What I learned about financial advice and pension freedoms

Today I found myself in a place I never though I would find myself – the offices of a firm of Independent Financial Advisers (IFA). I learned a fair amount about regulated financial advice, about regulation, about why I am having difficulty in getting hold of my own money. There’s a lesson in it for people at The Firm saving in AVCs. Like everything else on this blog it is opinion, not advice, if you want financial advice speak to an IFA. I personally found vouchedfor.co.uk easier to use than unbiased.co.uk, but your mileage may vary. I have a very specific and somewhat unusual request

How do I transfer the DC component of my works pension (in AVCs) into a SIPP so that I can front-run my main DB pension until NRA. That way I can avoid taking an actuarial reduction for drawing the main pension early

If you look up the glossary for AVC I say it’s like a SIPP for people in DB pension schemes. In terms of what it does, that’s right, but in terms of getting your hands on it early, that’s a maybe. More about that later, but bear in mind the difference means a lot of hurt and possibly a charge on the transfer. For small amounts below the personal allowance you may be able to dodge that (H/T DIY Investor) but the amount I am looking at is more that that. It isn’t quite six figures but it’s more than £30,000, which seems some FCA-mandated threshold where pension people start to jibber and start backing away as soon as they hear this is linked to a DB pension.

What did I learn about independent financial advice?

  1. It is there to protect you from yourself and making hasty stupid mistakes, not to teach you about finance. I learned diddly squat about finance.
  2. If your IFA steers you towards a percentage of execution fee then you are not rich enough to be there. Basically an IFA’s time is costed at about £150/hour. You need to have investible assets of more than about £500,000 to be worth using financial advice on an hourly paid basis – otherwise the percentage fees range between 2 to 5%. If your business is worth less than about £2000 to the IFA they don’t really want to know. The long-run return on equities is somewhere around 5 to 6% real, if you’re paying 3% to an IFA your ROI is impacted by at least 50%. If you pay them hourly then as long as the percentage fee on your assets is lower you get more of your money back. Unfortunately if you can understand that you probably don’t need an IFA… Before RDR rich people were fleeced to subsidise give the proles financial advice[ref]This is the second hit I have taken from that damn RDR. I don’t particularly think that saving rich people from their own stupidity/laziness is a particularly grand aim, considering the shafting that the proles took, but that’s just the way it goes.[/ref]. I am a prole – I will never have a networth of a million pounds.
  3. An IFA does not teach you about finance. They are there to tell you if you are being stupid, and possibly show you why. I didn’t get to learn much about that because it appears that front-running the DB pension is not a peculiarly dumb-ass thing to do. I am obviously glad to hear that, though it surprised me that the IFA had never come across the idea before. Ipswich has many residents who work(ed) for The Firm when it was a research facility rather than a jobbing-shop managing outsourced IT crews, these particular residents are no spring chickens because The Firm stopped recruiting that sort of people in the early 2000s and started to taper down in the early 1990s. I am somewhat surprised that more of my erstwhile colleagues didn’t jump to this obvious win and that they haven’t been banging on the doors of the town’s IFAs demanding to defer their pensions for the secure income and front-run their pensions using their AVCs (there is no GAR malarkey associated with The Firm’s AVCs – the main advantage of using AVCs is to get a bigger PCLS).
  4. You must listen between the lines. When doing the equivalent of the finametrica risk profiling I was beginning to answer the question ‘do you expect to need your capital in the near future with a yes. This is the AVC capital, and I think of what I am doing as running down that specific lump of capital. There is a world of difference in the regulatory world between saying I want to get an income from capital and ‘I will need this capital’ even though I am looking to run that flat in five years. If you want flexibility in what you can do Do. Not. Say. Anything. About. Needing. Capital. Just don’t – preferably you are aiming to leave it to your heirs, you have that little need of it. Thus taking an income of £X p.a. over five years from a lump sum of £5X is very, very, different from saying I will need to use this capital of £5X in the next five years. Confused? I was.  I got it right, and my risk profile comes out roughly the same as the finametrica test.
An Ermine's risk profile - batshit crazy
An Ermine’s risk profile – batshit crazy

This was complicated by the fact that I was there to look at a specific part of my assets – this was not a 360 degree review of my financial situation. The whole regulatory system struggles with that, which is a bastard. With this specific piece of money I am a timid mouse – because I expect to consume it all[ref]strictly speaking I will probably use half of it and some savings to keep filling my ISA allowance over the next five years, but that’s a different story[/ref]. I acknowledge, however, that normally this is a rum way to run a pension.

What should people in The Firm learn from this?

This is not advice, it’s my opinion. If you want financial advice speak to an IFA.

If you are a BRT payer stick with the AVCs, because you can salary sacrifice into the pension scheme, so the taxman doesn’t steal 32% of your money in tax and NI contributions, effectively amplifying every £100 you don’t take home by about 50 % (for every £100 you don’t earn you get almost £150 in the AVCs) as opposed to if you do that with a SIPP where you get £125 in the SIPP. Take the extra in the AVCs and if you do decide to front-run your pension then be prepared to pay the IFA tax. Hopefully by the time you do that it won’t be there – if it is, well, you still saved more in the NI so let it go.

If you area HRT payer then ideally you would first put money into a SIPP to bring you to the BRT/HRT threshold and then AVC the rest. Unfortunately I don’t know if you can do it that way round, I suspect the AVC would be taken off first. So you need to inform yourself if this can be done that way. It’s a tough call, because if you need to run down a larger AVC pot from age 55 and are not drawing the main pension you will pay more as a percentage to an IFA to take it out – you need to model this with Excel to see where the extra IFA cost of taking the AVCs out crosses the tax advantage you get in the BRT region of your savings. If, on the other hand, you are only pushing your salary down to the BRT/HRT threshold, the forget AVCs and use a standalone SIPP for the flexibility, though bear in mind that the advantage of AVCs was that your tax-free PCLS is bigger if you can wait until you draw the main pension.

You should also start talking to people about your AVC transfer a year to six months before you are 55 and want to do it.

What should I learn from this?

I am grateful for having a decent slug in a DB pension scheme, so if I have this extra grief and cost here then I need to focus on the fact that there are many other problems I simply don’t have in the pensions department. I do not have to worry about outliving the pension. Over periods longer than about 20 years a FS pension does get eroded comparative to other people’s earnings over time; it is the job of my accumulated ISA savings to lean against that sort of wind

I left work precisely to get away from stupid jobsworths and nitpicking rules. I had a rotten experience of that with Hargreaves Lansdown despite their vaunted reputation for service, and I’m coming round to being prepared to pay about £2000 to get rid of the aggravation because dealing with jobsworths and rules is rules types makes me want to lamp them. Lots of people in the pensions biz seem to be really frightened of pension transfers connected with DB schemes, and fundamentally they want paying to get over/insure against their fear of being sued later on. Such is life. I was vaguely tempted to leave this a year, start using some of the income from my ISA and try again when some of the dust has settled. But I am scared shitless by some of the rest of what Osborne is saying about pensions. I very strongly suspect that in five years time there will be no tax-free PCLS or it will be limited, and some of what they are saying about pensions being no longer tax-advantaged makes me want to shake this down while I can. There will, of course, one day come the evil time when NI and tax are fused and no doubt an upper limit on the amount that can be held in ISAs. But I will do something about the things I can do something about. And maybe I should bear in mind the wise worlds of Thomas Jefferson

You ask, if I would agree to live my seventy or rather seventy-three years over again? To which I say, yea. I think with you, that it is a good world on the whole; that it has been framed on a principle of benevolence, and more pleasure than pain dealt out to us.

There are, indeed, (who might say nay) gloomy and hypochondriac minds, inhabitants of diseased bodies, disgusted with the present, and despairing of the future; always counting that the worst will happen, because it may happen. To these I say, how much pain have cost us the evils which have never happened! My temperament is sanguine. I steer my bark with Hope in the head, leaving Fear astern.

Most of that shit won’t happen. But it’s prudent to favour the bird in the hand… My original plan was to take the 25% actuarial reduction and invest the AVCs to compensate for the loss, but since I am in good health I will probably be better off favouring security over investing raciness, dodging the actuarial reduction and investing only half the AVC fund, and Osborne has made this possible for me.