions + £75,000 ISA||Only 50% of fees can be charged via pension but taking fee from the ISA is not tax efficient||50% of fees from Pension + 50% cheque or DD from client|
|£75,000 ISA + £75,000 GIA||‘Don’t touch the ISA’||All the fees to come out of GIA|
|£50,000 ISA + £50,000 Pension + £50,000 GIA||Only 1/3 of the fees can be charged via pension. The rest come from the GIA||1/3 of the fees from pension.The rest come from the GIA.|
|£50,000 ISA + £50,00 Pension + £25,000 GIA + £25, 000 Bond||Only 1/3 of the fees can be charged via pension.The rest come from the GIA||1/3 of the fees from pension. The rest come from the GIA.|
If you add to these, the ongoing lack of clarity around VAT and the practicality of taking fees from a combination of products and cheques/DD, then what you get is a picture of advisers (and their paraplanners) scratching their heads wondering where the hell adviser fee should come from.
What is pretty clear here is that the regulator is ‘hell-bent’ on cutting the provider-adviser umbilical cord. And some might say, that is a good thing!