Read the special edition TechTalk magazine: Changing Opportunities. Scottish Widows' Financial Planning team revisits the biggest industry changes, while Patrick Leavey from the Group Public Affairs division explores changes to the legislative landscape.
For this and more, visit the new Scottish Widows change hub
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The FCA has proposed to ban independent advisers and portfolio managers from accepting payments from third party firms on investment research.
According to the third FCA Mifid II consultation paper, published today, only certain research products such as commentary on market moves or company results may be exempt as “minor” and “non-monetary.”
Mifid II will be implemented in January 2018.
Meanwhile, the Mifid overhaul is set to cost firms $2.1bn (£1.6bn) for a technology update, according to an estimate by IHS Markit and Expand, a consultancy owned by the Boston Consulting Group.
The estimate includes the top 40 investment banks and top 400 asset-managers.
The FCA's suggested rules, which apply to equities as well as fixed income and other non-equity instruments, say that for a non-monetary benefit to qualify as “minor” requires “a consideration of the substance of its content” not how it's labeled or who produces it.
The FCA says: “It is for the receiving firm to make their own assessment, and if material does appear to be substantive, value-added research, and so is not minor in nature and scale, a firm will need to either pay for it under the new research requirements or not accept it.”
The FCA also want research costs to be “fixed, predictable cost” with no links to execution costs but be a “core management cost” or to be fully transparent to investors to eliminate any potential conflict of interest.
Ashurst regulatory lawyer Tim Cant says the new rule is “a significant” and, “unwelcome change” for many City firms.
He says: “The FCA has today signalled the end of CSA arrangements as we know them. Managers will now need to establish a single research payment account, and take control over, or outsource its operation.
“This will require significant changes to processes and legal arrangements, and puts the FCA at loggerheads with other European regulators, such as the AMF, who are taking a more flexible approach.”
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The £50,000 compensation limit for negligent advice should be scrapped, according to Financial Services Compensation Scheme chief executive Mark Neale.
In a blog this morning, Neale said that while instances of bad advice were “few and far between”, protection needed to be in line with retirement savings held in insurance products to give consumers more confidence in the system.
There is currently no limit to compensation available for retirement savings held in insurance products, allowing consumers to reclaim 100% of their losses if an insurer or provider goes bust.
However, if an advice firm enters administration, the lifeboat fund can only pay out a maximum of £50,000 to anyone mis-sold investments.
Neale says: “There is little logic to protecting retirement savings in insurance products without limit, but to restrict protection for mis-selling to £50,000. This is confusing for consumers and corrodes confidence.
“And it leaves consumers with retirement pots in excess of £50,000 in a quandary because it makes no sense to break the pot up for the purposes of seeking advice. An adviser needs to see the full picture.”
Neale adds: “I can see a sound case for harmonising retirement savings limits. This has the support of MPs with 60% supporting harmonisation according to our research.”
The way the FSCS is funded is currently under review, with a consultation paper due this Autumn. According to sources familiar with the review, options being discussed include capping fees for smaller firms, making providers contribute more and taking unregulated investments out of FSCS coverage.
Neale said that how negligent advice was protected should also feature in the review.
Neale says: “Instances of bad advice are few and far between, when they do occur they can have a devastating impact on retirement savings which take a lifetime to build up. We see that now with Sipp-related claims arising from advice to transfer retirement savings into a Sipp and then to invest in illiquid and risky assets.
“That's why I believe it is right to take a fresh look at the level of FSCS protection for negligent advice – currently £50,000 – as part of the current FCA review of our funding.”
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The Prudential Regulation Authority has not carried out any contingency planning over the long-term effects of Brexit.
Following a Freedom of Information request to the regulator, the PRA says it had conducted “significant contingency planning” for any market volatility that could have happened before, during, or in the immediate aftermath of the UK's vote to leave the EU.
But it admits it has not drawn up plans for the longer term impact of Brexit.
The PRA's initial planning included requesting information from firms on how they were set up to deal with risks over the referendum period, , allowing the Bank of England to assess what risks would apply to particular businesses.
The Bank of England's directors also met on 25 May, one month ahead of the referendum vote, and a new team was set up to coordinate Brexit work within the PRA.
The PRA said: “Over the referendum period, the PRA stepped up its regular contact with firms and established a small team to coordinate that work. That team maintained a 24-hour presence on the day of the vote. That team monitored market movements and any new developments relevant to the safety and soundness of PRA regulated firms.”
“Using Bank [of England]/PRA Stress Testing work the PRA has analysed the impact of any economic shock to the large UK banks' capital positions and they remain resilient”
The PRA says it has not yet carried out an analysis of how the UK's financial sector would cope under different models outside of the EU though.
It said: “Given the significant range of outcomes for the UK's ongoing relationship with the EU, the PRA has not carried out any contingency planning on these longer term outcomes.”
The PRA declined to comment on whether more analysis has since been carried out.
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Banks could give unbiased advice to help less “savvy” customers, according to FCA research.
In a research paper published last week, the regulator looked at how particular groups of consumers are affected by price discrimination in financial services.
It examines firms charging different prices to different individuals, resulting in some groups paying high mark-ups and cross-subsidising others.
The authors warn some consumers may not realise they are paying a higher mark-up, and argues banks could step in in these cases to provide advice from staff with “well-aligned incentives.”
The paper says: “Consumers may be less 'savvy' in different ways and sometimes in several ways.
“They may not have clarity regarding their future needs, and may therefore choose unsuitable insurance, savings or mortgage products, or even postpone a decision. If firms use complex pricing or complex terms, then if the costs accrue over time or the costs are hidden and consist in the loss of a possible gain, consumers may be unable to assess the cost of the product or the risks involved.
“In such situations, advice from the bank or building society providing the product may alleviate these problems to some extent, and advice from agents with well-aligned incentives will likely be helpful.”
The research did not examine whether or not bank charges are clear enough for those products or whether access to advice was sufficient.
Overall, the FCA's researchers found price discrimination does not necessarily warrant any regulatory intervention because it is often the result of a normal, competitive market.
The regulator says: “Before intervening, it is necessary to carefully identify the problem, as well as identify appropriate solutions.
“Badly designed or inappropriate regulatory interventions can lead to undesired or unintended consequences for consumers and competition.”
In the advice market, cross-subsidy can occur between high and low value clients, but also between clients who chose to purchase a product after free reviews and those who do not.
In a newsletter before the RDR, the regulator expressed concern that firms providing both products and advice were cross-subsidising the total cost of delivering advice to make advice charges appear artificially low.
The RDR requires larger firms that provide products as well as advice to set advice charges that are “reasonably representative” of the services offered, preventing firms cross-subsidising advice charges from profit from other parts of the business.
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Neptune's Chris Taylor explains why pressure is mounting on Abe and conviction in his strategy has strengthened.
Important information
Investment risks
Neptune funds may have a high historic volatility rating and past performance is not a guide for future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the original amount invested. Please remember that forecasts are not a reliable indicator of future performance. The content of this document is formed from Neptune's views as at the date of issue. Neptune does not undertake to advise you as to any change of their views. Neptune does not give investment advice and only provides information on Neptune products. Please refer to the prospectuses for further details.
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A simple demonstration of how to get quotes for your clients using Simply Class.
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Interview with Simply Class' first adviser, Elliot Silk.
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Entrepreneurs' relief is due, subject to meeting certain conditions, in respect of capital gains arising on 'material disposals of business assets'. These 'business assets' include:
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The FCA has agreed a deal with payday lender CFO Lending for the firm to pay over £34m in redress over unfair lending practices.
The redress will be paid out to more than 97,000 customers. The bulk of the redress, £31.9m, will come from writing off customers' outstanding debts while £2.9m will be made in cash payments to customers.
CFO Lending traded under several brands, including Payday First, Flexible First, Money Resolve, Paycfo, Payday Advance and Payday Credit.
Customers used the companies to take out payday loans and guarantor loans.
The FCA says CFO Lending was responsible for “serious failings” including showing incorrect balances so that customers overpaid; using customers' bank details to take payments without permission; and continuing to collect payments when it knew customers were in financial difficulty.
CFO Lending also refused reasonable repayment plans; sent threatening emails and letters; reported inaccurate information to credit reference agencies and failed to assess the affordability of guarantor loans.
FCA director of supervision for retail and authorisations Jonathan Davidson says: “We discovered that CFO Lending was treating its customers unfairly and we made sure they immediately stopped their unfair practices. Since then we have worked closely with CFO Lending, and are now satisfied with their progress and the way that they have addressed their previous mistakes.
“Part of addressing these mistakes is making sure they put things right for their customers with a redress programme. CFO Lending customers do not need to take any action as the firm will contact all affected customers by March 2017.”
CFO Lending agreed to carry out a past business review in 2014, and to stop contacting customers with outstanding debts while it carried out its review.
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FCA chief executive Andrew Bailey says consumers can use their homes flexibly to fund retirement income, rather than saving for both property and a pension at the same time.
Speaking today at the Pensions and Savings Symposium in Gleneagles, Bailey warned of the challenges facing retirement savers in the current low-interest rate, low growth environment.
Bailey's theory-heavy speech touches on behavioural economics and the lifetime savings model – which is based on the assumption that consumers make decisions about spending based on the resources they have access to at the time and irrespective of income at each point in their lives.
He told delegates the two big investments in the lifetime model – a home and a pension – have both risen in cost which is changing consumer behaviour.
Bailey was wary on holding housing as part of a pension because of uncertainty of returns.
He said: “An alternative approach, again best viewed within the lifetime model, is that rather than save for housing and retirement income at the same time, people would use the former to fund the latter…Here the focus is on how much they invest in their own dwelling over their lifetime.”
Bailey says, depending on how much people invest in their property over their lifetime, they could choose to downsize their home at retirement or buy an equity release mortgage to access funds without moving.
However, he issues the following caution about equity release products: “While the approach has an appeal in terms of the lifetime investment pattern, the accompanying financial instrument is made much more complicated by the need to embed in it a no-negative equity guarantee. This can have both prudential and conduct consequences.”
He said he did not believe in the idea of using housing as part of a pension portfolio.
He said: “There is an argument that pension saving would be assisted by people holding more housing in their stock of pension assets, based on the real appreciation in the value of housing. I don't subscribe to this argument.
“Why? First, because given the scale of uncertainty over long-run real returns on assets, I would not favour overweighing to any one asset class, while recognising that a balanced portfolio can be exposed to property. But, increasing the weight on housing investments could be self-defeating.
“If the effect of increasing the demand for housing as an asset to own is to push up the cost of ownership, an increase in holdings of housing as pension assets will tend to increase the real cost, and thus household indebtedness.”
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Prudential staff in Reading have abandoned plans for two 24-hour strikes after the insurer guaranteed it would find jobs for the 82 affected staff elsewhere in the business.
The first strike was scheduled for 16 September over proposals to offshore back office annuity work to Mumbai.
An indefinite work-to-rule that started on 31 August – where employees do not take on work beyond their job description or contractual working hours – has also been suspended while talks over the alternative jobs take place.
Unite regional officer Ian Methven says: “This welcome commitment to find alternative jobs for the people affected by the outsourcing of work to Mumbai has enabled us to call off our industrial action.
He adds: “We will now seek to work constructively with Prudential bosses in hammering out the detail and ensuring the alternative jobs on offer are suitable for those affected.”
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By James Dowey, chief economist & CIO at Neptune
WHATEVER HAPPENED TO THE GOOD OLD DAYS OF CHUGGING ALONG AT 3 PER CENT A YEAR?
That was the average rate of real economic growth in the advanced world from the end of the Second World War until the late 2000s. Despite all of the recessions and social changes along the way, it proved a remarkably stable trend. But, by comparison, over the past decade we have come up short. Since 2007, advanced world real economic growth has instead averaged only 1.2 per cent a year. This is not just the effect of including the Great Recession in 2009 – between 2010 and 2015 growth still averaged only 1.8 per cent a year.
To read the full article, click here: Central banks, broken speedometer
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We live in a world where running a firm of advisers is as much about protecting it against future penalty as it is about helping clients. Of course, ensuring any advice is in the client's best interest is by far the best way of protecting against any future complaints. But just how much responsibility should we take for the decisions our clients make, having given them our advice?
The dilemma facing advisers is how to prove that, whatever the age, education or ability of the client, we have correctly assessed they know what they are doing, understand the risks and have made a considered decision.
If the case comes back to bite us later on and the client is represented as being less capable than our assessment determined, we stand in grave danger of having to face the wrath of the ombudsman.
However, the problem goes deeper than that. It seems to me the ombudsman's adjudicators do not accept the client has a right to make his or her own decision and, importantly, bears some responsibility for that decision if all the facts have been explained. As advisers, we are now expected to be a financial nanny, deciding what is best for clients and not allowing them to have their own way.
The problem is sometimes the client is adamant they want a specific approach that does not follow their normal pattern of behaviour. I have had clients generally cautious in their investments who decide to take higher levels of risk with a particular pot of cash, such as an unexpected inheritance.
This seems like a perfectly reasonable approach but do I advise against the higher risk, given their normally cautious risk profile? If they insist, how do I protect myself against a later claim the investment was unsuitable?
In a recent case, the ombudsman ruled against a highly regarded local firm largely because the client involved was in her 70s at the time of the advice and had no experience of the type of investment used. The firm's defence was that it had discussed lower risk options but these had been firmly rejected and she insisted on the higher risk route. It would appear all their discussions were documented and the rationale behind the advice explained in detail with regard to the client's stated preferences. It seems to have done everything according to the book but still the FOS ruled against it.
Frankly, her age should not be a factor. I have many clients in their 70s more than capable of making good financial decisions. The issue is whether or not the adviser should permit the client to take on a new type of investment, having no previous experience in that area.
Advisers are not dictators or nannies. We are there to serve clients. The ombudsman must recognise clients' rights include the right to express preferences and make their own decisions – and to take responsibility for those decisions if things go wrong as a result.
Our risk warnings are not put in the small print but are a core part of the discussion with the client, and carefully documented after any meeting.
However, now making claims against firms has become commonplace, the only thing we can do is to take a defensive stance. We have to say no to insistent clients and advise against anything that might leave us vulnerable later. The client can no longer be allowed to have the last word.
Carl Lamb is managing director of Almary Green
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Graeme Ballantyne, business consultancy manager, looks at how you can maximise the opportunities through your professional connections
As we move through the summer months it's perhaps a good time to pause and reflect on whether the plans you've made for your business are bearing fruit. One area we at PruConsulting know many advisers have been focusing on is the development of business from their professional connections.
The focus of this article is about how to ensure you maximise the opportunities in working with a professional connection rather than some of the more technical concepts covered by others. I'll take you through an eight-step process that will allow you to check how your process stacks up against this framework and hopefully provide a few ideas you can use to improve your approach.
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Nobody could accuse Alan Hudson of letting the grass grow under his feet. In the past 26 years, the chief executive of financial planning and wealth management firm AFH has been busy expanding the business he founded in 1990, both organically and through acquisitions.
The firm was selectively buying small advice firms even before its flotation on the PLUS stock exchange in June 2011, when it laid out its strategy to grow through acquisitions. In 2009, for example, AFH bought the IFA arm of the West Bromwich Building Society.
But the speed at which AFH acquired smaller advice firms between 2011 and 2015 seemed as if it had hit the accelerator button, determined that the buying opportunities that had started to emerge because of the RDR would not slip away. Between 2011 and June 2014, when it listed on Aim, AFH had made 21 acquisitions. Another 12 followed, with the final one completing in July 2015. This level of M&A activity has led to the firm being labelled a consolidator, much to Hudson's disapproval.
“I dislike AFH being referred to as a consolidator,” he says. “A consolidator is typically a private equity vehicle bolting businesses together primarily to take advantage of commercial arbitrage. I am a financial planner and the firm is growing organically. We will only buy businesses where the companies add value to our group.”
For Hudson, the differences between AFH and consolidators are clear. He says AFH is not under pressure to buy businesses, unlike the private equity vehicles that focus on buying up advice firms. “We stopped buying in July last year because we wanted to make sure the business could keep up with it. It's not right to continue expanding without having the infrastructure in place to support it.”
After hitting the pause button, AFH tried to buy advice network Lighthouse Group in March but its £17.4m takeover bid was rejected and, according to Hudson, Lighthouse was unwilling to enter into negotiations with AFH. So, what makes a successful acquisition in his view?
“It's the people – culture is everything. I see a lot of acquirers bolting together businesses quickly. For them it's all about short-term financial engineering. But we're not in it for the short term.”
Hudson says he cares about who and what is going to work well together, and that a successful deal needs those involved to support the structure and direction of the transaction. “Over the years you develop an insight for who is 'on page' and who isn't. It takes time. If you don't rush with the potential vendor and you take time to understand the business and have enough meetings, it can mitigate the risk.”
One thing he has noticed is the types of buying opportunities have changed in recent years. In the run-up to the RDR and in the aftermath, it was all about demographics and acquiring small client bases from advisers who were retiring because of the RDR.
“Latterly the deals are slightly larger, in between the £1m and £3m turnover range.”
Many of the current buying opportunities are successful firms with owners that realise they are sub-scale and, without access to capital to expand, they will find it difficult to be where they want to be in the future.
“But they are discerning about who acquires them. They need to crystallise value and are mindful of the proposition or acquisition. We can satisfy vendors on culture and proposition.”
If the AFH acquisition strategy is not fuelled by the same targets and pressures as a consolidator, what's the driving force behind it? The answer, it seems, is its founder's determination to keep AFH moving.
“Like most entrepreneurs, I'm driven by the fear of going backwards. I believe that in
business you can't just stand still, you've got to go forwards or backwards.”
Hudson traces his entrepreneurial spirit back to his early days in financial services as a sales adviser with Target Life, which later became part of Abbey Life. “Prior to Target Life I was an industrial chemist. It was interesting, but I realised prospects were limited in that career. A friend I used to play squash with gave up his job to become a self-employed adviser and he persuaded me it was a great career. So I joined Target Life in 1984 and ended up running the Birmingham office.”
Hudson describes Target Life as an entrepreneurial venture that helped him learn how to run a business.
“Each office was run as a profit centre. I was just a successful sales adviser who took over from the Birmingham branch manager.”
In 1990, a change of directorship meant the firm was under pressure to recruit more advisers and Hudson was concerned that quality would be compromised under the new regime.
“I did a deal with them to buy out the Birmingham office and that became AFH. It remained an appointed representative of Target Life and its successors until 2000, when we went independent.”
It seems incredible now but when Hudson started out in financial services, there were no requirements to carry out factfinds for clients. “The industry is better now than when I joined – the RDR raised the standards and that's a good thing.”
However, he believes the move from commission to fees was “a bit of an overkill”.
“There was nothing wrong with commission – all that was wrong with it was too much smoke and mirrors. If it was made transparent, it could have stayed, at least for some products.
“The issue is that the RDR has disenfranchised a strata of society from getting advice. With banks leaving the sector, that wasn't necessarily a good thing. Robo advice has a place going forward. It is a good way of engaging young clients and those with less assets but its not the definitive answer.
“It will work best in tandem with face-to-face advice – as a starting point that can move gradually to face-to-face advice.”
Hudson says AFH regards itself as a financial planning-led wealth management business and that it will remain so in the future. “We think the wealth management market will naturally polarise, so you'll have models where investment management is the lead and models where financial planning is the lead.
“Our aim is to be financial planning-led.”
Five questions
What's the best bit of advice you've received in your career?
Our chairman John Wheatley persuaded me to bring in outside shareholders as he knew it would be better for the business and for me personally.
What keeps you awake at night?
Nothing!
What has had the most significant impact on financial advice in the last year?
Brexit – in particular the recent issues with commercial property funds.
If I was in charge of the FCA for a day I would…
Lose sleep!
Any advice for new advisers?
Do a thorough job and don't fall into the trap of going for low-hanging fruit. By that I mean don't do a factfind for a client in name only and look for a quick sale of financial products.
CV
1990-present:
Chief executive, AFH
1984-1990:
Self-employed adviser, Target Life
1980-1984:
Industrial chemist, Parkinson Cowan
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Coutts, the private banking and wealth management arm of Royal Bank of Scotland, could be on the hook for hundreds of thousands of pounds in redress following client claims they were given bad advice to invest in film schemes.
According to the Times, 220 clients have filed a lawsuit against Coutts, UBS and other advisers related to a more than £100m bill in back taxes and interest from HM Revenue and Customs.
The law suit is being managed by Stewarts Law and concerns film partnerships created by Ingenious Media, which has been in a long-running tax avoidance battle with HMRC.
The First Tier tax tribunal released a mixed decision last month, which both Ingenious and HMRC claimed to have won. The tribunal found some parts of the scheme were eligible for tax relief while others were not.
Both HMRC and Ingenious are likely to consider appealing the tribunal decision.
Stewarts Law tax litigation head David Pickstone told the Times: “Investors were assured that these partnerships were entirely legitimate trading businesses seeking to make profit through financing films and video games.
“While investors have been vilified for seeking to avoid tax, the reality is they invested and lost substantial capital having been assured that any losses would be mitigated by government-sponsored tax reliefs.”
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Mortgage experts have called for Help to Buy to be overhauled and say the scheme may not be helping the would-be buyers it was intended for.
The Help to Buy equity loan scheme, launched in April 2013, sees the Government lend up to 20 per cent of the value of a new-build home to buyers with a 5 per cent deposit.
Due to rising house prices, in February the Government changed the upper loan-to value limit from 20 to 40 per cent for Greater London properties.
Last month it emerged first-time buyers cannot use the Help to Buy Isa to boost their deposit, after the Government introduced a clause limiting the bonus until after completion.
Brokers have also recently expressed frustration at a clampdown by the Homes and Communities Agency which effectively cut them out of the loop when advising clients on the Help to Buy equity loan scheme.
Darlington Building Society chief executive Colin Fyfe says: “Overall Help to Buy is a good addition to the market and is helping new homeowners onto the ladder. It is also helping the construction companies.
“Where it potentially has got some issues is there is not strong enough confirmation that the people getting the Help to Buy support are the ones who need it the most.”
Fyfe argues the scheme allows borrowers who could afford a full deposit to instead save money by using the Help to Buy scheme, and the system needs better means-testing.
He says: “If that means an individual who didn't have a deposit was no longer able to get their foot on the housing ladder, we will have reached a situation where Help to Buy hasn't achieved what it was launched for.”
London Money mortgage adviser Martin Foad says: “I have helped two clients this year with the scheme. Both wouldn't have been able to buy houses without it.
“Can it be changed or revamped? Absolutely. It is helping some people but it is missing others because it is just scratching the surface.”
Foad says the London upper LTV limit of 40 per cent should be extended to other parts of the country that also face affordability issues.
He adds: “They could also look at increasing that to look at 50 or even 60 per cent.”
London & Country Mortgages associate director David Hollingworth says the scheme does help first and second-time buyers, and that it lets users afford the house they want without overstretching their incomes.
But he also says London weighting could be applied to other parts of the country.
He says: “There will be lots of people in and around the south of England that will be able to make use of a larger equity loan. We shouldn't rule that out. There is no lack of appetite to build on the success of Help to Buy as it continues to evolve.”
South Coast Mortgage Services director Gareth Davies says Help to Buy has helped a number of people get a house they would not have otherwise been able to buy.
He admits the 13 lenders currently on the scheme do not represent ideal consumer choice, but he argues this is still enough to provide competitive deals to consumers.
But he believes lenders and Help to Buy agents need to communicate with customers more effectively about what happens when they need to remortgage.
He says: “One downside is the remortgage side. There is a lack of communication about what options people have when it comes to remortgaging, and whether they can use the Help to Buy scheme or not.”
Fyfe argues the recent bad press is unlikely to cause lasting damage to the reputation of Help to Buy.
He says: “I don't believe Help to Buy will have taken a hit from the people who are typically the ones using the scheme. People reading the financial broadsheets will realise there is a fly in the process, but I don't think the man or woman in the street will be negatively impacted.”
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The FCA has set out the standards Pension Wise staff should be expected to meet when giving guidance to people considering selling their annuity.
The consultation paper, released today, follows the Government's move to extend access to Pension Wise to those thinking about selling their annuity when the secondary annuity market is introduced in April 2017.
The regulator has set out proposals for the kind of knowledge it expects Pension Wise workers to have on the secondary annuity market.
This includes: the tax implications of selling an annuity, the details of when advice is required, and the circumstances when a consumer might need further specialist help.
The FCA is also proposing to set out in the standards what a guidance session on selling an annuity should cover.
The paper also proposes changes to the standards reflecting how Pension Wise is now being used by consumers and also how the service has changed since it was set up.
Those proposals are:
These changes would apply to all Pension Wise workers, not just those giving guidance on selling annuities.
The consultation closes on 4 October.
The move comes as Hargreaves Lansdown has decided it will not be operating a broking service for secondary annuities, given the risks the market poses.
It is considering whether or not to offer an advisory service on secondary annuities.
Money Marketing reported Hargreaves' concerns about the cash for annuities market earlier this year.
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This week I am going to continue my detailed look at the salary versus dividend versus pension conundrum I started before the summer break. When considering the available options there is no real substitute for number crunching once the principles are understood. What follows are some examples applying the principles I discussed in the past couple of articles on this most important subject.
Example one shows a one-person company wanting to keep income within the basic rate band, with no employment allowance available.
Table 1.1 shows the dividend benefits from both the £5,000 dividend allowance and the £2,940 of unused personal allowance. Suffering 20 per cent corporation tax on the dividend is better than the position for salary that bears no income tax, but 25.8 per cent employer/employee National Insurance contributions, of which only the employer's is tax-relieved. The extra net income comes with a greater slice of the profit. If the gross profit is kept the same for salary and dividend, table 1.2 is applicable.
Example two shows a one-person and single other employee company wanting to keep income within the basic rate band, with at least £2,888 of income covered by employment allowance.
The bottom line in table 2.1 is £352.80 less than in table 1.1 but the gross profit cost is £735 lower because an extra £2,940 has been extracted as employee NIC-able salary rather than dividend, thereby avoiding any corporation tax charge. If we repeat the calculation with the same gross profit as the salary only option, the results in table 2.2 are applicable.
Example three shows a one-person company wanting to keep income under £50,000 child benefit tax charge level, with no employment allowance available.
Again, the dividend route absorbs more (£4,704.46) gross profit, which boosts the resulting net income (by £9,232.80). If at least £2,888 of income is covered by the employment allowance then, as in table 2.1, there would be a cut of £735 in the gross profit cost for the salary and dividend option, and a corresponding reduction in net benefit of £352.80 due to employee's NICs. I will look at a few more important examples next week.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn
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Standard Life head of adviser engagement Ian Mobley has passed away following a cancer diagnosis last year.
He passed away on 21 August, aged 52.
During his eight years at Standard Life he held a number of positions working with advisers to help build their advice propositions with clients.
Colleagues and advisers knew him for his technical knowledge and understanding of the market, and his self-deprecating presentation style.
His career in pensions and investments spanned more than 25 years, starting as an adviser at Endsleigh Insurance, before joining Friends Provident and then ultimately Standard Life in 2008.
He also worked on secondment as head of business development with Threesixty in 2013.
Threesixty managing director Phil Young says: “Ian was much loved during his time at Threesixty. He was an honest and generous man, with an encyclopaedic knowledge of music.”
Standard Life head of adviser and wealth propositions David Tiller says: “Ian was a passionate advocate of financial advice, helping advisers deliver better results for countless clients through his training and insight.”
Donations can be made to The Brain Tumour Charity or Christies Manchester.
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Advisers have warned a spate of strikes at providers risks consumer detriment and will only add to already poor service.
Prudential staff in Reading began industrial action yesterday over plans to move 81 annuity-related roles to Mumbai.
Unite members voted for industrial action last week, which will see employees “not co-operate with or undertake any work” related to Project Jupiter, the internal name for the offshore move.
The roles being moved relate to servicing annuities, bereavement, and tax, power of attorney and bankruptcy enquiries.
Pru was among the firms hit by an earlier two-day strike by Capita in July, alongside Aviva and Royal London.
Staff at Legal & General also backed industrial action earlier this year over the closure of its flagship Kingswood headquarters in 2018.
Page Russell director Tim Page says: “With some of these companies the response times are so bad that the odd day here or there on top of the lead times might not make much difference.
“If you are looking to set up an annuity it can be a nervous time for clients. If it increases the time for that income to start then it could cause extra distress to those clients at a nerve-wracking time.”
Yellowtail Financial Planning managing director Dennis Hall says: “We are more concerned with the overall state of service. Advisers have known for several years that service standards have been slipping constantly and they don't seem to be getting better.
“Somewhere along the line the staff, who are getting it from all sides, clearly feel this is the only thing they can do.”
Investment Quorum chief executive Lee Robertson says: “It is not mission-critical, but it is annoying. Life companies very often are not that communicative, quick or accurate anyway, so anything that makes that worse is not good news.”
Pilot Financial Planning managing director Ian Thomas says: “I respect everyone's right to withdraw their labour. But it is a sign that all is not well at these organisations in general.”
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