Is Paying Financial Adviser From Pension Taxable

Published / Last Updated on 26/02/2015

Video answer:  Is paying financial adviser directly from my pension fund or investment taxable to me? Will I pay income tax when adviser fee paid from policy charges?

Transcript:  Is Paying Financial Adviser From Pension Taxable?

“Hello again and thank you for rather watching yet another one of my videos.  The subject for this video has really a risen from an exchange of emails that I had with a potential client this week, so thank you that you know who you are if you're watching this video.  [And] it's to do with paying financial adviser fees from your pension fund.

What this gentleman raised was: he’d read various articles where if you start paying your financial adviser’s fees from your pension fund then potentially you may get a tax charge yourself, because it had been written that by you having indirectly other monies out of your pension fund then that becomes taxable.  So, as well as you having let's say your tax-free lump sum when you retire [or] and things like that in your normal income; well what if then you’re also paying your financial advisers fees from your pension fund? 

Is it taxable?

Valid question and I thought I would explain that in this video for you so: what we have to realise is with a pension fund there are two types of payment that can come out of your pension fund are:

  • Authorised payments where HMRC (Her Majesty's Revenue and Customs) they have deemed them authorised payments and
  • Unauthorised payments [which have tax penalties]

Now many people may have come across the term unauthorised payments where they’ve had a tax-free lump sum bigger than the 25% and if they’ve taken too much as a lump sum and it wasn't a ‘protected cash amount’ so you’ve had too much out then there is a potential tax charge, or certainly right up until the pension rules change in April 2015: if you pass away and you’ve already taken benefits then your spouse or partner, the surviving spouse or partner, takes the whole fund out of the lump sum let's say: when you're in drawdown then there’s a potential tax charge of 55%.

So, that's what an unauthorised payment is but what about authorised payments?

  • An authorised payment is your usual tax-free lump sum
  • An authorised payment is your pension income but then in addition to that
  • An authorised payment is also paying management fees, fund administration fees and financial advice fees for your pension.

They are all authorised payments.

However, I will add one caveat to that and that is your financial adviser’s fee or the fund management charges must be reasonable and they must be a commercial, at arms- length, transaction. 

So what I mean by that is: let's say you come to my firm and you’ve got £100,000 in a pension fund and you want me to advise you but you and I agree a fee that can be paid from your pension fund for £20,000, is the fee £20,000.  As a fee from £100,000 pension fund is a ridiculous amount.  It is not reasonable and that would be deemed as an unauthorised payment, it's not a reasonable fee.  

It could be that between you and your adviser, ‘on the quiet’ your adviser has said right what we'll do is we will take £5000, £10,000 out of your pension fund to cover the fees but we’ll also, we’ll use that to cover fees for example to pay for your investment advice or insurance advice or get a Will done or something like that.  Now, that’s not in connection, truly in connection with pension advice, so again in those circumstances, any part of your money that was paid to your financial adviser which, wasn't to do with the pension advice specifically, that would be an unauthorised payment.  

An unauthorised payment can attract a basic charge of 40% plus an additional unauthorised tax charge of 15% and then there maybe another charge on the pension fund itself as well.  So you personally get ‘pinged’ for 55% tax charge but then your pension fund may also get charged a tax charge as well. 

[But] to put it in simple terms: if you want to pay your financial adviser for pension advice you can either write them a cheque for the advice or alternatively you can have it paid from the pension fund and it won't incur a tax charge provided it’s a reasonable fee, so it's a realistic fee, it's a commercial fee that’s being charged provided it's been confirmed in writing that it is a contractual matter, it's a contractual fee and then no problems, no tax penalties, no problems.

You can pay your financial adviser his or her fee from your pension fund and there won't be a tax charge, like I have said: provided it is reasonable then it becomes an authorised payment.  So that’s paying financial adviser fees from your pension fund and where you won't get a tax charge provided it complies with the basic rules as set out by HMRC.  Any questions, as ever, do come back to me.  Thanks very much for watching.”

Related Videos

Videos Channels

Explore our Site

Money MOT
T and C