LABOUR'S 74% TAX ON EARNINGS FOR PEOPLE ON UNIVERSAL CREDIT

Some householders who get the means-tested benefit Universal Credit keep just 26p of every extra pound they earn – an effective tax rate of 74%. That hardly fits in with Labour's promise in the King's Speech to 'make work pay'. In some parts of England it the loss could be more - losing up to 77p in every extra pound earned, leaving them with 23p for every extra pound they earn. Those losses undermine the work incentives which Universal Credit is was designed to create. 

For graduates on incomes high enough to make repayments on their student loan but low enough to get Universal Credit, the deductions would be more - they earn an extra £1 and keep just 14p.

Automatic pension deductions reduce these figures even further.

Universal credit

Universal Credit has been rolled out since October 2013 to replace six means-tested benefits and tax credits. It is currently claimed by around five million people. It is the benefit given to all new claims for help with income or rent. It is paid to people on low incomes who cannot work, are looking for work, or work on low or modest pay. People with children get more for two of them and many do not get all their rent paid. 

It is supposed to let people keep more of what they earn and thus boost incentives both to return to work and to earn more once in work. But since November 2021 for every £1 extra earned the credit is reduced by 55p allowing the claimant to keep just 45p. The previous Government - which reduced the withdrawal rate from 63p - said allowing people to keep 45p of what they earn was an incentive to work. However, that figure of 55p withdrawal rate is only accurate for people who earn less than £242 a week and are not householders.

There is one complexity to be aware of. People with a child or children and people who are judged to have 'limited capability for work' get what is called a 'work allowance'. This is not extra money but is simply an amount they are allowed to earn before the taper kicks in. It is set at £404 a month (£93.23 a week) if universal credit includes help with housing costs and £673 a month (£155.31 a week) if it does not. So those people can earn up to those amounts and the taper will not apply to those earnings. It does apply though to every pound earned when their income is above those amounts. And for everyone else the 55% taper applies to the first pound earned. 

Taxpayers

Universal Credit is worked out after tax and National Insurance have been deducted. In 2024/25 anyone earning more than £242 a week pays National Insurance and income tax. National Insurance was recently reduced and now takes 8p in the pound and income tax which begins at the same level takes another 20p in the pound before their Universal Credit is worked out. That leaves 72p of each pound. The Universal Credit taper then reduces their benefit by 55% of that net amount. The total loss from NI, income tax, and reduction in Universal Credit is 68p from each £1 they earn. So they keep less than 32p. But that is only part of the picture.

Householders

Universal Credit, despite its name, does not replace all means-tested benefits. It does not replace the means-tested reduction in council tax which is now called Council Tax Reduction and is operated by local councils. Like all means-tested benefits Council Tax Reduction is withdrawn as income rises. The standard taper is 20p for each £1 rise in net income (after tax and NI, and the Universal Credit taper). In other words for each extra pound of net income help with council tax is reduced by 20p. The result is that for each £1 earned a total of nearly 74p disappears in tax, NI, reduced Universal Credit, and reduced Council Tax Support. The calculation is at the foot of this blogpost. 

Localism

In some areas of England and Wales the reduction for every £1 of income earned may be even higher as local councils struggle to save money by raising the taper from 20% to as high as 30%. In areas which raise the Council Tax Reduction taper to 25% householders on Universal Credit who pay tax will find that 77p of each pound earned disappears in deductions. In areas with a 30% taper they will lose nearly 79p and keep barely 21p for each extra pound earned after deductions for income tax, National Insurance, Universal Credit taper, and lower Council Tax Reduction. 

A new way of calculating council tax reduction is to put income into bands and only change the reduction as income crosses from one band into another. If extra earnings do not change the band of earnings then the council tax reduction taper is effectively zero. However, if it does move income across a band the taper can be a lot higher than 20%. About one in four councils in England now use a banded scheme.

Pension contributions

Everyone who earns over £10,000 a year (£192 a week) has to be enrolled in a company pension scheme. They can opt out but most do not. The standard contribution for employees is 5% of pay and this is deducted along with tax and national insurance and it is this amount net amount to which the taper applies. However, the 5% (and 3% from the employer) is paid into a pension fund so remains the property of the individual. Calculations in this blogpost ignore these contributions but their deduction does affect net income. 

Students

Students with a Plan 1, Plan 2. Plan 4 (Scotland only) or Plan 5 student loan make repayments of 9% of on every pound they earn above a threshold (currently £480 a week for Plan 1 or 5, £524 a week for Plan 2, £603 for Plan 4, and £403 for a postgrad loan). That is in effect an extra 9% tax (6% for postgrad loans). However it is not counted as a tax for Universal Credit calculations. So it is taken off the final figure after that calculation. Graduates whose income is low enough to be entitled to Universal Credit lose typically 83p in the extra pound keeping just 17p, if they pay council tax.

It is a tax

Some people object to the deductions made from a means-tested benefit being called a 'tax'. They say that the taper rate reduces a subsidy from taxpayers is not a tax. Tax, they say, means a levy on your own money not a reduction in the money the state gives you. 

But it is a tax. And officially so. In his Spring Budget, 8 March 2017, Chancellor Phillip Hammond confirmed that the tapered loss of this benefit was a tax. He confirmed the reduction in the taper rate by saying "the Universal Credit taper rate will be reduced in April from 65% to 63%, cutting tax for 3 million families on low incomes." These words were echoed by Chancellor Rishi Sunak in his Autumn Budget on 27 October 2021 "This is a tax on working people -- and I'm cutting it from 63 to 55 per cent...Let us be in no doubt: this is a tax on work. And a high rate of tax at that."

So it is a tax. And a high one. 

Conclusion

Losing 74% of each extra pound you earn is hardly an incentive to work or to work more hours. It is the highest marginal tax rate in the system aside from the reduction in child benefit for those who earn £60,000 to £80,000 a year and have at least ten children. It is far more than the 42% tax and NI deductions for higher rate taxpayers with incomes over £50,270, more than double the minimum wage. And more even than the highest marginal rate of income tax in Scotland which can reach 67% for those earning over £100,000 - £125,140.

TOTAL DEDUCTIONS FOR A TAXPAYER HOUSEHOLDER FOR EACH £1 OF EXTRA INCOME WITH 20% COUNCIL TAX TAPER, IGNORING PENSION CONTRIBUTIONS AND STUDENT LOAN REPAYMENTS.

Earns extra		£1.00
Tax	20%	-£0.20
NI	8%	-£0.08
Net after tax		£0.72
UC reduction	55%	-£0.40
Net after UC		£0.32
CTR cut	20%	-£0.06
Net gain		£0.26

So earn extra £1 and keep just 26p. 

An effective tax rate of 74%

19 July 2024
Version 4.0

This blogpost replaces the one originally published 19 September 2012 and revised in October 2022.

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TARGET 221 - BOOST YOUR NEW STATE PENSION

UPDATED for the 2024/25 tax year. All rates are those paid from 8 April 2024.

More than a million people who reach state pension age in the years from 6 April 2016 will not get the full amount of the new ‘flat-rate’ state pension - currently £221.20 from 8 April 2024.

But many of them could boost their pension towards or up to the full flat rate amount.

This guide is for men born 6 April 1952 or later and women born 6 July 1953 or later who paid into a good pension at work or, in some cases, into a personal pension.

It is complicated - don't blame me I didn't invent the rules! But please persist, as it could make you better off for the whole of your retirement.  

There are other groups who may not get the full new state pension because they have paid less than 35 years of National Insurance contributions. They may be able to boost their state pension by paying extra contributions now. This piece does not cover that issue. Try the links at the end.

NEW STATE PENSION

The new state pension was supposed to be simple. A flat-rate amount for everyone who had at least 35 years of National Insurance contributions. This year 2024/25 that amount is £221.20 a week (£11,502 a year) and is taxable. However, there are around one and a half million people who will reach pension age in the years before 2027 who will get less than that even if they have 35 years or more National Insurance contributions.

That is because an amount is deducted from the new state pension for every year they paid into a good pension at work. I call it a contracted out deduction because they were ‘contracted out’ of part of the state pension called SERPS or State Second Pension (S2P). They paid lower National Insurance contributions and instead of that additional state pension they get a pension from their job which was supposed to replace it. The Government prefers to call it 'Contracted Out Pension Equivalent' or COPE. It is that COPE amount that is deducted from your new state pension.

This group includes most people who worked in the public sector, such as

• nurses, doctors, and others in the NHS
• teachers in schools and universities
• police officers and fire brigade staff
• civil servants
• local government workers
• armed forces
• Post Office workers

It also includes many people who worked for one of the privatised industries such as British Airways, British Rail, British Steel, and Royal Mail.

Another large group affected are people who worked for a private sector employer who paid into a good scheme at work that promised them a pension related to their salary. They used to be called ‘final salary’ schemes and nowadays are called Defined Benefit or DB schemes. In the past many large firms ran such schemes. There are still more than 5000 of them and if you paid into one at any time from 1978 your new state pension will be reduced.

Also included are some people who paid into a personal pension and who were persuaded to contract out of part of the state scheme – at the time it was normally called ‘contracting out of SERPS’.

For all these people their new state pension will be reduced to take account of the years they paid into a contracted out pension scheme. That deduction applies even if they have paid the 35 years which is needed to get a full pension – the deduction is made after the full pension is worked out. It can also apply even if they were contracted out for a short period and paid in 35 years or more when they were not contracted out. These deductions can be very large but normally can never leave you with less than £169.50 a week which is the amoount of the old or 'basic' state pension.

Please do not ask me why that is fair! It may not be fair, but it is the law. The good news is that you can reduce that deduction and, depending on your age and the amount deducted, you may be able to boost your pension up to the full flat-rate £221.20.

THE DEDUCTION

If your new state pension has an amount deducted from it because you spent some time paying into a good pension scheme at work then you can reduce that deduction or even wipe it out. It will help even if you already have 35 years of National Insurance contributions or more.

If your new state pension is reduced because you paid into a good pension scheme at work then every year of National Insurance contributions you pay or have credited from 2016/17 to the year before the tax year in which you reach state pension age - currently 66 for everyone - will mean that deduction is less.

If you work and earn more than £123 a week you will get contributions credited or paid to your account (you start actually paying for them when you earn above £242; under that they are credited). If you get child benefit for a child who is less than 12 years old then you will also get a credit for each week. If you get universal credit, jobseeker’s allowance, employment and support allowance, or working tax credit then you will get a credit for each week you get that benefit. You can also get credits if you are a carer in some circumstances. Check here for more details of who can get credits. Some are given automatically, others have to be claimed.

Men can get credits for years between women’s state pension age and 65. They get a credit for the tax year in which they reach women's state pension age (unless they also reach 65 in that tax year) and any subsequent tax year before the tax year they reach 65. So these man credits are only available to men born before 6 October 1953. See footnote.

If you are self-employed then up to 2023/24 you paid what are called Class 2 National Insurance contributions if your profits were £12,570 or more. They were £3.45 a week (£179.40 a year). If your profits are between £6725 and £12,750 you will be given a credit. If your profits are up to £6724 you can pay these contributions voluntarily - but only for years in which the were genuinely self-employed. In previous years there were no credits paid and the threshold for paying was just below £6725 a year. 

If you will not pay National Insurance contributions at work or as self-employed or get credits for them then you can pay voluntary contributions, called ‘Class 3’. They will cost you £15.85 a week (£824.20 for a year). For each extra year of contributions your pension will be boosted by £6.32 a week (£328.64 a year) so the payback is rapid – two and a half years for non-taxpayers; just over three if you pay basic rate tax; just over four for higher rate taxpayers, and four and a half for top rate 45% taxpayers. Contributions for 2023/24 were the same as 2024/25 at £907.40 but a concession made recently means that the 2022/23 rates are applied to back contributions up to 2023/24. So those filling gaps pay the 2022/23 rate - £824.20 - until 5 April 2025. Contributions for 2021/22 and earlier will also be at that rate [For reference earlier rates were 2021/22 -£800.80, 2020/21 - £795.60, 2019/20 - £780.00; 2018/19 - £772, 2017/18 - £740, and 2016/17 - £733.20 but you can no longer pay at these rates.]

The new state pension was increased to £221.20 a week from 8 April 2024 rising according to the triple lock of earnings, prices, or 2.5%. Earnngs rose most so the pension rose with them by 8.5%. 

If you have paid some contributions at work or as self-employed during the tax year but you are short of a full year you can pay individual weeks through Class 3 (or Class 2) to make your record up to a full year.

You can only pay Class 3 contributions for the years before the tax year in which you reach state pension age. That limits the number of years you can pay to boost your pension. The table show which years you can pay Class 3 contributions to set against the contracted out deduction and the maximum boost that should give to your pension. Your pension cannot be boosted to more than £221.20 a week and it will not ever be reduced to less than £169.50 so the maximum boost is £51.70. Paying the ninth year may not be worth it for £1.14 a week boost.

BOOSTING A NEW STATE PENSION THAT IS SUBJECT TO A CONTRACTED OUT PENSION EQUIVALENT (COPE) DEDUCTION

Reach State Pension Age in	Men born		Women born		Years you can pay	Maximum pension boost (2024/25 rates)
2016/17	6 April 1951	5 April 1952	6 April 1953	5 July 1953	0	£0.00
2017/18	6 April 1952	5 April 1953	6 July 1953	5 Oct 1953	1	£6.32
2018/19	6 April 1953	5 Jan 1954	6 Oct 1953	5 Jan 1954	2	£12.64
	Men and women born
2019/20	from 6 January 1954		to 5 July 1954		3	£18.96
2020/21	from 6 July 1954		to 5 April 1955		4	£25.28
2021/22	from 6 April 1955		to 5 April 1956		5	£31.60
2022/23	from 6 April 1956		to 5 April 1957		6	£37.92
2023/24	from 6 April 1957		to 5 April 1958		7	£44.24
2024/25	from 6 April 1958		to 5 April 1959		8	£50.56
2025/26	from 6 April 1959				9	£51.70 (max)

NEXT STEPS

You can normally pay voluntary Class 3 contributions in the tax year they are due or up to six tax years after that. But a concession announced earlier this year means that you can still pay for the 2016/17 and 2017/18 tax years until the end of this tax year, 2024/25. But from 6 April 2025 the earliest year you can pay will jump to 2019/20. So you should act quite soon if you want to pay for the three tax years before that. You cannot pay them in advance so make a note to pay future years in April. However, the price will almost certainly rise as time passes so it will usually be cheaper to pay them as soon as you can.

If you will reach state pension age in 2024/25 you may want to act soon to see if you can boost your pension by paying National Insurance contributions for the eight years 2016/17 to 2023/24. That could give you an extra £50.56 a week on your pension.

The Government has introduced a new service to help you check your state pensioncheck your state pension and boosting it. Sadly it only works for people under state pension age. Even those within four months of pension age cannot use it. Instead you should phone the DWP’s Future Pension Centre on 0800 731 0175 and ask for help or advice about paying extra contributions. Have your National Insurance number with you. Ask what your ‘starting amount’ is and ask if there is a deduction for being contracted out. If your starting amount is less than £221.20 and there is a contracted out deduction then you may be able to boost it using the information in this guide. 'Starting amount' is explained in the notes below. If you have a deduction for a pension which you cannot trace use the Government's free Pension Tracing Service.

In the past, many people have contacted the DWP and been told they cannot boost their pension because they already have 35 years or more of contributions. That is incorrect. Some officials seem to be confusing this scheme with one to fill gaps in your contribution record. Others have been told that they need more than 35 years to get a full pension. That can be true in the circumstances in this blogpost, but it is a confusing way to put it. 

You may get more sense from the free and excellent Money Helper website or call on 0800 011 3797. Beware of similar sounding commercial organisations.

You can check your starting amount at this Government website. You will have to go through security procedures which can be a pain. Make sure it includes your 2015/16 contributions. This website may let you see how you can boost your pension by paying extra National Insurance contributions. 

NOTES

1. All the rates in this guide are correct in 2024/25. 

2. If your income is low then you may get extra money from pension credit or help with your council tax or rent (rent or rates in Northern Ireland). If you buy Class 3 contributions to boost your pension those benefits will be reduced but it will almost always still be worthwhile.

3. Your ‘starting amount’ is the calculation of how much state pension you have built up at 6 April 2016 under the old and the new rules. Your starting amount is the one that is bigger. It will take account of National Insurance contributions paid up to 2015/16 and will also make a deduction for years you have been ‘contracted out’ of part of the state pension system called SERPS. If it shows that you have fewer than 35 years of National Insurance Contributions then you may be able to pay to fill gaps right back to 2006/07 to boost that number. But always check if it is worthwhile to do so - see  Filling gaps in your National Insurance record – new state pension. 

4. SERPS, the State Earnings Related Pension Scheme, was an earnings-related supplement to the basic state pension. People paid into it as part of their National Insurance contributions from April 1978 to April 2016. From April 2002 it was changed and renamed State Second Pension (S2P). It was SERPS and S2P – officially called ‘additional pension’ – which people ‘contracted out’ of if they paid into a good pension at work or in some cases into a personal pension which they chose to ‘contract out’. They paid lower National Insurance contributions. The pension they paid into was supposed to replace the SERPS or S2P but it does not always do so in full. 

5. Tax years run from 6 April one year to 5 April the next. So 2024/25 runs from 6 April 2024 to 5 April 2025.

6. If you have an old company or personal pension you cannot trace, use the Government's free Pension Tracing Service.

7. Contacted Out Pension Equivalent is the amount deducted from your new state pension to take account of the time you were contracted out of SERPS/S2P. In theory the amount deducted should be paid to you by the pension scheme you paid into as part of being contracted out. But that will not always happen especially if you were contracted out into a personal pension. This government guide to contracting out sort of explains it.

8. Man credits. These credits for men - called auto-credits - are only awarded for whole tax years, not individual weeks. Men born 6 April 1952 to 5 April 1953 can get a year of contributions credited for 2016/17. They may also get earlier years credit but they do not help with reducing their contracted out deduction. Men born 6 April 1953 to 5 October 1953 can get a year credited for 2017/18. Men born 6 October 1953 or later cannot get them.

BOOST YOUR PENSION GUIDES FOR OTHER GROUPS

Men born 6 April 1951 or later and women born 6 April 1953 or later.

·       Filling gaps in your National Insurance record – new state pension 

Men born before 6 April 1951 and women born before 6 April 1953

·        It is now too late for you to fill any gaps in your National Insurance record – old state pension 

·        

Version: 7.6

21 May 2024
Previously: Target 203, Target 155, Target 164, Target 169, Target 175, Target 179, Target 185

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Nanocharge will fund remission of fees at top university

 

OXFORD UNIVERSITY TO ABOLISH STUDENT FEES

One of Britain's top universities is to abolish student fees after the Supreme Court allowed it to charge a royalty on every use of English words online.

From 6 April 2024 Oxford University will use a monopoly granted by Henry VIII to demand money from the one billion people who write online in English. They will automatically be billed a ‘nanocharge’ of 0.0001p by Oxford University Press for every word they publish online if it is in the Oxford English Dictionary. Fees from the estimated fifty trillion English words written online each year will allow the university to make education free at all levels.

The Oxford English Dictionary itself only began in 1859 and rapidly became the definitive record of the language. 

But under Letters Patent of 1523 Henry VIII granted the University “our speciall lycence” to collect money “from thoos persons who prynt in the language of Englonde” and use such money “for the supporting and maynteynyng of the vnyuersite of Oxenford” and the order “shulde passe and be sealed vnder our greate Seale as by our said comaundement as ye haue more parfite knaulage of the language of Englonde than any other”.

Henry VIII Letters Patent of 1523 granting Oxford University rights to all English words ‘in perpetuity’. 

The royalty could have been charged at any time since 1523. But early attempts to levy printer’s type led to riots against the so-called “taxes on knowledge”. The situation changed last week when the Supreme Court held unanimously that the words of the Letters Patent "could not be clearer” and gave Oxford the right “in perpetuyte” to the copyright on the words in its Dictionary. The court rejected a counter-claim by rival publisher Collins that the Letters Patent were repealed by the Monopolies Act 1624. “No such provision exists in the Statute” said the President of the Court and High Steward of Oxford University Lord Reid of Allermuir. Significantly, Justice Lord Lloyd Jones, who went to Cambridge, did not dissent.

Professor Fiona Nomura, a Proctor of Oxford University Council, told me in an exclusive interview

“For nearly half a millennium Oxford has allowed England, Britain and the world to use the English language free of charge. However, the University is increasingly uncomfortable at the higher annual fee of £9,250 charged to our UK undergraduates. So Congregation decided to use this ancient right to levy a charge on every online use of the words which are the University's copyright and make education at this world beating institution free again.”

She pointed out that Henry VIII himself was a great patron of education and founded several grammar schools and colleges.

Oxford claims the amount “will be too little for an individual to notice but very valuable to our students”.

All words published online will be compared with the online Dictionary and an automatic PayPal debit applied for each word in it. The nanocharge of 0.0001p levied on the estimated 500 trillion online uses of English words each year will raise £500m – more than enough to replace the £110m in fees paid by Oxford’s 12,000 undergraduates. The balance will be used for bursaries and to support its 11,000 postgraduates – who Congregation called “the entrepreneurs of tomorrow” in the so far secret meeting that made this historic decision.

However, Professor Angie Buff of Trinity College Cambridge said the move was a backward step. “It will lead to people misspelling and making up words to try to avoid the nanocharge. They may even start tweeting in foreign languages. It may help a few Oxford students but it will damage literacy and, ultimately, English itself.”

The levy will cover all websites and social media including blogs, Twitter, Facebook, LinkedIn, and even the subtitles on YouTube. Twitter alone publishes 3 trillion English words every year. Oxford is working with GCHQ to extend the nanocharge to encrypted services such as SnapChat.

Professor Nomura confirmed that the copyright only extends to the 600,000 words defined in the Oxford English Dictionary. “Neologisms such as ‘deepfake’, ‘sportswashing’, and ‘mountweazel' will still be free to use, should any ignoramus wish to do so.”

However, she confirmed that the fee would be levied on one relatively new word. At an emergency meeting of the Words Admission National Council English Register in March 2018 ‘Brexit’ was added to the Dictionary with immediate effect. Such speed is unusual for an organisation which took twenty-four years to admit the word ‘snozzle’. Professor Nomura denied then that there were any plans at the time to charge people for using English words despite rumours spread on 1 April 2018. "It is simply because the definition was so clear" she said "Brexit means Brexit," Fi Nomura smiled, “end of."

UPDATE: I have learned that the nanocharge will be brought forward five days and will be applied from 0001 on Sunday 1 April.

Vs 3.0001

1 April 2024

FIND GOOD FINANCIAL ADVICE

How do I find a good financial adviser? It's a question I am often asked. And there is no easy answer. Especially if you do not have a lot of money.  

My first question is do you need financial advice? Unless you have a big lump-sum (tens of thousands of pounds or more) or a lot of surplus income to invest (hundreds of pounds a month) you probably don't need financial advice and probably will not want to pay the fees good advisers charge. See free financial advice below for other services that can help you.  

But if you do want regulated financial advice then here is my guide. Many people first want or need advice when they think about exercising their new pension freedoms. Some with a fund worth than £30,000 or more which comes with a guarantee have to take regulated financial advice before they can transfer their money out either to another pension or, ultimately, to cash.

I have three filters to sort the best advisers from the others. 

Filter One - Independent

Only ever use an Independent Financial Adviser. This term is now regulated and policed under EU rules called MIFID II which began on 3 January 2018. Now that the transition period is over and the UK has left the ambit of the EU these rules have become part of UK law and the Financial Conduct Authority polices them.

Under these rules there are two main sorts of financial advisers.

The sort you want is called 'independent'. That can mean one of two things.

1. They give advice on all financial matters and looks across the whole of the market and give that advice on any financial topic where they might recommend a product.

2. They give advice on a specific type of product - such as annuities or pensions - and not on other types of product. But they must still look across the whole of the market relating to that product. This may be called 'focused independent' or may just be called 'independent'.

Any adviser who is not independent does not look at the whole of the market and may be tied to one or more firms and can only recommend products from those firms. In the UK these advisers are called 'restricted' though hardly any of them used that term. Never ever use an adviser who is restricted by products. If you ask 'do you offer independent financial advice' and the answer is anything but a clear 'yes' then reject them. Many work for a bank or insurance company and of course only recommend you buy their products. That is just sales masquerading as advice.

A lot of advisers will be rejected by Filter One. The only way through it is to become independent.

Filter Two - Planners

Only ever use an IFA who is a chartered or certified financial planner. The very best qualified financial advisers are chartered (or certified) financial planners. This brings you down to the best qualified 6000 or so of the 33,000 regulated financial advisers. They are beyond what is called QCF Level 6. So they have put a lot of effort into being the good guys and the chances of a bad guy (or gal) remaining in there is small. Some firms are chartered which means that at least some of their advisers are chartered themselves and the rest are probably working towards it.

Lots of good advisers will be rejected by Filter Two. Sorry. Get the qualifications.

Filter Three - Payment

My general position is only use a financial planner who you can pay in pounds. Do not choose one who wants to charge you a percentage of your money. You earned, made, or inherited it. Charging a percentage is like taxing your wealth. Even HMRC is not entitled to do that. 

Percentage fees are a hangover from the days of commission when advisers lived on a percentage of your money they were paid year after year. If you cannot afford the fee in pounds then you probably do not need or cannot afford financial advice. 

However, in some very limited circumstances a small percentage charge - say 0.5% or so - can be better value than paying in pounds. But always make sure that:

• you know each year how much has been taken from you so you can see if it is value for money.
• you review the service you get every year and if it is poor, find another adviser.

Ideally you should also pay upfront from your non-invested resources rather than out of your invested money. One drawback of that approach is that a fee taken out of your pension fund comes from money which has already had income tax relief. So ultimately that fee costs you less than if you paid it out of your taxed income. It is all part of the massive taxpayer subsidies for the financial services industry (relief from VAT for finance and insurance costs £11 billion a year). That was originally an EU law but is very unlikely to change once we have finally left the EU in 2021. If you must, then pay in tax-subsidised pounds from your pension fund. But ideally - and with all other investments - pay in pounds out of your non-invested resources. That way you see the money you are paying and can ask yourself – is it worth it? And unless it is good value and you know what it is and what you get for it never pay a wealth tax to the adviser from your fund. 

Contingent fees
One iniquitous method of charging grew up around pension transfers. If you have a good company pension that promises you a pension related to your salary - called Final Salary or sometimes Career Average schemes (they are branded Defined Benefit or DB schemes by the industry) you may be tempted to transfer it to a pension pot scheme - a money purchase or Defined Contribution (DC) scheme.

Transferring out of a DB scheme into a DC scheme can seem very tempting because you will get a massive amount of money to move away from the guaranteed DB pension. And then if you choose to do so you can cash some or all of that pension in. It is almost always a bad idea. In the past some financial advisers who would deal with this for you (you have to get advice if your pension is worth a transfer value of £30,000 or more) charged on a 'contingent' basis. That meant you only paid them if you took their advice and transfered your fund. Such fees created a conflict of interest between you and the adviser who was only paid if you transfered. The FCA finally saw sense and banned contingent fees from 1 October 2020. 

The difficulties of advising people about pension transfers and the cost of insurance mean that relatively few advisers will handle this business. Esepcially if you do not have a very valuable pension. 

Next steps
These three filters will take you a long way towards finding good, safe, but often expensive, financial advice. There may be adequate or even good, safe, and perhaps cheaper advisers which have been filtered out. They can get themselves through my three filters by becoming independent, getting financial planning qualifications, and changing the way they charge.

I must also add that there are a small number of well qualified independent financial advisers who have given dreadful advice (especially about pension transfers), have gone out of business, or have even turned out to be crooks. So these three filters are not a guarantee but they are a good start.

Website research

You can apply your three filters using online directories of financial advisers.

1. Adviser Book is the newest directory. Unlike the others no-one pays to be included. It has the complete list of more than 12,000 FCA regulated adviser firms on it but it does not yet list individual advisers separately. It clearly states who is verified as independent thouhg most of them are still unverified. You can filter by qualifications and specialisms. You can also filter by independent and how fees are charged.

2. Unbiased was the first real attempt at a comprehensive database. It says it lists more than 18,000 financial advisers who are mainly independent but some are restricted. Advisers get a basic listing free but they must pay a subscription to be directly contactable through the website. You will see a list of the 'top 20' near your postcode which unbiased says is based on how near they are to you.

You can use the site to apply my filters. You can also make other choices such as specialisms or qualifications. You can even pick a male or a female adviser.

3. Vouched For uses its algorithms to provide a list of advisers for you. They are ordered to take account of how local they are to you, reviews by customers, and ratings. Advisers cannot pay for a better position in the list. The site checks qualifications by asking the senior manager who is responbile for them and checks that periodically. It demands images of certificate for qualifcations.

You can filter by speciality, by independent or not, and by qualification. And each entry shows clearly if the adviser is independent or restricted - always reject the latter of course. It will also show the minimum amount of money you need for them to take you on as a client. 

Vouched For lists about 8000 financial advisers who choose to pay the fees to be included and of those 3000 are full vouched for - you can only click through to the adviser website for those. 

Other listings are available but they are much less useful. The Personal Finance Society lists all the advisers who have its qualifications and are Chartered Financial Planners, or are on the way to becoming Chartered, or work for a firm which is Chartered. That is a useful check. But it does not indicate if they are independent.

Next steps

After using these sites and checking for independence, qualifications, and how they charge, you should then pick two or three you fancy.

I would only use an IFA who has a website where you can find out more. Ignore the slick sales patter which usually reads as though it is generated by a PR machine. You'll find similar meaningless platitudes on most of them.

Most adviser websites do not tell you how much they charge - I would tend to pick only those that do. Certainly make that your first question when you meet them. If the answer is anythnig but clea that is a warning flag. Also ask what it will be in pounds (if they haven't told you) and then ask what you get for that fee.

Most advisers will give you one free session. Go prepared with details and information about yourself. Try two or three and see which you prefer. Do not be embarrassed to say 'no' to them.

If you pick an adviser but later regret it you can leave by just writing them a letter telling them that they are no longer your adviser. Ask them to return any documents and destroy all your data. If you feel you have been badly advised or locked into investments you did not want, then complain and pursue the complaint to the Financial Ombudsman Service.

Free financial advice 

If you want financial advice outside the regulated professionals, then try the free, Government approved Money Helper site. That is the new name for what used to be called the Money Advice Serivce. Its website is very good on a whole range of money issues, some of which many financial advisers will know little or nothing about. Or you may want to consider joining Which? and subscribing to its Which? Money Helpline. That will cost you £10.75 a month.

If you have pension questions then you can still contact the Pensions Advisory Service which has a helpful helpline on 0300 123 1047. The service is now part of Money Helper. It is free and approved by the Government.

Specific advice about the pension freedoms which began in April 2015 can be found at Pension Wise. If you are over 50 you can call 0300 330 1001 to book an appointment for one-to-one telephone advice, or a face-to-face interview at a nearby Citizen's Advice office. Again, Pension Wise is now part of  Money Helper.

Footnote

Only the term 'independent financial advice' is regulated. Anyone can call themselves a 'financial adviser', an 'investment manager', or a 'property specialist'. And they do. All those terms are meaningless. Some call themselves International Financial Advisers which they abbreviate to IFA trying to give the impression that they are Independent Financial Advisers. They are not and are probably not even regulated. All these people are allowed to operate unregulated as long as they only sell unregulated investments in things like whisky, property, or art. Your money is completely at risk. 

If an adviser does not use the word 'independent' or does not say simply say 'yes' when you ask if they are independent, then they are not. Avoid them. Always ask for a Financial Conduct Authority number and check it out on the Financial Services Register. Not all individual regulated advisers are on it. But all regulated firms are so ask the adviser about their firm. Then use the contact details on the FSA Register to check with that firm is the person who claims to work for them does so. 

Sadly - and madly - the register does not say if the adviser is independent or restricted. Sadly - and madly - again, changes to the Register mean that it is not as comprehensive as it was. But never trust someone who is not on it. And be cautious even about those who are.

If you are ever cold called or receive a text or email from an adviser you have not found and researched just say 'no'. No-one ever lost money by doing that. Many have lost money by not doing that.

Paul Lewis

23 October 2023

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DON'T TAKE AWAY WINTER FUEL PAYMENT

UPDATED 3 OCTOBER 2023

Another autumn, another round of people saying means-test the winter fuel payment. Somne even saying do that and use the money saved to save the triple lock.

Let me declare an interest. I am old enough to get the £200 tax-free Winter Fuel Payment (the extra £300 is a cost of living payment last year and this and not technically part of the WFP). And I might add I do not in the slightest need that money. If it disappeared tomorrow it would not leave me freezing in the winter and wondering whether to choose turning up the heating or buying a few groceries. 

So I get it; I do not need it; and the amount is small enough in my personal financial affairs that whether I get it or not is neither here nor there. 

That leaves me uniquely able to say unequivocally that it would be complicated, counterproductive, and wrong to stop Winter Fuel Payment for those over state pension age of 66. Here’s why.

First, complicated. Who would you take it away from? Everyone who admitted they didn’t need it? Everyone called Paul? Everyone who paid higher rate tax? That would be possible but it would create a cliff edge at an income of £50,270 – earn an extra £1 or your pension rises £1 a year and you would lose £200. And it would not save much. The Government estimated some years ago that ending it for households with an income above £35,000 would save just £270 million out of the total cost of more than £2 billion. The administrative cost could be £25 million a year or more.

You would save more by following what one tweeter suggested to me. Go down the income scale and only give these benefits to those poor enough to pay no income tax. Then the cliff edge would move down to £12,570. That would save more but would certainly take it away from many who did need winter fuel payment to keep warm in winter living on less than £241 a week.

Another problem is that these are individual entitlements so the non-taxpaying spouse or civil partner of a higher rate taxpayer would continue to get it. 

The same problem would be found if the payment was taxed as income. Where two pensioners share a household the £200 is split in two - £100 each. So each partner would have to be taxed separately on it. And where one partner earned, say, £1,000,000 a year and paid 45% tax on the payment, their partner may have no taxable income and pay nothing. So a household where many think the payment is not needed would still keep £155 of it. 

There would also be problems where the payment just tipped someone over from being a non-taxpayer to paying tax. How would the right amount be collected if, for example, winter fuel payment pushed an individual £50 above their tax threshold and they owed £10 tax? Solving those problems would be expensive and a back of the envelope calculation suggests the tax take might be less than £200 million a year. 

The next step might be link it to pension credit. But the level of pension credit is less for younger pensioners than it is for older ones. So that would be another divide. And of course an estimated 850,000 pensioners who could get pension credit do not claim it and would not get the Winter Fuel Payment either. Though as they are already living below the pensioner poverty line they certinly need it.

Now, I know your next argument. It is one I have made myself. Surely, you are thinking, surely all that Oxbridge brain power in the civil service can come up with SOME scheme to rid me of these turbulent pensioners? Well, they might. They did come up with a scheme to tax child benefit at up to 100% where a parent has an income over £50,000. That sort of works except a lot of those who should pay the tax did not know about it and are now being pursued for arrears. The others have the bother of filling out a self-assessment form or not claiming child benefit at all which could cause them problems later in life.

So that is the ‘complicated’ bit.

Now ‘counterproductive’. The thing about these universal benefits – ones that you get on grounds of age or condition – is that they go to everyone in those categories. Those who need them do not have to declare their poverty to get them. If they do have to take that step then many simply do not claim. A total of £19bn is unclaimed in varous means-tested benefits by people of all ages (Policy In Practice 2023). As I said an estimated 850,000 pensioners do not claim £1.75 billion in pension credit. Add in housing benefit and council tax support and the figure is a lot higher. 

Paying everyone Winter Fuel Payment is the price we pay as a society so that my neighbour Marjorie, too proud to claim means-tested benefits though she needed them, at least got her winter fuel payment in her last years. If you means-test winter fuel payment then poverty among pensioners would grow as many who needed it failed to claim what they could get. 

And finally ‘wrong’. In a way this is an extension of counterproductive. Some countries call the government departments that run social security or health the Ministry of Solidarity. Because state benefits represent solidarity. Between the sick and the well. Between the jobless and those in work. And, of course, between young and old. There are times and circumstances in life when the state should step in and transfer money from one group to another. Just as the childless pay for schools. The law abiding pay for the police force and the courts. And those without solar panels on their roof pay for those who get cheaper power from them. 

In summary, taking winter fuel payment away from richer older people or from older people deemed not to be poor would save relatively little, cost a lot in administration, increase poverty among the old, and undermine solidarity between the generations. 

This is a revised version of a blog first published in 2012 and 2015 when there was also a debate about whether to means-test free bus passes.

3 October 2023
version 2.0