2013 will see the world of financial services change – again

In January 2013 the regulations under which financial advisers work will change. The change, known as the Retail Distribution Review (RDR) will mean four fundamental differences to financial advisers:

• Commissions on new products will be banned, with the exception of insurance
• Advisers must have a higher level of qualification to practise, known as Diploma level
• Firms must have significantly higher reserves to fund possible complaints
• Firms must decide to be independent or restricted

The ban on commissions is well overdue, and very welcome, as is the increase in qualification level and the increase in reserves required. The issue on restricted or independent is more contentious, with most advisers being confused by the new rules.

Currently, an adviser is either independent, tied or multi-tied. This means they have access to the whole market if independent; or work for a single company (for example an adviser for NatWest or St James’s Place) and only sell their products; or are linked to a number of companies.

The main issue going forward is that you will be restricted if you do not offer all forms of financial advice. For example, if you only do investment planning and not tax planning, then you can be restricted. To be independent, the future costs look as though they will rise substantially as additional training is required, additional technology is needed, and professional indemnity costs will increase.

A recent survey by NMG suggests that 80% of advisers will be restricted. This will generally be bad news for consumers, and is something that the FSA didn’t seem to take into account.

Going forward, the advice to clients is clear. Use us for all of your advice needs. We have always been qualified significantly above the new minimum level; have always charged fees; have more reserves than required by the regulator; are independent, and will continue to be going forward.

HSBC closes its tied advice serviceThe changes noted above are starting to have an impact on most of those giving advice, including the banks. Last month saw HSBC announce that it will close its tied advice service, with the loss of 600 jobs.

Last year Barclays Bank closed its advice division in anticipation of the change of rules, with some 2,000 advisers losing their jobs. It remains to be seen how this will actually affect the UK consumer when access to advice reduces as businesses realise they can not function under the new regulations.

Has Which? been reading these updates?

The consumer body Which?, last month set out 13 different products that consumers should steer clear of. From the list, absolute return funds were mentioned as a product that was not achieving its aims.

An absolute return fund attempts to produce positive returns whatever is happening around the world. A great idea, but the problem is that the idea lacks results in the real world. As we have pointed out several times before, we can see no reason why you would use these funds. They look simple, but are in reality incredibly complicated because they use derivatives to “bet” on market movements. As we all know, there is only one winner when betting is involved, and that’s the house.

While we don’t always see eye to eye with Which?, it’s good to see they are in line with our thinking.

HMRC wins

HMRC has won a landmark case which will significantly change the way that tax mitigation is dealt with in the future.

Last month HMRC won a court battle to stop an investment partnership from gaining £117m in tax relief.

The Eclipse 35 partnership is a firm that focused on obtaining tax relief for its members. And this was the main reason why they lost the case. The company was set up to take money from investors. Investors’ money was then used as a deposit to borrow more money. For example, if you invested £100, then £900 would be borrowed. You then had £1,000 to be invested of which only £100 was yours. You would be liable for the interest on the £900. However, the £1,000 became invested in a “qualifying” film partnership.

In the UK, film partnerships benefit from tax relief. This is to encourage our own film industry, and without it films such as The King’s Speech would never be made. It means that if you invest in a film, you can obtain tax relief. The idea is that by investing £100 in a film, if you paid tax at 20%, then you could claim back the 20% tax, effectively investing without the payment of tax. This is how the scheme is meant to work in simple terms (it is of course much more complicated than this, but this gets across the principle).

In this case, however, the loan was used to bump up tax relief. Because you get tax relief on the amount you invest, not the amount you put in, tax relief could be increased. In our example, the initial £100 led to £1,000 being invested. If you were a higher rate tax payer, this meant £400 of tax relief. That’s £400 of tax relief on a £100 investment (less fees and a few other bits and pieces, not least commission!). What a great deal: put in £100 and get £400 back.

The money was not actually used to finance a film, but to rent a film from Disney and then lease it back. In this way Disney received a large lump sum, and paid rentals on the film as income came in. The investors didn’t really care if any money was made, so long as they got their tax relief. An insurance was also built into the scheme so that if the money wasn’t made back, the loan would be paid off.

HMRC won because they said the company was specifically set up to avoid tax, not to fund films – and they won.

You will have seen in the press a great deal of coverage of this case where many famous and wealthy people were invested in the company.

The important point here is that it is all about how fairly you are trying to mitigate tax. Transferring money from a husband to a wife to take account of the personal allowance is sensible planning, but to get £400 back from the taxman from a £100 investment is just wrong.

Tax penalties change

From this tax year the penalties on no or late submission of tax returns change. From now on, late submission of a return will carry a penalty of £100. This was previously the case, but it would be waived if no tax was payable. From now on the penalty is payable even if no tax is payable. On top of that, an additional £10 per day will be added for each day that the return is late, to a maximum of £900. There will also be an additional charge of 5% of the tax paid. In exceptional circumstances (and there is no definition of this) the penalty can be 100%. Of course, interest on the unpaid tax will also be due at 3%.

I’m sure every company in the country would be happy to have these terms for late payment. But do you think a company could get away with charging a penalty even if no invoice was due? Probably not!

Annuities – will anyone use them?

The popularity of annuities has fallen in recent years. An annuity is the guaranteed income that can be purchased with a pension fund when it matures. However, as annuity rates are linked to interest rates, via gilt rates, their low returns have meant that they have lost popularity. The introduction of the “drawdown account” by the coalition government has further reduced their popularity.

From December this year, new EEC legislation means that on non-occupation pensions, a unisex rate must be used. At present, the annuity rate is based upon your life expectancy. Going forward, it will be based on a unisex age! Strangely, occupational pensions can still use your actual age!

The use of enhanced annuities is still, however, a very good way to secure good levels of income, yet still only accounts for about 2% of all annuities. Even the smallest medical problem can increase annuity rates, so it’s always important to check.

If you, or someone you know, is taking the benefit of a pension soon, please call us and we will see if you can obtain a better rate.

Should you transfer now?

Many people have old pension schemes from an employer that they used to work with. Very often these are final salary pension schemes.

However, many companies want to close these schemes because they cost a fortune to run and are listed as a debt on their balance sheet following the change in legislation known as FRS 17.

Therefore, many final salary pension schemes are offering incentives to leave them. In many cases that we have looked at, the old employer is offering as much as 100% to leave the scheme. The problem is that the FSA has become very unhappy about this as they see it that people are increasing the benefits from their pension scheme. The FSA issued a consultation paper (CP12/4) in which it proposes to change assumptions built into the transfer calculations, which will have the effect of reducing these benefits.

Therefore, if you have an old occupational pension, we strongly suggest you check to see if it should be transferred elsewhere, and to take up any pension benefits sooner rather than later.

Book of the Month

Instead of a book of the month, this month we have a course of the month.

Charlie has just come back from 4 days on the Tony Robbins workshop Unleash The Power Within, that amongst other things included doing a fire walk across 1000 degree hot coals.

Tony will be repeating this event next May, and Charlie cannot recommend this highly enough.

Whether you are business owners, or someone that wants more clarity on where life is taking you and on what you want out of it, we think you will find this invaluable