So what’s the difference between financial guidance and financial advice?

The aim of this article is to explain the difference between consumer guidance and consumer advice within the financial services market. The source of this information is the Financial Conduct Authority (FCA).

It is important that individuals understand the subtle but significant difference between the two. In certain circumstances it is a legal requirement to take financial advice, although a starting point in any financial planning decision may well be to initial take financial guidance and then, if necessary, financial advice.

“Guidance” 

• Guidance is an impartial service which will help you to identify your options and narrow down your choices but will not tell you what to do or which product to buy; the decision is yours. 

• Providers of guidance are responsible for the accuracy and quality of the information they provide but not for any decision you make based on it.

• Guidance is free unless your provider clearly tells you otherwise.

• It will recommend what you should do.

Pensionwise, the Pension Advisory Service, the Money Advice Service and the Citizens Advice Bureau are institutions that are only able to provide GUIDANCE.

“Advice” 

• Advice will recommend a specific product or course of action for you to take given your circumstances and financial goals. This will be personal to you, based on information you provide. 

• Advice will be provided by a qualified and regulated individual or online by a regulated organisation. 

• Providers of advice are responsible and liable for the accuracy, quality and suitability of the recommendation that they make and you are protected by law. 

• You will usually pay a fee for advice. Fees will be disclosed before you are asked to commit yourself. It will suggest what you could do. It will recommend what you should do.

There's no such thing as free pension advice

There is no such thing as free pensions advice.

Almost five years on from when the Government introduced the new pension freedom legislation and it is still difficult to know how things are going.

This has meant that anyone who wants to blame the freedoms for consumer harm can do so.

Last month, the Financial Times published a story based on a freedom of information request about those who had cashed in final salary pensions since 2015.

It found concerns about 80 per cent of the companies providing bad advice in this £80bn market. As a result, the Financial Conduct Authority planned to write to 1,841 financial advisers about potential harm in their advice. 

The estimable Mick McAteer, formerly of Which? and an ex-FCA board member, demanded a full-scale inquiry.

It came in the same month that the FCA admitted too much transfer advice was not at an acceptable standard.

The FCA’s intervention, in its letter to chief executives of financial advice businesses, should be taken with deadly seriousness.

It is clear from the tone of that missive that the FCA has advice companies in its sight – just at a time when the burden of regulation is already at its most choking.

It was interesting to see it positively demanding advisers turn in criminal or rogue businesses – a call I have been making for some time now.

Let’s hope that means good advisers turning the table on introducers and ending all ties with them.

But what are we to make of all this in the context of the pension freedoms?

Are mis-sold pension transfers to blame; is it criminal activity or poor advice; is it reckless consumers; is it contingent fees; was it the fault of the media for cheerleading the death of the freedoms; or is it driven by trustees desperate to reduce their liabilities?

Sadly, it is impossible to know, even though 160,000 people could be affected. 

The key argument against the pension freedoms seemed to be that consumers are fundamentally too stupid to be able to make their own decisions. It is certainly true that most will underestimate their own longevity.

We were told that everyone would gamble their money; if anything, the tentative findings we have already had from the FCA show that people are not taking enough risk.

We know that lots of people have cashed in pots, but any evidence that this only applies to smaller pensions is scant.

It may be the case that many should be taking annuities, but we do not know for sure.

And it is certainly true that when the pension freedoms were launched, the industry was utterly unprepared. 

I have seen arguments for minimum income requirements before people can access the pension freedoms, or that some sectors of the economy could be barred.

All that would do is make freedom a right of the rich – and that is clearly not good.

The freedoms are a great act of consumer empowerment, but having launched them on the public, the Treasury and the FCA should now launch a study into their effects so that we have a full picture of how people are behaving and the advice companies are giving.

It would not be fair for advice companies to bear the brunt of increased scrutiny without greater evidence of what actually has happened since 2015.

Whoever the permanent boss of the FCA is, he or she should make a full assessment of the pension freedoms one of their top priorities.

Source: James Coney is money editor ofThe Times and The Sunday Times@

Taper allowance

Tapered annual allowance – threshold and adjusted income

So what is the tapered annual allowance?

Pension annual allowance (AA) is the annual limit on the amount of contributions paid to, or benefits accrued in, a pension scheme before the member has to pay tax.

Tapered annual allowance is lower than the standard annual allowance. This lower limit may apply to any member, based on their level of taxable income within the tax year.

Key points

• The tapered annual allowance was introduced from 6th April 2016.

• For the taper to apply, the limits on threshold income and adjusted income must both be exceeded.

• For every £2 of adjusted income over £150,000, an individual’s annual allowance is reduced by £1.

Why was the tapered annual allowance introduced

The government, in an attempt to control the cost of pensions tax relief and help make sure pensions tax relief is fair and affordable. So from tax year 2016/17, a reduced annual allowance may apply to all pension savings by or on behalf of a member, depending on their level of taxable income within the tax year.

On 6 April 2016 the government introduced the Tapered Annual Allowance for individuals with “threshold income” of over £110,000 AND "adjusted income" of over £150,000.

So what is threshold income?

Threshold income is one of two measures used to determine if a member has a tapered annual allowance limit.

Where an individual has a "threshold income" of £110,000 or less they cannot be subject to the tapered annual allowance and there is no requirement to calculate adjusted income.  If threshold income exceeds £110,000 there must be a calculation on the adjusted income to work out the amount of any tapered annual allowance.

For individuals with lower salaries who may have one off spikes in their employer pension contributions the threshold income measure helps to provide certainty . If the individual’s taxable net income is no more than £110,000 they will not normally be subject to the tapered annual allowance. Anti-avoidance rules will apply so that any salary sacrifice for pension savings set up on or after 9 July 2015 will be included in the threshold income calculation.

"Threshold Income" is broadly defined as ‘the individual’s net income for the year’. This will include all taxable income such as salary, bonus, pension income (including state pension), taxable element of redundancy payments, taxable social security payments, trading profits, income from property (rental income), dividend income, onshore and offshore bond gains, taxable payment from a Purchased Life Annuity, interest from savings accounts held with banks, building societies, NS&I and Credit Unions, interest distributions from authorised unit trusts and open-ended investment companies, profit on government or company bonds which are issued at a discount or repayable at a premium and income from certain alternative finance arrangements etc, less the amount of any taxable lump sum pension death benefits paid to the individual during the tax year that can be deducted from the threshold income.

What is adjusted income?

Adjusted income is the other of alternative measure used to determine if a member has a tapered annual allowance limit.

The ‘adjusted income’ definition adds in all employer pension contributions, to prevent individuals from avoiding the restriction by exchanging salary for employer contributions. For those in defined benefit or cash balance arrangements, the value of the employer contribution will be calculated using the annual allowance methodology. That is, the employer contribution will be the total pension input amount for the arrangement, less the monetary amount of any contributions made. 

How does the taper work

Where both the adjusted income and threshold income have been exceeded then the rate of reduction in the annual allowance is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000, down to a minimum tapered annual allowance of £10,000.

This results in an Annual Allowance of £40,000 for those with an adjusted income of less than £150,000; a reducing Annual Allowance for those with adjusted incomes between £150,000 and £210,000 and an Annual Allowance of £10,000 for those with an adjusted income over £210,000.

The Tapered Annual Allowance limits apply to both Defined Contribution and Defined Benefit pension input amounts. Although the value of "contributions" is easily identifiable within Defined Contribution type schemes, it is not as straightforward with Defined Benefit schemes. When assessing against the above limits it is the combined total of all pension "contributions" that need to be considered. In some circumstances deferred pensions may also count towards the calculation of "contributions".

Those subject to a Tapered Annual Allowance will still be able to carry forward unused allowance from previous tax years.

Source: Prudential

More ‘Daves’ than women running funds

More funds have a manager called David or Dave at the helm than a woman, research has shown.

According to figures from Morningstar, 108 UK-listed open-ended funds are run by managers named Dave or David — the equivalent of 7.2 per cent of the 1,496 funds in the market.

Meanwhile just 105 funds are run by female fund managers, also accounting for 7 per cent of all open-ended funds.

Other common names included Paul, with 87 funds having a man called Paul in charge, James (65 funds) and Nick (62 funds).

The most common female name among fund managers was Kate, at 12 funds, while Johanna and Katie both had 10.

Jason Hollands, managing director at Tilney Bestinvest, said the proportion of female managers was “embarrassingly low”, particularly compared with other professions such as law and accountancy. 

Ann Cairns, executive vice chairman of Mastercard and global co-chair of the 30% Club, a campaign group of chairpersons and CEOs taking action to increase gender diversity on boards and senior management teams, said: “This data is disappointing, but nothing new.

"Perhaps the biggest blocker to gender balance within the asset management industry is the perception that it is a male-dominated culture. 

The 30% Club’s Think Future Study found that financial services rated a lowly 12th on the list of career choices for female students, versus 4th on the list for male students."

Ms Cairns said it was "vital" more women were encouraged into asset management, noting internships and early exposure was key to encourage more women to enter the industry.

Emma Morgan, portfolio manager at Morningstar Investment Management Europe, agreed, adding it was a "great shame" the industry was missing out on a swathe of talented individuals.

Just yesterday (November 19) the Financial Conduct Authority published a damning report on how little progress had been made towards achieving gender diversity in the financial services industry.

The regulator warned diversity had remained "consistently low" at industry level, with a female quota of approximately 17 percent of FCA approved individuals.

Diversity is an issue featuring increasingly in the spotlight in the world of finance and several non-profit organisations are working on the problem. 

Campaign group 100 Women has recently launched a female fund manager visibility campaign and Gain, set up by fund manager Charlotte Yonge, aims at inspiring young women of sixth form age (typically aged 17 and 18) about a career in asset management.

Source: imogen.tew@ft.com

Money purchase annual allowance (MPAA)

The MPAA trap

This little known tax rules mean that pension savers could see their ability to save into a pension slashed by up to 90% if they draw money from the ‘wrong’ pension pot, according to new analysis by mutual insurer Royal London. 

Since the introduction of ‘pension freedoms’ in April 2015, savers aged 55 or above have been able to take money out of their pensions in ‘chunks’ rather than turn the whole pension pot into an income for life by buying an annuity. To prevent people from repeatedly taking money out, benefiting from tax free cash, and putting money back in again with the benefit of tax relief, HMRC introduced a limit on the amount people could put back in to pensions once they had started drawing taxable cash. 

This limit is known as the Money Purchase Annual Allowance (MPAA) and was originally set at £10,000 per year, but has since been cut to £4,000 per year. This compares with the standard annual allowance of £40,000. 

In general, someone taking money out of a ‘pot of money’ or ‘Defined Contribution’ pension is affected by the MPAA if they draw money out beyond the 25% tax-free lump sum. 

But there is a little known exception to this rule. Those who take everything out of a ‘trivially’ small pension pot under £10,000 do *not* trigger the MPAA. 

If an individual has two pensions and wants to withdraw less than £10,000, they should think seriously about cashing in a small pot in full rather than taking a partial withdrawal from a larger pot, as this avoids triggering the MPAA. As a result, they retain the ability to put up to £40,000 into a pension each year in future, rather than having it slashed to £4,000. 

Consider, for example, someone with two pension pots, one worth £4,000 and one worth £20,000. Suppose that they want to withdraw £9,000 (before tax). If they cash in the £4,000 pot in full and take just the 25% tax free lump sum out of the larger pot, they will not trigger the MPAA. But if they take the full £9,000 from the larger pot they will trigger the MPAA which will reduce by 90% their annual allowance going forward. 

Commenting, Steve Webb, Director of Policy at Royal London said: 

“Last year, over half a million people aged 55 or over made flexible withdrawals from their pension, and many of these withdrawals will have been for amounts under £10,000. If they emptied out a small pot then this will have had no impact on their future ability to save into a pension. But if, by mistake, they took the same amount as a partial withdrawal from a bigger pot, they risk triggering stringent HMRC limits on future pension saving. Those with more than one pension pot should consider very carefully the order in which they access these funds, especially if they may want to contribute into a pension in future”. 

Source: Royal London