Why is Defined Benefit pension transfer advice so expensive?

A team of financial experts meeting to discuss Defined Benefit pension transfer advice

It is a legal requirement for a member of a Defined Benefit (DB) pension scheme, with a Cash Equivalent Transfer Value (CETV) of over £30,000 to obtain advice from a qualified adviser authorised by the Financial Conduct Authority (FCA) to advise on pension transfers. It is not uncommon for members to find it difficult to access this specialist advice for numerous reasons.

  1. The FCA do not like DB transfers and specifically state that they expect advisers operating in this area to start from the position that a pension transfer is unlikely to be suitable for their client.1 The FCA’s research published in December 2018 stated their findings that in their opinion, less than 50% of pension transfer advice given was suitable
    Effect – Advisers are nervous about operating in an area under such intense scrutiny from their regulator that they’ve made it clear they are unhappy with. Does any professional really want to irritate their regulator unnecessarily?
  2. Claims Management Companies (CMC) make life difficult. There are a large number of CMC’s (now regulated by the FCA) that have been looking for new lines of business to pursue as replacement for PPI claims and IFAs might be seen as easy targets. In light of the FCA’s findings noted above, IFAs clients are being directly targeted by CMCs ambulance chasing potentially very lucrative cases to the detriment of the IFA firm. Dealing with complaints is a time consuming, costly and, not to mention, stressful process which will undoubtedly end up being adjudicated by the Financial Ombudsman Service (FOS) because the IFA firm’s Professional Indemnity (PI) insurer will not want to admit liability and settle the case.
    Effect – Advisers still operating in the sector are becoming very particular about the types of case they will take on in terms of size of transfer, age of client and intended investment strategy amongst other things.
  3. PI Insurers are putting their premiums up exponentially. In response to the FCA’s position and the inherent risk of operating in the pension transfer sector, advisory firms are seeing their renewal quotations for PI insurance (which is mandatory for FCA regulated firms) come in at multiples of previous years, with increased excesses and additional restrictive provisions, in response to the market conditions and the increased likelihood of there being a claim and subsequent pay-out. With DB transfers often being for substantial amounts and the maximum compensation on FOS claims being increased to £350,000, PI insurer are understandably factoring that risk into the premiums quoted. Furthermore, due to the long-term risk posed by each individual pension transfer advised upon, each case will increase the PI premium paid by the firm for at least the next 6 years.
    Effect – IFA firms are revaluating the viability of operating in the pension transfer sector in light of the increased cost burden. Many firms are now choosing not to advise on pension transfers.
  4. Costs of operating are high. DB transfers are a lot of work in addition to the risks involved, take a long time and require a lot of administrative input.
    Effect – Advisers have to set their prices for giving advice at a level that makes the work commercially viable as a minimum if not attractive enough for them to be interested. Clients are often not keen to pay the prices dictated by the market and often see the fees as merely a tax imposed on a transaction they wish to undertake.
  5. DB Transfer specialists are busy. Due to the number of firms operating in the DB transfer sector shrinking, demand is naturally increasing. This also compounds the effect of more risk being concentrated in fewer firms and therefore increasing exposure for PI insurers.
    Effect – The price of giving and protecting DB transfer advice is increasing while simultaneously encouraging the advisory market to become more selective about the clients it will work with.

There are other factors that might affect the ability of DB scheme members to obtain pension transfer advice but those are the main ones we have identified. The people we come across most affected by this advice squeeze are:

  • The relatively young – IFA firms often won’t even entertain advising on a transfer before the age of 50, even age 55.
  • Modest CETV – It is hard to find an IFA that will give advice on a case less than £100,000 and many not considering those below £200,000.
  • The cost conscious – most IFAs charge a percentage fee scale to reflect the increased risk the larger the case is. 3% of CETV is a common starting point (although 5% is not unheard of) which often raises eyebrows to those unfamiliar with the process especially those who see the advice fee as merely a tax on exercising their wishes.
  • The adventurous – IFA firms are often nervous about advising clients going into non-FCA regulated pensions and/or investments. If it is the intention of the client to transfer to a Small Self-Administered Scheme (SSAS) and then to invest in property, both of those are non-regulated and may not be something an advisory firm will want to be associated with.
  • Transactional clients – many IFAs are only looking to work with clients over the long term and are therefore unwilling to provide DB transfer advice on a one-off basis.

Despite all of the above factors and difficulties in the DB transfer advice market we maintain a dedicated panel of specialist IFAs who are able to deal with these issues for our clients.

To discuss this further please email us on info@indigotrustees.co.uk

1 https://www.fca.org.uk/publications/multi-firm-reviews/defined-benefit-pension-transfers

Small Self-Administered Schemes (SSAS): An independent guide to costs and pricing

A young lady at home trying to calculate the costs and pricing for a small self-administered scheme SSAS

We understand that setting up a SSAS is a huge decision and often financial milestone in somebody’s life and the prospect may be a little daunting, especially if it is on one of the first steps in taking control of their finances. Our objective is to equip you, by giving you honest and reliable information regarding SSAS pensions, to make this decision with confidence.

As you consider setting up a SSAS, this guide to costs will help you discover whether it is a cost-effective course of action that you will derive benefit from. SSAS pensions are not for everyone and there is a broad spectrum of different offerings out there to choose from.

Costs of SSAS: THE first thing to consider

There is a lot of noise around SSAS’s recently and demand is rising along with awareness. The first thing to ask is:

Do I need a SSAS?

A SSAS, while being very flexible tools for wealth creation and preservation, is a complex, costly beast to run and should not be created without consideration and comparison to other types of pension. There are numerous situations where a SSAS is unlikely to be beneficial, such as:

  1. You are not an employer – A SSAS is an occupational pension scheme and must be established by a bona fide employer, typically a limited company or limited liability partnership.
  2. You are just starting a pension – unless you have a sizeable amount of money to contribute to a pension, the costs of a SSAS are likely to be prohibitive and negate the tax advantages of having a pension in the first place.
  3. You already have a Self-Invested Personal Pension (SIPP)- SIPPs already have very wide powers of investment and can invest in all of the same asset classes as a SSAS. Approach your SIPP trustee to discuss your plans. They may be able to support your proposed investment activities.
  4. You don’t need the features of a SSAS – going to the trouble and expense of setting up a SSAS to merely invest in mutual funds etc is the equivalent of owning a Ferrari and leaving it in the garage.
  5. You live outside of the UK – put simply, there are less restrictive ways to invest in the UK than using a SSAS.
  6. You are too close to age 75- it is very difficult to fund a SSAS quickly enough to make it worthwhile beyond age 70. As with 5), there are different tools available if Inheritance Tax (IHT) planning is the main objective.
  7. You like things done for you – unless you want to be directly involved in the investment decision making process there is a little point in taking out a SSAS.

In most of the above scenarios another type of pension will likely be more suitable and better value. If you’ve decided that a SSAS is the best course of action for you, the next thing to decide is what service you require.

What do SSAS providers offer?

The SSAS industry comprises a diverse range of service providers from consultants operating out of their spare rooms through to global financial services powerhouses. This means that the offerings of the providers vary widely but they can be split down into 3 main services:

  1. Scheme Administrator – Under section 270 of the Finance Act 2004, the Scheme Administrator is responsible for the tax affairs of the scheme and for ensuring that it complies with its tax obligations.
    The scheme administrator’s duties include:
    • registering the pension scheme with HMRC;
    • operating tax relief on contributions under the relief at source system;
    • reporting events relating to the scheme and the scheme administrator to HMRC;
    • making returns of information to HMRC;
    • providing information to scheme members, and others, regarding the lifetime allowance, benefits and transfers.

      Some of the above duties may be delegated to a practitioner (see below) but the Scheme Administrator is liable for the payment of ant tax charges that may apply.
  2. Trustee – In addition to carrying out the duties of the Scheme Administrator, a professional SSAS trustee will provide formal support in the day to day running of the scheme along with being a co-signatory to the scheme bank account in conjunction with the member trustees. This provides an additional layer of oversight and guidance, giving more comfort to the member trustees.
  3. Practitioner – a SSAS practitioner will typically undertake most of the work of a Scheme Administrator but their role is limited to the tasks delegated to them which leaves the trustees free to pursue their own investment objectives. The reality is that some people like this freedom and are comfortable with it, others prefer the additional comfort of having a Scheme Administrator and/or professional trustee involved.

What do these services cost?

There are two main charges that typically apply to all SSASs. These are:

  1. Initial set up (or takeover) fee; and
  2. Annual fee

In addition to the above, there is a great variety of approaches to charging with some providers having low, headline annual fees and then adding fees for every individual scheme interaction and other who charge larger, more inclusive fees that provide a more comprehensive service as standard.

We maintain a comprehensive schedule of the fees of 25+ providers. Here is a range of costs for common elements of a SSAS:

  1. Scheme set up – from £500 to £2995
  2. Annual fee – from £500 to 1% of SSAS fund value (no cap)
  3. Property purchase – from minimum £275 to £1000+ (time costed)
  4. Annual property fee – from £0 to £1275
  5. Property disposal – from £250 to £600
  6. Loan advance – from £300 to £1000
  7. Annual loan fee – from £150 to £500

There is a myriad of other charges that providers levy in different scenarios and it would be impractical to list them all here. The above are a list that we find to be common for most of our clients and people we meet.

Typical lifetime cost of a SSAS

It is difficult to determine the lifetime of a SSAS due to there being so many variables regarding age at establishment and longevity of the members, However, a comparison of charges over 10 years should give a fair reflection of the total costs and allow for the amortisation of the set up costs over a reasonable period.

Year Total cost Cost analysis
1 £3,362-50 £1500 set up, £1250 annual fee, £612-50 property purchase
2 £1887-50 £1250 annual fee, £612-50 property annual fee
3 £1887-50 £1250 annual fee, £612-50 property annual fee
4 £1887-50 £1250 annual fee, £612-50 property annual fee
5 £2537-50 £1250 annual fee, £612-50 property purchase, £650 loan advance
6 £2212-50 £1250 annual fee, £612-50 property purchase, £325 loan annual
7 £2212-50 £1250 annual fee, £612-50 property purchase, £325 loan annual
8 £2212-50 £1250 annual fee, £612-50 property purchase, £325 loan annual
9 £2212-50 £1250 annual fee, £612-50 property purchase, £325 loan annual
10 £1887-50 £1250 annual fee, £612-50 property annual fee
Total £22,300  

NOTE: This example uses the median charges across all providers included in the research panel based upon a £200,000 pension fund. VAT is not included in these figures.

Things to look out for when considering SSAS charges

Due to the non-standard and unregulated nature of SSAS charging, it can be difficult for the layperson to compare likely set up and running costs of a SSAS and which can lead to hidden costs at a later date. Here are a few traps to look out for:

  1. Annual member fees – some providers may disclose an annual running cost for the scheme which may appear competitive and then have an additional annual fee per member. This can have a significant impact on the total fee charged.
  2. Annual property fees – while it is still more common that not to charge an annual fee in relation a property owned by the SSAS, there are providers out there who don’t.
  3. Annual loan fees – not all providers charge annual fees for loans but for the unwary these can make a serious dent (or even wipe out) returns on interest received if loans extend unexpectedly.
  4. Bank accounts – it is not uncommon for SSAS trustees to gravitate toward their business bankers to set up bank accounts for the scheme but many SSAS providers have their preferred relationships and will charge to use other banks.
  5. Transfers in – some providers charge for pension transfers to the SSAS, some don’t and some allow a specified number.
  6. Time-costed work – some tasks a SSAS provider might be required to undertake will be billed on a time-costed basis. It is worth checking up front and trying to agree a fixed fee to avoid any nasty surprises at a later date.
  7. Non-standard investment charge – Many providers charge a fee to undertake due diligence on a non-standard investment such as a loan note. This charge can be levied on you even if the provider has already done due diligence on the same investment for another client.

Other Considerations

Costs and charges are an important consideration when looking at setting up a SSAS but clearly are not the only points to consider. You should work out what type of transactions you want your SSAS to undertake and if they are complicated, numerous, non-standard or out of the ordinary you should discuss your requirements directly with a Trustee, Administrator or Practitioner of a couple of providers to get a feeling of who understands your requirements and who you will be comfortable working with over many years to come.

For more details on the information contained in this article please email us at info@indigotrustees.co.uk

Pension Freedom and Why YOU Shouldn’t Take It

A lady holding a silver ballpoint pen about to sign up to her pension

Pension freedoms introduced in 2015 have fuelled a rush to buy-to-let investment using previously inaccessible funds. While this may appear laudable to many, it often has catastrophic tax consequences with tens of billions being lost and further billions in latent Inheritance Tax (IHT) waiting to manifest. In this piece we will identify the issues and address them.

What happened in 2015?

In 2015, legislation was passed in the Pension Schemes act allowing those aged 55 or over to access their pension “flexibly”. This means that upon attaining age 55 members of defined contribution pension schemes can draw a 25% tax-free lump sum from their fund and the balance can be withdrawn as income – as frequently or infrequently as desired – or even in one lump sum.

It seems that there are an awful lot of people who trust their bank more than their pension provider with nearly half (48%) cashing in their pension to put the money on deposit.

This is insanity.

The problem with taking an entire pension fund as a lump sum is that the majority of it is taxable and this will likely push the recipient in to the higher (or even additional) rate tax bracket. So that’s the first spanking – income tax.

Tax payable on lump sum pension fund withdrawal 2020/21

Pension fund value £200,000
Earnings £30,000 £50,000 £100,000
Total tax paid £66,000 £75,000 £97,500
Total lump sum after tax £137,500 £132,500 £130,000
Tax paid @ 20% £7,500 £7,500 £7,500
Tax paid @ 40% £45,000 £45,000 £45,000
Tax paid @ 45% £13,500 £22,500 £45,000

Next, the funds have now moved into the recipient’s estate for IHT purposes. Should they be unfortunate enough to be run over by the proverbial No. 9 bus, the estate now stands to lose 40% of the remaining fund in IHT.

Finally, as is common in the previously stated statistic, rates of return on deposit are negligible and generally less than inflation so the money is being stolen every day by this silent, invisible thief that no vault can protect it from.

The rise of the retiree landlord

So, what are the other half of those that encash doing with their money if not stashing it in the bank? Well, a significant chunk (29%) are withdrawing to purchase buy-to-let property. This is admirable – people taking control of their personal finances always is – but still folly. All of the tax consequences previously stated apply and the IHT problem then becomes further compounded by the addition of properties to the estate.

How would we do it?

Keeping in mind that the reason nearly everybody takes out a pension in the first place is to provide an income in later life and also that the reason people are encashing their pensions and paying huge amounts of tax is to buy rental property, it seems nonsensical not to combine the two.

It is a commonly held misconception that pension schemes cannot invest in residential property. There are quite clear exemptions, in both primary legislation and HMRC guidance, to the circumstances in which an investment regulated pension scheme can hold residential property. One of these exemptions involves investments made through a Genuinely Diverse Commercial Vehicle (GDCV).

The reasons for investing via a GDCV are clear:

  1. No need to encash pension fund and pay tax
  2. Ability to buy and hold residential property
  3. Rental income received free of tax by the pension
  4. Disposals of property are free of Capital Gains Tax (CGT)
  5. All property is out of the estate for IHT purposes
  6. If over 55, rental income received by the scheme can be drawn as and when desired
Pension fund value £200,000
Total Investable £137,500 £200,000
Leverage @ 75% LTV £412,500 £600,000
Total Invested £550,000 £800,000
Gross Yield @ 8% £44,000 £64,000
Increased yield using GDCV 45%
IHT exposure £55,000 Nil

Clearly by not encashing to invest and retaining the tax benefits of the pension scheme by using a GDCV to hold the property, the improvement on the overall financial position is staggering.

For further detail on the information contained in this article please email info@indigotrustees.co.uk

Purchase of mixed-use property

Mixed-use property purchase options from Indigo Trustees

Our client owned a successful recruitment business and was looking for their own offices to move their growing team into. They found a freehold property with vacant possession in the locality that consisted of a retail shopfront with offices behind and a residential flat above. Our client had a pension from their previous employment but hadn’t been contributing in recent years. They had been discussing the prospect of setting-up a SSAS for the business for some time with the intention to purchase the property this way but had been advised of the complexities of residential property in a pension and wasn’t sure of its viability in this instance.

The property value was £325,000 and the surveyors report split the value at £200,000 for the commercial element and £125,00 for the residential.

As things stood there would be prohibitive tax charges if they set up a SSAS and purchased the property due to the residential element. The value of the investment in the residential part would have been classed as an unauthorised payment and taxed at up to 55%.

The challenge in this case was that freehold titles can only be split with properties adjacent to the subject property in England and Wales. Flats (or indeed anything above or below) are caught by this.

In this case Indigo was able to come up with a practical solution to a complex situation which entailed creating a leasehold interest within the existing freehold title. The steps that were followed are:

  1. Offer made to vendor to purchase the property for £325,000
  2. Valuation carried out by surveyor confirming the value of the intended leasehold and commercial element
  3. A SSAS was set-up and existing pension transferred into it
  4. The SSAS trustees formally appointed a solicitor to act for them in the purchase:
    • Legal work commenced to transfer freehold title
    • Solicitor simultaneously created a new leasehold title on the commercial part of the property.
    • The freehold transferred to the client and the leasehold for the commercial to their SSAS
    • The SSAS released £200,000 and the client personally paid £125,000 to the solicitor as consideration
    • The vendor received £325,000 to complete the purchase of freehold title

This neatly dealt with all of the challenges presented by the scenario leaving the SSAS with no interest in the residential element and therefore no nasty tax charges and the client in control with options over what can be done in the future i.e. convert the residential element into commercial as their team continued to grow.