These ‘pension reciprocation plans’ claimed to be able to offer access to 50% of the value of pension funds, even to those younger than the minimum benefit age of 55.

The High Court subsequently ruled that such schemes are illegal.

Earlier this week we saw an example of an equally dangerous pension scheme, which has today been reported on the front page of Money Marketing.

The scheme offers commission rates of 16% to the pension investor in return for introducing themselves to the promoter of the scheme.

Commenting in Money Marketing today, Informed Choice chartered financial planner Martin Bamford said:

“This is a terrible deal for the customer and could be in breach of HMRC rules on pension commencement lump sums. The commission paid to the customer could be considered an unauthorised payment and the pension fund could suffer significant tax penalties as a result.”

Pensions are designed to provide an income in retirement and have strict rules regarding the shape of benefits as a result.

Tax-free cash from pensions (more properly known as a pension commencement lump sum) is limited to 25% of the value of the pension in most cases, and only payable from age 55 onwards.

The level of ‘commission’ on offer from this particular scheme makes us suspect that it involves an investment in unregulated UCIS investment funds, which are typically high risk illiquid schemes in esoteric assets.

UCIS investments can only be legally promoted to high net worth or sophisticated investors in the UK.

We hope that the HMRC and FSA take fast and decisive action to shut down this scheme and any others that emerge following this model.

The risks to investors in terms of potential tax penalties, scheme charges and investment unsuitability appear to be substantial.

Photo credit: Flickr/Leo Reynolds

I have been making some new year resolutions (losing weight, getting fit, etc) and thought I might need some financial resolutions. Do you have any suggestions?

This is the time when we all start to think about the year ahead and what we want to achieve.

I think all resolutions should be SMART ones – specific, measurable, achievable, realistic and time-bound. That way, they are more likely to be kept, so here are some financial resolutions I think are doable for most people.

Organise your financial paperwork. Get one of those expandable box files and label the contents. Each time you get a piece of financial correspondence, action what is required and then file it safely in the box.

Not only will you feel more organised but you will also know where all your financial paperwork is and be able to access it easily.

Some will suggest you scan the paper and keep it on your computer. Same thing, just different media.

The second resolution is to make a budget plan. Here, you may well find a computer spreadsheet is the easiest way to do things. Month by month, estimate what you are going to spend. Some of these expenditure items may be known and fixed quantities, others may be estimates but you can use last year’s payments to get a feel for this. You may need to increase the estimates to take care of inflation.

Use the spreadsheet to compare your expenditure against income and this will help you to avoid overspending.

You may then need a separate spreadsheet to list your savings, investments and pension arrangements. You can even add to this the details of any life insurance, income protection and critical-illness cover that you have. Don’t forget to add in details of any benefits that you get from employment as well.

To this spreadsheet, add the value of any other assets you have (your house, for example) and then detail any liabilities that you have. This can start to help you determine the net value of your wealth (assets minus liabilities).

You can put in as much or as little detail as you choose but I would advise you to go for as much detail as you can.

The next thing to add to your spreadsheets is a simple list of your financial goals and objectives. When do you want to retire? What plans do you have for property purchase or moving home? How much do you think you need to accumulate to have the lifestyle you want?

None of the above will cost you anything other than some time and effort (apart from the expandable box which might cost £10).

You may think my motives for suggesting these resolutions are less than honourable because if you get all this information together you might want to book yourself a review meeting with an independent financial adviser but even if you don’t do that at least you will have achieved a goal of getting yourself organised.

If I were a gambling man, I bet that being in control of your finances, if you do all of the above, will last longer than your diet or keep-fit regime.

Pension benefits in excess of this new lower lifetime allowance will be subject to a recovery charge.

Whilst £1.5m is a lot of money, it is estimated that around 100,000 members of public sector pension schemes could be caught out when the lifetime allowance is reduced.

This is because a formula of twenty times the annual pension income is used to test pension benefits against the lifetime allowance.

It means that anyone who starts receiving a pension income over £75,000 a year from 6th April 2012 will be subject to a 55% recovery tax charge, unless they implement a form of protection ahead of this change.

Fixed protection is an option available to those with large pension funds or significant pension benefits.

This needs to be registered ahead of 5th April and one implication of fixed protection, which gives the pension scheme member a lifetime allowance of £1.8m rather than £1.5m, is that you need to opt-out of your defined benefit pension scheme.

To understand whether you are better suffering the recovery tax charge or leaving your final salary pension scheme requires a reasonable level of data gathering and analysis.

Based on the typical length of time it can take for a pension scheme to provide the necessary data for this type of advice, anyone who needs to consider whether they should register for fixed protection should be doing so within the next week.

Even with this timescale, we expect certain public sector pension schemes to struggle to provide information in time for us to provide our analysis and advice ahead of the end of the tax year.

Photo credit: Flickr/focal1x

It is becoming increasingly expensive for pension schemes to provide the defined benefits they have promised to members.

With all of us living for longer and investment returns generally lower, it should come as little surprise that pension scheme trustees are looking for ways to manage scheme liabilities.

Two of these methods are the enhanced transfer value and the pension increase exchange.

Schemes offer members an enhanced transfer value in return for transferring their benefits out of the scheme. This can take the form of a higher cash equivalent transfer value, as a cash incentive to transfer away, or a combination of the two.

Commenting in The Times, Martin said:

“Transferring out of a defined benefit pension scheme is rarely the right thing to do.

“It can be tempting to accept cash today in return for lower pension benefits in the future, but these are valuable and will be what pays for your lifestyle in later life.”

A pension increase exchange is an uplift to current pension benefits in return for giving up future inflation-linked increases.

Whilst not as financially dangerous as an enhanced transfer value, Martin pointed out in The Times that they carry the risk future pension benefits will be eroded in real terms by inflation.

If you are a member of a defined benefit pension scheme and you receive either an enhanced transfer value or pension increase exchange offer, you should always seek professional independent financial advice before making a decision.

In many cases, the pension scheme will offer to pay for such advice. Even if you have to pay for advice yourself without help from the pension scheme, it will be money well spent to ensure you make the right choice about valuable pension benefits.

Photo credit: Flickr/Ben Sutherland

The ‘patient’ for this Wealth Check was 31 year old Willard Foxton from London. In the article it describes him as being “terrible with money”.

His income from employment as a television producer are supplemented with freelance earnings. With no savings and nothing left at the end of each month, he often falls back on payday loans to see him through.

Here is what I had to say:

“There are no get-rich-quick schemes or wizards to sort out Willard’s finances. He needs to start budgeting quickly and put in place a written financial plan before a mistake lands him in real difficulties.

“It may take two or three years to get to this stage so Willard needs to commit to a financial plan for this length of time. He should not feel guilty about submitting expense claims. He could use a smartphone application to keep on top of expenses claims, which would allow him to scan in receipts and file them in a folder ready to submit.”

Photo credit: Flickr/surroundsound5000

It was stimulated by the launch of yet another service that offers to rebate to clients the fund based renewal commission (or at least a large percentage of it) typically payable by financial services product providers to intermediaries.

Leaving aside some of the inaccurate bits of “puff” coming from the person launching the new service, some IFAs have seen the broadcast as a direct attack on their integrity.

The suggestion is that consumers are paying a large amount of the value of their hard earned pension fund in trail commissions to their adviser who is, put simply, then failing to deliver a service to them.

Like with all good stories there is an element of truth in some of this but equally a lot which is simply not true.

Some consumers are probably paying renewal commissions to their advisers in respect of products that they have previously purchased and for whatever reason do not receive an on-going service.

Some IFAs will argue that in order to receive this renewal payment they took less initial commission in the first place and this argument does indeed have some merit – as long as this was properly explained and documented to the client when the plan was first set up.

Other IFAs argue that they do indeed provide a meaningful ongoing advice service to their clients and this is also very true.

Certainly the vast majority of IFAs that we know are keen to maintain a long-term relationship with their clients and meet and communicate with them on a regular basis.

The Telegraph on Saturday contained a good article on this subject and I was pleased to contribute to it.

Certainly we would argue that every consumer needs to search for value and that if they do not believe that they are getting the service they deserve from their adviser the sensible thing to do would be consider moving to an adviser who does offer the service they want.

This isn’t always easy but frankly it should be.

Every competent adviser these days issues an “engagement letter” to their prospective clients. That letter should set out exactly what you get and what you pay for an on-going service.

There simply is no excuse for not knowing what you pay your financial adviser and what you get in return.

Today the front page of the Daily Express has added a lot of fuel to the fire, with an in your face headline – “Pension pots slashed by 75% millions may be victims of “rip-off” financial advisers”.

Now we all know that the media loves a good negative story but this should not detract us from the reality of the situation.

Just like any other form of consumer, financial services clients should be able to see the important differences between price and value. If you are concerned that you are paying for something that you are not receiving then the sensible thing to do would be to discuss this with your adviser and seek understanding and, where applicable, resolution.

This headline followed a sharp drop in global stockmarkets and the article went on to explain how billions of pounds had to wiped off the value of pension funds in a single day.

Where are the positive headlines when stock markets recover?

The FTSE 100 has finished up 125.87 points today that is around about 2.4%. It also closed up yesterday by around 2%.

Now call me a cynic but when the FTSE 100 finishes down the mainstream media will be almost salivating in their endeavours to tell the Great British public that so many billions of pounds have been wiped off the value of their pension funds.

If I were a gambling man (which I am not) my money will be that on news this evening they do not tell us how many billions have been added to the value of our pension funds so far this week. Another example of emphasis on the negative I am afraid.

Still for the TV newsreader and national press editor there really is no such thing as good news.

Within the article, Martin said:

“Investors are having to work harder to seek out good yields that remain lower risk but still beat inflation in the current environment.”

The article looked at several options for income investors, including infrastructure, commercial property, overseas government bonds, ground rent and permanent income bearing shares (Pibs).

Here at Informed Choice, we work with income seeking investors to build and regularly review investment portfolios suited to income requirements, financial planning goals and risk preferences.

In the current economic environment where interest rates are very low, price inflation remains stubbornly high and investment markets are volatile, investors can find it challenging to maintain a desirable income level without eroding capital.

It is important to approach the quest for investment income with realistic expectations and to ensure you understand the risks associated with each investment asset class.

Photo credit: Flickr/topgold

The Financial Services Authority (FSA) explains within the article that investment platforms have no duty of care for investors when it comes to the availability of funds.

What this means in practice is that an investment platform could offer investment funds without considering their suitability, risks or long-term viability. By being selective about the specific funds on offer, the platform could be seen as providing advice.

The financial adviser, however, does have a duty of care – particularly if they are an independent financial adviser acting on behalf of their clients.

We believe that investment platforms should offer all available funds, leaving the financial adviser to exercise their duty of care in ensuring suitable recommendations.

However, execution-only investment platforms where there is no advice provided do need to exercise caution when it comes to making funds availability.

We would argue that these direct to consumer investment platforms need to exercise a higher duty of care than those investment platforms which can only be accessed via a financial adviser.

Photo credit: Flickr/joeflintham

These are funds which aim to deliver an absolute (greater than zero) return for investors.

They attempt to do this by using a variety of investment strategies, including the use of financial instruments such as derivatives and futures.

Absolute Return funds are often referred to as the retail investor equivalent of hedge funds, as many of the investment strategies they use are very similar.

Within the Independent on Sunday article, Martin commented on the often very high charges associated with Absolute Return funds:

“Many have performance-related charges, with the fund manager creaming off an additional 20 per cent of the outperformance against a target. This ‘hurdle’ to qualify for an additional payment is usually set very low,” says Martin Bamford from independent financial adviser (IFA) Informed Choice.

You can read the Independent on Sunday article in full here and find out more about our views on Absolute Return funds here.