IFA charges for advice confirmation letter

dadsma

Hi,

I would be grateful for some input on a 'catch-22' situation which has confused and worried a friend.

She is age 63 and has an old Scottish Provident defined contribution pension policy worth £40k

She wishes to withdraw it all in one go in order to pay off an expensive mortgage. She is aware she will get 25% tax free and have to pay the marginal rate of tax on the balance.

The government website explains that the Pensions Schemes Act 2015 ensures A 'guidance guarantee whereby everyone with a defined contribution pension arrangement is offered free, impartial guidance......'

My friend took this free advice from Pensions Wise, The Pensions Advisory Service and paid for a 1 hour consultation with an IFA before reaching her decision to take cash.

Unfortunately the pension company refuse to accept her instruction without written confirmation from an IFA that they have provided specific advice on the option she has chosen. They refer to section 48 of the Act and the Transitional Provisions (SI2015/742) which they say require the letter and they cannot accept my friend's confirmation.

The IFA is willing to write the letter at cost of nearly £1k.

IMO it makes nonsense of the government's aim of providing free advice when the same legislation requires a costly letter to be sent to the pension company before they are allowed to accept an instruction.

Is my summation correct or have I misunderstood the situation?

bigadaj

The ifa will want to be paid and his argument may be that there is a minimum transaction fee he's prepared to offer on the basis of his insurance cover.

Does this policy have guaranteed annuity rates or similar preserved benefits that may be valuable, it may be that this is the case and so your friend may be worse off by cashing it in.

What is the rate of this expensive mortgage, can this be renegotiated or moved to save money?

If Scottish provident won't cash in the pension then an alternative may be to move the pension to another provider that will, though there will be fees involved in that also.

With some answers to the questions above then better answers may be forthcoming.

Paul_Herring

dadsma wrote: »

The government website explains that the Pensions Schemes Act 2015 ensures A 'guidance guarantee whereby everyone with a defined contribution pension arrangement is offered free, impartial guidance......'

My friend took this free [STRIKE]advice[/STRIKE] guidance from Pensions Wise, The Pensions Advisory Service and paid for a 1 hour consultation with an IFA [for advice] before reaching her decision to take cash.

Unfortunately the pension company refuse to accept her instruction without written confirmation from an IFA that they have provided specific advice on the option she has chosen. They refer to section 48 of the Act and the Transitional Provisions (SI2015/742) which they say require the letter and they cannot accept my friend's confirmation.

The IFA is willing to write the letter at cost of nearly £1k.

IMO it makes nonsense of the government's aim of providing free advice when the same legislation requires a costly letter to be sent to the pension company before they are allowed to accept an instruction.

Is my summation correct or have I misunderstood the situation?

You are conflating 'guidance' and advice' as defined in the various bits of legislation and pension contracts.

The Government has provided free guidance. Guidance is not binding on the entity providing it.

The pensions companies tend to refuse transfers under certain conditions unless (proof of) advice has been obtained. Advice has to be paid for (since the advice is binding on the entity providing said advice) and the Government is not providing advice, paid or otherwise.


Unfortunately to the layman, the two words confer a lot of similarity. But when pensions (or most financial produces) are concerned they are at opposite ends of a spectrum.

HappyHarry

So you are aware, the IFA is not going to be charging £1,000 to spend 5 minutes writing a letter.

The £1,000 fee will be to provide advice to your friend. To provide this advice, the adviser has to demonstrate that he has fully understood your friend's current financial circumstances and objectives, your friend's expected future circumstances, and researched the pension policy your friend holds.

This pension policy will undoubtedly contain some 'safeguarded benefits', such as a guaranteed annuity rate, which may be very valuable. If there were no safeguarded benefits, the pension provider would not need to know that advice has been taken.

The IFA needs to demonstrate that your friend understands that they will be losing their safeguarded benefits, and what this means to them in the long-term.

All this needs to be carefully documented by the IFA, in case your friend were ever to change their mind in later life, and claims against the IFA for bad advice. The adviser carries the risk of this to the grave.

It is quite possible that the IFA will advise that your friend keeps the pension and the safeguarded benefits, and explores other options to pay off the mortgage. This does not matter to the pension provider, as the pension provider only needs to know that advice has been given, not what the advice is.

The reason for the pension provider insisting on advice is that many people do not understand the long-term implications of giving up safeguarded benefits. The law says that professional advice must be sought if safeguarded benefits of £30,00 or more are being given up. Hopefully, this will reduce the amount of people making poor financial decisions that will detrimentally affect their long-term income.

£1,000 doesn't seem an unreasonable price.

atush

How expensive can her mtg be? Mine is just over 1%?

what will she retire on if she spends her pension in this way? how was she planning on paying off the mtg- how many years does it have to run?

dunstonh

£1,000 seems quite reasonable for the level of risk involved. i.e. full encashment of a plan with safeguarded benefits. Plus, it still needs the full advice process (factfind, research, analysis of situation and needs and then the letter at the end).

Malthusian

To add to what Paul has said, it's not surprising that your friend thought they were getting "free advice" because the Chancellor stood up in Parliament and said that free advice would be available to all pensioners. This, I am afraid, was a lie. The two essential differences between guidance and advice, in the world of regulated financial services, is that a) someone who gives advice will tell you what you should do, "guidance" means they give you some information to work it out for yourself; b) if the advisor gives bad advice, you can claim redress. If you go away from a Pension Wise consultation and then do something stupid, you have no comeback against Pension Wise.

When the significance of the word "advice" was pointed out to the Government they backtracked and weaseled their way out of it by saying the man in the street didn't know the difference so it didn't matter.

When it was then pointed out that if people did not take advice, they would be in danger of making themselves considerably worse off in their own age by giving up final-salary pensions or guaranteed annuity rates - and that with no-one to blame other than themselves, they would probably blame the Tories - they performed another reverse ferret and decreed that anyone with "safeguarded benefits" such as these would have to take advice after all. Which, as we've covered, would not be from Pension Wise because they only give "guidance" and would therefore not be free.

And so your friend is where she is. All I would say is that she should listen to the IFA instead of just trying to get her hands on his rubber stamp. Atush's questions are all good ones. I will add one more: has she considered encashing the pension over two tax years, as she will almost certainly pay 40% tax on a large chunk of it otherwise? These are the sort of questions that an IFA can answer but Pension Wise will not.

soperman

Hi Dadsma

Pension freedoms is fast becoming a Kakfa-life circle but in essence your interpretation and summation of the new regulation is incorrect but I can assure you that almost everyone that has contacted RetireEasy has had exactly the same understanding as yourself.

Hopefully, the following will give you a backdrop of what is going on:

1. When the pension freedoms were announced last year, there had been almost no consultation between Government and the pension providers and I understand that there was also very little discussion between Government and the FCA.

2. The vast majority of all UK pension plans are designed to provide retirement benefits on a fixed pension date that constitutes a 25% lump sum (potentially higher from a company pension scheme) and a fixed monthly pension or annuity. This system is not compatible with the new pension freedoms allowing 100% cash withdrawal.

3. Pension Freedoms do not constitute a Statutory obligation on the provider to allow more than 25% of the fund to be taken in cash.

4. The FCA regulated that providers must confirm to all customers seeking pension freedoms the existence of Pensions Wise, the inherent risks and the potential tax liabilities. Over recent weeks and months an increasing number of pension providers now insist that its customers must prove they have sought advice from an IFA before the provider will allow pension freedom.

5. To help the general public understand the impact of the pension freedoms and the potential impact on their current and future finances, Pensions Wise was established providing a free source of guidance and consultation. Specifically Pensions Wise cannot deliver definitive advice but do signpost the potential risk/rewards of various outcomes. In many cases they point their customers to get professional advice.

6. In order for an IFA's advice to be compliant it must present the most suitable outcome for the client and there will be many alternatives for the IFA to consider other than the 100% withdrawal of the pension fund. In March this year the FCA announced that in March 2016 it will commence a review of the pension freedom advice dispensed by IFAs.

7. As a result of this impending review, you will appreciate that IFAs need to be very careful in handling pension freedom enquiries. Some will charge fees for the work that needs to be done to deliver all the alternative client outcomes but many of our own customers tell us that IFAs have simply refused to deal with ''insistent' customers and have referred them back to the pension provider

The Kafka Circle

a.Client requests provider to pay out pension fund in cash
b.Provider points client to Pensions Wise
c.Pensions Wise points client to IFA
d.IFA considers client request and suggests 100% encashment probably a bad idea.
e.Client insists to IFA that he/she needs the cash and wants proceed
f.IFA re-states the pitfalls and sets out fee for conducting a full review.
g.Client declines advice/fee and insists that the cash is paid out.
h.IFA declines request and points client back to the provider.

Kind regards

Mark Soper

mania112

I have to say that a restricted report on the advice question 'should I cash in this pension?' could well be prepared for less than £1,000.

Our client agreement details such a report at £595, with the factfinding to be completed during the 1 hour free consultation.

The advice doesn't have to say 'yes do it' which is where the costs of advice become expensive.

gadgetmind

bigadaj wrote: »

If Scottish provident won't cash in the pension then an alternative may be to move the pension to another provider that will, though there will be fees involved in that also.

Yup, that's the best solution. Yes, there will be some costs, but a lot less than that £1k letter (how much per word?) from the IFA.

I've got a DC pension with Friends Life and am 99% sure I'll have to move the money over to my Best Invest SIPP before I can access it as I choose.

Brightspark87

Firstly can I say how unhappy I am that you all assumed this IFA was a man? Secondly, I would day 99% of providers will not allow you to withdraw the whole fund without confirmation you have received advice. Your friend received GUIDANCE rather than ADVICE. When we give advice especially on such a risky area of business we have to do an awful lot of work you may not see. That is why its costing £1,000. She could try to explain what guidance she has received and then if still wont complain and then take it to FOS>