Do i have a complaint against IFA?

Texas_Pete

Hopefully someone can help me with this. My father visited an IFA in 2005 for advice on how best to invest £80,000. He was advised at the time to take out a capital and income bond with Skandia. The planned investment term was to be 10 years. Investing in the following funds (I imagine these are possibly picked by a software system based on a risk profile?):

14% Invesco Perpetual Corp Bond
16% Fidelity American Fund
5% Fidelity European Fund
13% Fidelity Special Situations
3% Gartmore China Opps
24% New Star Property
12% Newton Higher Income
13% Jupiter Corporate Bond

Last year he needed to withdraw £32,000 from this investment (the maximum he could without being hit with early encashment charges). This resulted in a tax liability as it took him over the 40% tax threshold.

Does he have any grounds for complaint against the original IFA giving the advice?



I realise this is a tricky subject given no one knows all the ins and outs of this particular case but I can’t see what advantage a capital and investment bond gave him over say directly investing in Unit Trusts or Oiec.


He required access to the cash which he does have though there is a risk of incurring a tax liability even if no gain on the original investment had been made (which is the case here).

The advisor took a 6% commission on the original investment (£5600) at commencement of the bond. I’m not complaining about this just including it as it probably was a factor in selecting this particular product.

Is it worth pursuing this or will it just be palmed off that this was one of a number of investments that could be classed as suitable.

Regards.

bendix

No case.

Next.

Reaper

Texas_Pete wrote: »

He required access to the cash which he does have though there is a risk of incurring a tax liability even if no gain on the original investment had been made (which is the case here).

I don't understand. Are you saying the fund had not grown in value above the original £80,000? Firstly that's quite surprising and secondly if so why would it incur any tax?

By the way did he know on these types of policies you can withdraw 5% each year without any tax liability?

jimjames

Are you saying that he told the IFA that he was prepared to lock the money up for 10 years but then realised after 5 years that he actually needed it? Or did he tell the IFA he needed access to the money?

If he told the IFA that he needed access to the money then there may be a case I guess but if it is clearly documented that he agreed he didn't need access for 10 years then I'm not sure what the complaint would be?

jamesd

Assuming this is an investment bond there are some possible benefits:

1. Money in one may not count against the means test if residential care is needed in old age. This may preserve assets for inheritance and is one of the more popular reasons for people or ordinary income levels to get benefit from using them. If done for this it must be done long before there is a predictable need for care.
2. The ability to draw 5% a year ax free, with the ability to accumulate any unused allowance so that if none is used after say four years 20% of the original deposited could be taken with no tax to pay.
3. Deferring tax liability until money above the 5% parts is withdrawn, of particular value to those subject to 40% or 50% tax. Drawing more than the accumulated 5% allowances is taxed as normal income.
4. Avoiding age allowance reduction.
5. A convenient tax wrapper than can ease the administration of investments, like avoiding CGT calculations and tracking within the product. Of use mainly to those who have already used their ISA allowance and who will exceed their CGT allowance.

From April 2008 the reduced 18% CGT allowance made them less attractive for some people because they are taxed at 20% but that's now changing again with the introduction of a higher rate of CGT.

Whether it was appropriate depends on the objectives he had when he did it, including his past, present and future tax situations, and what he said about the chance of needing more than an average of 5% a year from it.

dunstonh

Does he have any grounds for complaint against the original IFA giving the advice?

Not on what you have said. The IFA does not have a crystal ball. If your father said that money was not required for 10 years but then 5 years later decides he does need money then there is no way that IFA can be held responsible for that.

Also, the tax issue is largely irrelevant as bond has deferred higher rate tax rather than create a new tax.

I can’t see what advantage a capital and investment bond gave him over say directly investing in Unit Trusts or Oiec.

James has listed a number of the reasons above. However, cost can be an issue as well. Bonds can often be cheaper than unit trusts where internal funds are used (although not in this case as a good range of external funds were used.

The advisor took a 6% commission on the original investment (£5600) at commencement of the bond. I’m not complaining about this just including it as it probably was a factor in selecting this particular product.

he could have taken 6% on UTs if he wanted. So, whilst 6% is very high by todays standards the figure doesnt suggest any potential for bias. Skandia Life was on the first providers to offer external funds and whilst they were never the cheapest, they were one of the best quality providers around at that time (not any more as the ex Selestia contract now owned by Skandia and rebadged as Skandia is better placed for that)

Is it worth pursuing this or will it just be palmed off that this was one of a number of investments that could be classed as suitable.

I cant see any wrong doing. He was a higher rate taxpayer. So, the ability to defer higher rate tax rather than pay each year is an advantage of the bond. The IFA cannot be responsible for a withdrawal made 5 years later.

jem16

Texas_Pete wrote: »

This resulted in a tax liability as it took him over the 40% tax threshold.

As jamesd has pointed out there are numerous reasons for the investment bond being a good choice, one of which is avoiding higher rate tax on dividends.

Was your father a higher rate taxpayer at the time the bind was taken out or indeed very close to being a higher rate taxpayer?

bendix

dunstonh wrote: »

Not on what you have said. The IFA does not have a crystal ball. If your father said that money was not required for 10 years but then 5 years later decides he does need money then there is no way that IFA can be held responsible for that.

Also, the tax issue is largely irrelevant as bond has deferred higher rate tax rather than create a new tax.



James has listed a number of the reasons above. However, cost can be an issue as well. Bonds can often be cheaper than unit trusts where internal funds are used (although not in this case as a good range of external funds were used.



he could have taken 6% on UTs if he wanted. So, whilst 6% is very high by todays standards the figure doesnt suggest any potential for bias. Skandia Life was on the first providers to offer external funds and whilst they were never the cheapest, they were one of the best quality providers around at that time (not any more as the ex Selestia contract now owned by Skandia and rebadged as Skandia is better placed for that)



I cant see any wrong doing. He was a higher rate taxpayer. So, the ability to defer higher rate tax rather than pay each year is an advantage of the bond. The IFA cannot be responsible for a withdrawal made 5 years later.

Yeah. That's what I said already.

No case. Move on.

darkpool

I just wonder if the OP's father will ever go to an IFA again. Somehow I doubt it.

bendix

As with any professional service advisor relationship, the real value from consulting IFAs only comes if you happen to know a bit about what they're talking about in the first place.

There is joint responsibility.

So often we see complaints about banks, IFAs, investment companies on here, and when you scratch at the surface of the complaint you realise the fault is as much to do with the ignorance of the complainer, and not the advice they got.

Linton

darkpool wrote: »

I just wonder if the OP's father will ever go to an IFA again. Somehow I doubt it.

That would be a mistake - who would he have to blame next time he's not happy with his finances?