Why are you asking me things outside what I want?

Why are you asking me things outside what I want?

When we sit down with a new client who comes to us with a specific request, there is almost always a sharp intake of breath when we ask them to complete a financial questionnaire with us. The conversation then usually follows the form, “why do you want to know X, when I only want you to do Y?”

All new clients expect to treat each financial area as a separate closed box, compartmentalising pensions, investments, protection, savings, investment planning and sometimes not even associating multiple pensions providers together as a common issue.

As advisers, the Financial Conduct Authority expect us to offer holistic advice in the best interests of the client; although the client can ask us to confine our advice to one field or another, we have to be aware of any likely interactions, positive or negative, that may occur. Sometimes, these need to be flagged with the client before we proceed, as the consequences can be dire.

At the moment we are getting a number of enquiries about pension freedoms and releasing funds from old schemes, once the owners reach 55 years old. Let us assume that you have a pension of £50,000 that you were going to take as a lump sum tomorrow less applicable taxation. Here are some of the consequences and relevant circumstances:

  • A fund of £50,000 will be worth in your hand about £44,620 if you had no other income in the tax year 2015/16 or as little as £33,125 if you were already a higher rate taxpayer. Consequently we need to know how much taxable income you have from all sources.
  • What you are going to do with the cash has a bearing on its value to you. If you had £40,000 of credit card debt at 25% APR, clearing it would be worth £10,000 a year to you. If all you were going to do was to put it into cash deposit accounts, if might be worth 2% per annum, say £800 per year on £40,000. Clearing a mortgage would be worth proportionally more, as although the %APRs can be quite low, the term of the loan can be long. As part of the advice process, we need to know what you will do with the money, to see if it working as well as it can for you.
  • If the £50,000 was all the pension you had in the world and you were about to claim state benefits, taking it all as cash and buying luxuries, like a Lamborghini, could find you without benefits as you may be deemed deliberately depriving yourself of income. Paying down debt or purchasing an annuity are the anticipated default positions, so moving away from them may cause difficulties in the future.
  • Many older pension schemes have terms and associated benefits that make taking cash much less advantageous than the originally intended benefit. Guaranteed fund values and guaranteed annuity rates are not uncommon in older policies. Consequently we need to know the details of the pensions you hold and how they fit into your retirement income expectations in the future.
  • Funds held in a pension scheme before age 75 have tax-privileged status when passed to spouses or direct descendants. Taking the funds out of the pension to pass to relatives can disadvantage them compared to leaving it all alone. Consequently we could do with knowing how much you would like to leave when you are gone and to whom.

For some people, asking about taking their pension as cash will be the first time they have actively sought financial advice and they have no field of reference to sort poor advice from the merely adequate or the great.

As a minimum, the adviser should collect details about your income and expenditure, your likely income in retirement and your earnings between now and a likely full retirement date. Your personal taxation situation will have a significant bearing on how best to take the money, as taking it all on one day could cost you income tax, when a gradual withdrawal might avoid tax altogether.

As a wider issue, compartmentalising your assets can work against you when investment fees are calculated with volume discounts; putting your ISAs, bonds, shares and pensions on the same investment platform could save a great deal on charges, as well as making following your investment returns as complicated as a press of a button.

IFAs are often the only professionals who have to take a wider view of someone’s affairs; your bank manager, solicitor and accountant will concentrate on their own areas and pay a limited amount of attention to the wider picture. Taking your pension as a lump sum now could be the best thing you ever did or the first part of a larger disaster; only time will tell.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.