Tax When Commissions or Adviser Fees Are Shared with You

Published / Last Updated on 13/07/2022

From the age of 55 currently, payments to you from your pension fund can be 25% as a tax-free lump sum and the balanced of 75% used to buy a taxable annuity or taxable flexible drawdown.

  1. What if you transfer your pension from one scheme to another and the adviser receives a payment or a commission and then refunds some or all of it to you in cash?  Will you pay tax?
  2. What if you are only 40, i.e., not eligible to receive any pension benefits yet and your adviser makes a commission or adviser fee payment to you?  You have technically received a lump sum benefit from your pension before you are legally allowed to.

Unauthorised Payments:  When you receive a payment from your pension fund either directly or indirectly and it is not within pension tax law, it is deemed an unauthorised payment and you will face a tax penalty.  This is a flat rate of 40% even if you are only a basic rate taxpayer.

We have been approached on a number of occasions to do this and we refuse as we charge online and discounted set fees in £GBP numbers for our services.  We do not charge a % commission or a set % adviser fee for consumer facing retail financial services.

For example, for a Pension Transfer to Flexible Drawdown of £500,000. 

  • Our (current) lowest set fee for this (paid upfront) is: £4,939 plus an optional yearly service e.g., Gold Service from £435 pa.  All paid for by you.
  • Our second lowest set fee when it is paid at the end from policy fund charges deductions is: £5,096 plus an optional yearly service e.g., Gold Service from £435 pa.  All paid from your pension fund.
  • An adviser charging 2% would take £10,000 plus say 1% pa, starting at £5,000 pa.  All deducted from your pension fund.
  • An adviser charging 3% would take £15,000 plus say 0.5% pa, starting at £2,500 pa.  All deducted from your pension fund.

Perhaps a competitor financial adviser firm might offer you a refund/rebate of the commission or adviser fee paid to them from your fund to compete with our low fees.  In some circumstances, this will then become an ‘unauthorised’ payment and you may face a tax charge. 

There are 4 distinct categories that these refund/rebated payments may be paid to you: Rebated Commission, Adviser Charge Rebate, Consultancy Charging and the Pensions Advice Allowance.

Rebated Commission

Commission can only be paid on life insurance policies (advised or no advice given), but it can also be paid to pension and advisory companies when no advice is given whatsoever on your pensions and investments.  For example, Company A outsources its pension annuity business to Company B.  Neither Company A or Company B gives you advice.  A commission for the introduction is paid by Company B to Company A as a ‘thank you’.  Some companies may then offer you a rebate/share of the commission paid to them.

  1. The pension scheme member can be rebated a share of the commission provided the company is still making a profit.  This is not an unauthorised payment, but you should pay income tax on the money received.
  2. The pension company can rebate a share of the commission to company pension scheme trustees provided it is for the benefit of the whole company pension scheme.  This is not an unauthorised payment.
  3. If the pension company rebated a share of the commission to company pension scheme trustees and it was not distributed for the benefit of the whole company pension scheme it then becomes an unauthorised payment and an unauthorised payment charge is due.

Adviser Charge Rebate

When giving financial advice, commission is not allowed as it is a sales incentive that may encourage an adviser to 'sell' you something paying a higher commission, the adviser must quote you a fee whether that is a set, transparent fee like ours or a % of the fund value.

  1. A rebate of the advice fee paid from your pension fund to the financial adviser can be rebated back to you.  This is not an unauthorised payment, but you should pay income tax on the money received.
  2. If the adviser fee is purely a commercial decision e.g., you and your adviser keep moving your pension scheme from Company A to Company B to Company C just to generate an adviser charge fee that they then share with you, this is a transaction for commercial reasons.  This is an unauthorised payment, and an unauthorised payment charge is due.
  3. If the adviser fee is paid and the adviser shares this with you but is now making a loss on the transaction, this again is an unauthorised payment, and an unauthorised payment charge is due.

Consultancy Charging

Many company pensions employ an adviser in a consultancy role to set up a pension scheme for their employees.

  1. If the consultancy fee payable by the employer is paid for from employee members’ own pension funds, is an unauthorised payment, and an unauthorised payment charge is due.
  2. As with the commercial decision above, your employer and their adviser keep moving your company pension scheme from Company A to Company B to Company C just to generate an adviser charge fee that they then share with your employer, this is a transaction for commercial reasons.  This is an unauthorised payment, and an unauthorised payment charge is due.

Pensions Advice Allowance

This is a totally separate area of pension and tax law to the above 3 routes.  You are allowed, by law, to instruct your pension schemes up to 3 times in your lifetime, to release funds to pay for or contribute towards generic pension and retirement planning advice.  It is not specific advice on the individual pension scheme itself, it is general financial planning such as your options, and cash flow modelling needs and advice.

  1. Maximum £500, for each ‘advisory’ session/report.
  2. You can use the Pension Advice Allowance up to 3 times during your lifetime.
  3. It is in a separate class of ‘Authorised Payments’ to all the above.

Credit Due: We give credit to the idea for this video from an article we read on a financial adviser technical website that we subscribe to www.techlink.co.uk.  Thank you.

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