Clients for whom we manage investments and pensions frequently call us for ad-hoc advice. When that happens, we don’t put them ‘on the clock’ and send them a bill. We operate, at our discretion, on a ‘fair usage’ basis, so provided clients respect that rule, we’re happy to help at no extra charge.
In December 2015 a lady client who was thinking of investing £60,000 in London Capital & Finance mini-bonds called us. As has been widely reported in the media, we warned her off and we tipped off the regulator. LCF subsequently crashed earlier this year, costing investors £237m. Unfortunately, the FCA didn’t act on our tip-off, but at least our client saved £60,000. We think that’s a great example of the value of independent financial advice. Below is another example, a client we’ve just helped this week.
Jim (not his real name) called us recently. He has a pension pot built up with previous employers which we’ve looked after since he needed to extract his tax-free cash. We merged the old plans when he first came to us in 2017. He took the tax-free cash after the merger and since then the fund has grown nicely. We warned him, however, that he should avoid taking more than the tax-free cash so as to avoid triggering the Money Purchase Annual Allowance (MPAA). His current employer funds 8.5% of his £70,000pa into his current money purchase pension arrangement, some £5950 a year. If he triggered the MPAA he’d lose £1950pa of that amount.
We had an annual review with Jim in June and he was pleased with the results we’d achieved. Then he called us again a couple of weeks ago. He’d discovered an old Zurich (originally Allied & Dunbar) pension which he had forgotten about, worth approximately £49,000.
As Jim had a bank loan with an outstanding balance of £15,894, he was keen to cash in the Zurich plan in full, with a view to clearing the borrowing. We asked Jim to get a settlement figure. The lender advised him that clearing the loan now would save him just £1268 in interest. As Jim is a 40% taxpayer however, he would pay 40% tax on the entire plan value apart from the tax-free cash element. That would be a tax bill of circa £14,700. Even if he only took enough to clear the borrowing, it still wouldn’t be worth it. The tax-free cash would only come to £12,250. That would leave a shortfall of £3644. As a 40% taxpayer, he would need to raise £6073 gross to end up with £3644 net; a tax cost of £2429 compared with an interest cost of £1268 if he kept the loan going.
But that would only be the start of his troubles. By flexibly accessing his pension beyond the tax-free cash he’d trigger the MPAA, losing £1950 each year in employer’s contributions. Jim isn’t due to retire until his state pension age in November 2028, which means that even on his current salary, he’d lose pension contributions totalling £18,200. Add that to the immediate tax cost and you’ve got a total real cost of £20,629.
We advised Jim to keep his loan going, make the payments on time, make the most of the very generous pension contributions his employer was making on his behalf, and look forward to a retirement that would be considerably more prosperous than that he’d have had if he’d not made the call he did make.
