…..and not a lot of people know!
The impact of the RDR
The RDR (The Retail Distribution Review) was an Financial Conduct Authority (FCA) led initiative which has changed the financial advice landscape forever. Since January 2013 charges for advice have become clearer, and advisers have had to become better!
The 2 main changes are:-
- Advisers are no longer paid Commissions for giving advice on Investments (including Pensions). Advisers must now agree a fee for their advice (both research, implementation and also ongoing reviews) with their client before commencing any work, meaning much more transparency than before.
- All Investment Advisers must be qualified to at least diploma level, which is a higher standard than previously when you only needed to be a certified adviser. Certified advisers can now only give advice on insurance policies.
The reasons for the change?
The central theme of the RDR was to make sure that clients understand what they are paying for, and that they would only receive advice from appropriately qualified advisers.
Advisers must also now show that they are up to date in their knowledge and training, by being awarded their Statement of Professional Standing (SPS) from the FCA annually. Any adviser failing to maintain their SPS will have their authorisation to provide Investment Advice removed. This means that as a client you can be confident that your advisers is not only qualified, but that their knowledge is up to date.
The Value of taking Retirement Advice
Receiving financial advice can increase your retirement income by up to £232 a month, according to research from Unbiased and Standard Life.
The research of over 2000 adults revealed clients who use the services of an IFA made an average monthly pension contribution of £167 while those who did not take advice made an average contribution of £108.
This leaves advised clients with an average annual retirement income of £5,921, with a monthly income of £493, and non-advised with an average annual income of £3,132 with monthly income of £261.
The calculations were based on a 6 per cent annual investment return and monthly contributions increasing by 2.5 per cent each year with 2.5 per cent inflation to the age of 65 and paying a joint life annuity.
The study also found the average pension pot of advised clients at 54 was £74,554 and £37,277 for non-advised.
How has the RDR affected you?
In practice, every regulated firm providing Financial Advice has had to review their business models (that have historically been based in most cases on commission payments) and ensure that all their advisers are qualified to at least the new minimum standard. Thus all advisers have had to consider how they provide a service which is value for money.
Clients have always paid for their advice – the payment had been called ‘commission’, paid to the adviser by the product provider.
From January 2013, these have been called ‘fees’ and approved by and paid by the client (albeit in many cases paid directly from the same investment pot that commissions were paid from).
Another choice open to clients is what type of advice they need.
Financial Advisers are now broadly divided into 2 camps:-
a)Independent Advisers (IFAs)
b)Restricted Advisers (Financial Planners)
A central aim of the RDR was to achieve value for money for clients. There is a simple principle behind this. Most clients do not have complex or sophisticated needs, and therefore do not need to pay expensive fees for unnecessary research.Typically clients wish to find the best savings rate for their money, have access to the best mortgage deals, have access to insurance policies from strong reputable companies who have excellent claims payout history, and have low cost investments and pensions which allow them to access all of the best funds available.
Having a panel of providers in each arena, from savings to ISAs, Pensions, Insurance policies etc… can allow advisers to reduce the charge to the client, giving clients better value for money, whilst still enabling access to the most suitable products. By restricting advisers to choose from “pre researched” providers, advisory firms can be confident that their clients are receiving consistently good advice from their advisers, and that only appropriate products can be recommended.
Of course there are some times when you need the help of a fully Independent Financial Adviser who can search the whole of the market for you. This is typically for those who have a particularly complex situation, require specialist tax advice, are a high nett worth adviser who has spare money to “speculate” with and wish to have access to higher risk investments, and who therefore wish to pay extra for this service.
There is no difference between the level of qualification or expertise of a restricted or an independent adviser, it is just that they offer different services, suitable for different clients.
The good news is that Ablestoke can offer our clients both services. We have certified advisers to help clients with their insurance needs, we have restricted Financial Planners who are at least diploma qualified to help clients with their investment needs, we have specialist mortgage planners who can select mortgage deals from the whole of the market, and we have IFAs who can provide fully independent advice to people who have more complex needs.
Ablestoke have also been offering a fee based service for the last 8 years, so this is not new to us. Have a look at the variety of service plans available for you to choose from.
Ablestoke have always offered fee-based charges.
Ablestoke’s various service plans, along with offering clients a choice between fees and commissions meant we aere always ‘RDR ready’.
This existing transparency with clients means that not only do we believe in charging fairly for the services being offered, but more importantly our clients do also.
We like to call that forward thinking!
Until relatively recently, No qualifications were required to become a Financial Adviser
It is true that until 1988, anyone – from bricklayer to hairdresser – could start to work for a firm giving financial advice to consumers with no formal industry qualifications. Thankfully, this situation has changed dramatically over the years.
The FCA now require that firms ensure that all individuals have appropriate qualifications. The list of appropriate qualifications is determined by the Financial Services Skills Council at the behest of the FCA.
The entry level is normally the historic ‘Financial Planning Certificate’ (FPC), or its successor, the ‘Certificate in Financial Planning’ (CFP) which includes an additional examination focusing on investment advice and risk.
For the payment of a fee to the Personal Finance Society members with this level of qualification may use the CertPFS designation.
The exams to achieve this are certificate level as designated by the Qualifications and Curriculum Authority (QCA) each exam is approximately equivalent to a GCSE (five for CFP and three for FPC).
The next level is the historical ‘Advanced Financial Planning Certificate’ (AFPC) and newer ‘Diploma in Financial Planning’ (DFP). Again for a fee members of the Personal Finance Society may use the designation DipPFS.
The next level is ‘Advanced Diploma in Financial Planning’.
The highest level is Chartered Financial Planner status.
About the most effective Tax strategies possible
It is always best to take advice before a specific financial transaction takes place – which may result in you paying what you consider to be too much tax.
For example, if you are:-
- A high earner or a high net worth individual with exposure to Higher Rate Income Tax or an additional rate
- An individual who has disposed of an asset, such as property or shares, and has been assessed for Capital Gains Tax
- A successful company director with substantial profits liable to Corporation Tax
- An individual who has significant assets and may have a potential Inheritance Tax liability
You should always discuss your personal situation in order to benefit from sound and competent financial guidance in dealing with your financial affairs.
The effects of a living will
You may have heard of a ‘living will’ or an ‘advance directive’ before.
These were ways of explaining how you wished to be cared for in future if you lost mental capacity.
They might have included how you wanted or preferred to be cared for such as always having a shower instead of a bath.
However, an advance decision only applies to where you want to refuse medical treatments.
You can’t use an advance decision to:
- ask for specific medical treatment, or anything that is against the law, like requesting help to commit suicide
- say you want someone else to decide what treatment you should have
- choose someone to make decisions about your treatment you have to make what is called a ‘Lasting Power of Attorney’
Your advance decision will only be valid (accepted legally and by health care professionals) if you:
- are 18 or over and had capacity when you made it
- have set out exactly which treatments you don’t want in future (if you don’t want life-saving treatment, your decision must be signed and witnessed)
- have explained the circumstances under which you would want to refuse this treatment
- have made the advance decision without any harassment by, or under the influence of, anyone else
- haven’t said or done something that would contradict the advance decision since it was made
Can you make your own will ?
Although it is possible to make your own Will, it is always advisable to consult an expert to assist (for example, a qualified Will-writing practitioner or a Solicitor).
Before you write your will or consult an expert, it’s a good idea to think about what you want included in your will, for example:-
- how much money and what property and possessions you have
- who you want to benefit from your will
- who should look after any children under 18 years of age
- who is going to sort out your estate and carry out your wishes after your death – that is your executor
An executor is the person responsible with passing on your estate. You can appoint an executor by naming them in your will. The courts can also appoint other people to be responsible for doing this job.
The consequences of not having a Will
We all know it’s important to make a Will but just what are the consequences for not having a valid will in place?
- You don’t control where your assets go
- Your estate will be divided amongst your relatives in accordance with the rules of intestacy and indeed could end up with the Crown
- Your estate will generally be administered by your next of kin, which may not be in accordance with your wishes
- You may not have control of who looks after your children
- If you have not made a Will and you have children under the age of 18, the courts may have to decide who is appointed as their guardians
- To have control over who are the guardians for your children you need to make a Will, this reason alone should be enough to encourage most people to make a Will
- You cannot make gifts
- Many people wish to make specific gifts on their death, perhaps to relatives or charities
- You may want these gifts to be specific chattels or family heirlooms.
- If you are married, your spouse may not get everything
- If you are married with children, your spouse will only receive the first £250,000 of your estate and a right to an income, but not the capital, from the remaining half.
This is contrary to the common myth that a spouse always inherits 100% of their husband or wife’s estate, and is again another excellent reason to make a Will.
- If you are unmarried with children, it gets even worse
- In this situation your partner will not receive anything, which in many cases is not likely to be desirable or in line with your wishes
- More inheritance tax may be payable
- By not making a Will you lose out on the ability to arrange your affairs in the most tax efficient manner, which may result in more Inheritance Tax becoming payable.
Take care to look after your children
If you have children from a previous marriage, a Will is an important tool to ensure that they receive the proportion of your estate that you intend for them to have.
These are just some of the consequences of not making a Will.
We would always recommend that you have a valid Will in place and that it is checked on a regular basis, and at least in the event of any major change in your circumstances.
Disclaimer: Please note the Financial Services Authority does not regulate will writing.
Opting out of a Pension
Should I opt out of a Pensions scheme?
Definitely a question that should be answered only after discussing with a qualified Financial Adviser.
People are living longer. You could be retired for twenty years and you need to think about how you’ll fund it.
The State Pension is a foundation for your retirement. But if you want to have more when you retire, you may want to consider contributing to a workplace pension. The full basic State Pension in 2012/13 is £107.45 per week for a single person.
The government is getting employers to enrol their workers automatically into a workplace pension so it’s easier for people to start saving.
Benefits of staying in a workplace pension
A pension is a way of saving money to provide you with an income when you retire. There are many benefits to having a pension at work.
In fact the Government from later in 2012 have mandated that all companies in the UK put in place, and contribute into a mandatory pension scheme.
(This is called auto-enrolment and in order to enrol all 1.2m companies without a scheme in place, this is being phased in over the next 6 years).
Your employer will pay into it. This contribution from your employer means your pension can build up more quickly than if you were saving for your retirement on your own.
The government will also pay into it, in the form of tax relief. This means some of the money you earn, instead of going to the government as income tax, now goes into your pension instead.
Your workplace pension belongs to you, even if you leave your employer in the future.
As your employer will automatically enrol you into this pension, it’s a hassle free way of saving while you earn.
Being in a workplace pension is an important step towards giving yourself the lifestyle you would like in later life.
Talk about your own situation with a qualified Financial Adviser.
The value of a state pension
The basic State Pension is a pension that the government pays to those who reach State Pension age. Eligibility for the basic State Pension is based on the number of ‘qualifying years’ a person has accumulated.
These years are gained through the National Insurance Contributions (NICs) that a person has actually paid, has been credited with or has been treated as having paid throughout their working life.
It is important to realise that the State Pension is not a lot of money. The state pension age will rise with longevity. It is designed to keep retirees above the poverty line and not by too much. If you want to have a more comfortable level of life in retirement, setting up a STAKEHOLDER PENSION of your own could be a good idea.
For the 2011/12 tax year recently ended, the basic single state pension is £102.15 per week which many may find is insufficient in meeting even ordinary everyday expenses such as grocery and utility bills. When holidays, presents and other extras are taken into account, relying entirely on this sum may require a significant change in lifestyle.
What are qualifying years?
Qualification for the basic State Pension is based on accumulating a sufficient number of qualifying years before reaching State Pension age. A qualifying year is a tax year where a person:
- has sufficient income to pay National Insurance contributions;
- is treated as having paid National Insurance contributions; or
- is credited with enough contributions
In 2011-2012, a person would need to have £5,304 or more of such earnings if an employee or £5,315 or more if self-employed.
How many qualifying years are needed?
The number of qualifying years a person needs for a full basic State Pension depends on their age and their sex:
- Men born before 6 April 1945 usually need 44 qualifying years
- Women born before 6 April 1950 usually need 39 qualifying years
- Men born after 5 April 1945 need 30 qualifying years
- Women born after 5 April 1950 need 30 qualifying years
A person who reached State Pension age on or after 6 April 2010 needed just one qualifying year in their working life to qualify for some basic State Pension.
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