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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Other authorised payments: scheme administration member payments: rebated commission, adviser charging and consultancy charging

Glossary PTM000001
   

Rebated commission
Adviser charging
Adviser charges deducted when purchasing an annuity
Adviser charges deducted when purchasing a scheme pension under a money purchase arrangement
Adviser charges deducted when designating funds for drawdown pension
Adviser charges deducted when taking a trivial commutation lump sum
Consultancy charging

Rebated commission

Sections 161(3), 161(4) and 171 Finance Act 2004

A financial adviser might be entitled to commission from a pension scheme provider as a result of that adviser gaining new business for the provider. The adviser might agree to rebate some of that commission to the member as part of the settlement with the member for the cost of the advice given by the adviser to the member.

On the basis that the payments are all set at commercial rates (including, for example, the management fees paid by the registered pension scheme and the commission paid by the pension scheme provider) and the adviser makes a commercial profit from advising the member after passing on the commission rebate to the member, the commission rebate would not be an unauthorised member payment.

However, the position could be different if the contract for financial advice was between the trustees of a registered pension scheme and the financial adviser. It would be expected that any rebated commission passed to the trustees would be used for the purpose of the pension scheme. There could be an unauthorised payment if the trustees passed on the rebated commission (or otherwise allowed it to be passed on) to someone else, such as to a member of the pension scheme.

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Adviser charging

A registered pension scheme might make a payment to a financial adviser for the cost of pension advice that is given to the member by the financial adviser in relation to the pension scheme.

Such pension advice might be in connection with the suitability of fund choice, asset allocation, pension provider, pension taxation or checking against statutory limits. Also, the advice could cover how to maximise income from the pension fund at retirement or how to maximise the return on an existing pre-retirement pension fund or more general advice on the payment outcomes/risks of respectively choosing the type of pension to be taken; scheme pension, lifetime annuity or drawdown pension.

Pension advice in this context can also include costs for implementation and administration fees covered within the advice. For example, as part of giving pension advice, an adviser recommends a client to switch from one fund to another within a pension scheme. The adviser then implements the recommendation on behalf of the member by arranging for the funds to be switched and the adviser charges the client for undertaking that implementation work.

A payment by a registered pension scheme to a financial adviser to meet pension advice costs would not be an unauthorised member payment provided the payment is made as a result of:

  • genuinely commercial remuneration arrangements between the member and financial adviser for the pension advice given by the adviser to the member, and
  • the agreed amount of remuneration for the adviser is appropriate in relation to the service the adviser provided in respect of the advice given.

A payment by the pension scheme to meet the member’s costs for pension advice would create unauthorised member payments if those costs are not genuinely commercial. The amount of the unauthorised payment would be the excess amount over the genuinely commercial cost for the pension advice concerned.

Also unauthorised member payments would be created if the payment was for costs that were not just for pension advice related to the registered pension scheme. For example, costs for advice about retirement income in relation to ISAs or other non-registered pension scheme property would not be covered. The amount of the unauthorised payment would be the amount of the costs that did not relate to pensions advice related to the registered pension scheme.

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Adviser charges deducted when purchasing an annuity

When a member is purchasing a lifetime annuity whether under an open market option, or under an in-house option, an adviser charge for pension advice can be a scheme administration member payment. This applies whether the charge is deducted from the member’s funds before they are passed from the pension scheme to the chosen annuity provider or is deducted by the annuity provider after the member’s funds have been passed from the pension scheme. (In the latter case the adviser charge is not paid by the original pension scheme but is brought back into the registered pension scheme tax rules by virtue of Section 161(3) and (4) Finance Act 2004, as the annuity is secured with registered pension scheme funds.)

However deducting these adviser charges arising at the time of the lifetime annuity purchase might have a bearing on the maximum amount of pension commencement lump sum as the amount of lump sum is based on the amount of the member’s funds used for, or in connection with, the purchase of the lifetime annuity. In broad terms, the maximum pension commencement lump sum in relation to a lifetime annuity is one-third of the annuity purchase price. PTM063200 onwards has more details about pension commencement lump sums.

Example 1

No adviser charge deducted from member’s fund

Member’s pension fund at retirement = £100,000

Member takes lump sum of £25,000

Balance passed to annuity provider to buy a lifetime annuity = £75,000

Member’s lump sum does not exceed one third of the annuity purchase price

There have been two benefit crystallisation events (BCEs). These are BCE 6 - the payment of the pension commencement lump sum (£25,000) and BCE 4 -the purchase of a lifetime annuity (£75,000). PTM088100 onwards has more details about valuing benefits on BCEs.

Pension advice not limited solely to the lifetime annuity purchase

The adviser charge might relate to wider pension advice culminating in the decision to purchase a specific lifetime annuity. Such advice could cover how to maximise income from the pension fund at retirement or how to maximise the return on an existing pre-retirement pension fund or more general advice on the payment outcomes/risks of respectively choosing the type of pension to be taken; scheme pension, lifetime annuity or drawdown pension. This sort of pension advice can be included as part of the advice given in connection with the lifetime annuity purchase.

However, wider pension advice cannot include advice that simply happens to be given at the same time as the advice leading to the annuity purchase. For example, advice about the investment of other pension funds that are being left in force and not being considered as part of the member’s pensions options. The advice must relate directly to the pensions options of the member and the member’s retirement fund.

Pension advice relating solely to the lifetime annuity purchase

There is no bearing on the maximum amount of pension commencement lump sum where the adviser charges relate specifically and only in respect of the lifetime annuity purchase. This would be the payment of adviser charges in relation to any of the following:

  • the member exercising the in-house lifetime annuity option/open market option
  • advice about the type of lifetime annuity, and
  • advice concerning from whom the lifetime annuity should be bought.

Example 2

Adviser charge of £500 for advice on the pensions options of the member and the member’s retirement fund

Charge to be deducted by the annuity provider

Member’s pension fund at retirement = £100,000

Member takes lump sum of £25,000

Balance passed to annuity provider = £75,000

Adviser charge of £500 deducted

Balance used to buy lifetime annuity = £74,500

Amount of member’s funds applied to, or in connection with, the annuity purchase = £75,000 (£74,500 + £500)

Member’s lump sum does not exceed one third of the annuity purchase price (i.e. the ‘purchase price’ includes the adviser charges for advice on the pensions options of the member and the member’s retirement fund)

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Adviser charges deducted when purchasing a scheme pension under a money purchase arrangement

An adviser charge for pension advice when a member becomes entitled to a scheme pension under a money purchase arrangement can be considered as a scheme administration member payment.

Deducting the adviser charge at the time of the scheme pension purchase might have a bearing on the maximum amount of pension commencement lump sum, as the amount of lump sum is based on the amount of the member’s funds used for, or in connection with, the purchase of the pension. In broad terms, the maximum pension commencement lump sum in relation to a scheme pension is one-third of the pension purchase price.

The ‘pension purchase price’ in this context includes the application of the member’s funds for, or in connection with, the purchase an insurance backed scheme pension or a pension paid from the pension scheme and any related dependants’ scheme pension.

PTM063200 onwards has more details about pension commencement lump sums.

The examples above under the heading ‘Adviser charges deducted when purchasing a lifetime annuity’ that show what elements of adviser charges that can be included as funds that are applied in connection with the purchase of a lifetime annuity (adviser charges relating to the lifetime annuity purchase) and those adviser charges that cannot be so included (adviser charges for other pension advice) apply equally in respect of adviser charges that are deducted when a scheme pension is purchased under a money purchase arrangement, reading references to lifetime annuity as being to scheme pension.

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Adviser charges deducted when designating funds for drawdown pension

As with the purchase of a lifetime annuity, or scheme pension, an adviser charge for pension advice when a member designates funds available for drawdown pension can be considered as a scheme administration member payment.

Deducting the adviser charge at the time of designating funds for drawdown pension could have a bearing on the maximum amount of pension commencement lump sum, as the amount of lump sum is based on the amount of the designated funds. In broad terms, the maximum pension commencement lump sum in relation to the designation of drawdown pension funds is one-third of the funds so designated.

Whether funds used to meet the costs of the adviser charges have a bearing on the amount of pension commencement lump sum depends on the timing of the deduction. There should be no bearing on the amount of the pension commencement lump sum if the adviser charges are deducted after the member has designated funds for drawdown pension.

When this happens shortly after a basis amount has been established at a review point, the amount deducted can nevertheless be included as part of the member’s drawdown pension funds at the review point.

PTM062700 onwards has more details about the provision of drawdown pension.

Example 3

Adviser charge of £1,500 for advice on the pensions options of the member and the member’s retirement fund

Member’s pension fund at retirement = £100,000

Member takes lump sum of £25,000

Member’s pension fund designated for drawdown pension = £75,000

Adviser charge of £1,500 deducted from designated funds

Member’s lump sum does not exceed one third of the amount of funds designated for drawdown pension of £75,000

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Adviser charges deducted when taking a trivial commutation lump sum

When a trivial commutation lump sum is paid in respect of uncrystallised rights 75% of the lump sum is treated as taxable pension income and the remaining 25% is tax-free.

When an adviser charge for pensions advice is deducted from the member’s funds at the time of the trivial commutation lump sum payment the 75% taxable and 25% tax-free elements of the lump sum are based on the amount actually paid to the member after deduction of the adviser charges.

PTM063500 has more information about trivial commutation lump sums.

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Consultancy charging

An employer might take financial advice in relation to setting up a personal pension scheme or group personal pension scheme and the cost of that advice is met from the funds of those employees who join the pension scheme. Such consultancy charging might be for:

  • giving advice or assistance to an employer on the operation of such a scheme
  • taking, or helping the employer to take, steps that must be taken to enable an employee of the employer to become a member of such a scheme, and/or
  • giving advice to an employee, pursuant to an agreement between the employer and the adviser, about membership of such a scheme.

A payment by a registered pension scheme to meet such consultancy charges would not be an unauthorised member payment provided the payment was made as a result of:

  • genuinely commercial remuneration arrangements between the employer and financial adviser for the pension advice given by the adviser, and
  • the agreed amount of remuneration for the adviser is appropriate in relation to the service the adviser provided in respect of the advice given.