If you decide that a financial adviser would help you to make decisions with greater confidence, your first priority should always be making sure that you’ve chosen the right adviser for your particular needs. Our article How to find the right financial adviser can help you here. You then need to consider how much you’ll need to pay for their services, and how their fees will be charged.
Different ways to charge fees
Advisers charge fees in a number of different ways, although not all advisers offer all the options available. You should pick an adviser and a fee structure that best suits your own needs and requirements.
As the Latin name suggests (if you understand Latin!), these fees are proportionate to the amount of money you invest and are expressed in the form of a percentage charge. There may be two percentage-based charges, one for the initial advice and one for any ongoing advice. Typical fee ranges are:
• Initial advice 1% to 4%
• Ongoing advice 0.5% to 1%
While the percentages may look small, they can add up to substantial sums if you have a lot of money to invest. Converting the percentage charge into £s may help you decide whether you’re receiving value for money.
Hourly rates range from £100 to £300, with an average of around £150. The rate payable will depend upon the adviser’s location (e.g. London is likely to be more expensive), how well qualified the adviser is, and the type of advice given.
As a guide, a full financial plan will usually take anything between 8 and 12 hours and, in some cases, even longer.
A set fee
This is most common when advice is given regarding a very specific topic, such as transferring a defined benefit pension to a defined contribution pension.
A monthly fee
This is a ‘£s’ fee and is usually charged to cover ongoing advice. For example, this might be advice about withdrawal and investment issues for people who are taking an income from their pension. If you’re taking ongoing advice, it’s worth comparing the cost of monthly fees with the percentage charge option.
Regardless of how an adviser charges for advice, they are obliged to provide a fee schedule, setting out how they charge. This should be handed to you when you first meet them. The fee schedule will detail the advice payment options available and the range of likely charges.
Once you have explained to the adviser what sort of assistance you need, ask for a more firm quotation of costs. However, as this quotation is given in advance of the advice being received, it is unlikely to be guaranteed. This is because the advice may be more complicated than it first appeared once you get into the details.
Paying for advice from your pension versus paying from your own pocket
It’s usually more tax-efficient to pay for the cost of advice out of money already in your pension than from your own funds. There are two main reasons for this:
1) The money inside your pension has received tax relief of at least 20%. That means £100 worth of advice only costs you a maximum of £80.
2) Fees paid out of your own pocket may be (but aren’t usually) subject to VAT at 20%. If this is the case, £100 worth of advice would actually cost you £120. Fees paid out of an existing financial product, such as a pension, are VAT-free.
However, you can only extract advice fees from a financial product if the advice you receive is about that product.
An exception to this rule is the new Pensions Advice Allowance, available from 6 April 2017. This allowance permits pension savers to extract £500 over three different tax years (total £1,500) to pay for financial advice. Importantly, there is less restriction on the advice provided, which can cover general retirement planning, rather than just product-specific advice.
Employers are also allowed to pay for the cost of advice on behalf of their employees, up to a cap of £500 (from 6 April 2017) each tax year, without the cost being treated as a benefit-in-kind.
This can be used alongside the Pensions Advice Allowance, providing up to £1,000 to pay for advice in each of the three tax years in which the Pension Advice Allowance is used.
Of course, not all employers offer this benefit to their employees and many will be unaware it even exists. Speak to your employer to find out what they do.
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