When should you pay for advice? - tax planning
So you've got a financial decision to make, but should you pay for advice or go solo?
Which route you take will depend on your confidence with money matters as well as your specific needs – for example, whether you need to sort out a tax problem or just want to set up a regular savings account.
Charges for financial advice should become clearer from January next year, following changes known as the 'retail distribution review' or the RDR. From then, you'll face an upfront fee from independent financial advisers if you do decide to seek their help.
But how do you know when it's wise to pay for help? Here are some key financial milestones and guidance on whether you can do it yourself or need to call in the experts.
FINANCIAL ADVICE WHEN TAX PLANNING
INVESTING - NO
You don't have to consult an IFA to set up simple savings and investments that can help lessen the tax burden.
ISAs and pensions will usually form the core of any portfolio, as these are tax-efficient savings vehicles with annual allowances.
CAPITAL GAINS TAX - MAYBE
If you buy an asset - shares, a second home - and later sell it at a profit, that profit could be subject to capital gains tax (CGT). We all have a yearly tax-free CGT allowance (£10,600 in 2012/13), so only gains above this tax-free band are liable.
Basic-rate taxpayers pay a CGT rate of 18%, while higher-rate taxpayers pay 28%. Taking advice can help reduce your bill and help you understand the basics but savvy investors might be able to do this alone.
ESTATE PLANNING - YES
With no inheritance tax (IHT) plans in place, the taxman can take a massive 40% of everything you own above the current IHT threshold of £325,000.
For those with concerns, tax planning is essential and an adviser is the wisest route to make sure your affairs are in order.
Why can I no longer get 'free' advice?
There are currently two ways of paying for financial advice – an upfront fee or commission.
Commission has enabled advisers to seemingly act on a 'free' basis for clients, with charges then deducted from investors' funds each year – eating into returns – or added to premiums. This makes it diffi cult to gauge the real cost of advice.
Analysis by the Financial Services Authority (FSA) suggests consumers were losing £43 million a year because of advisers, driven by commission, encouraging them to switch pensions.
As a result of the controversy surrounding 'commission bias', from January 2013 customers will instead be charged an upfront fee. These changes are designed to make the cost of advice more transparent and help consumers have a better understanding of what kind of service they are being offered.
It will be important that you ask and agree what the fee will be upfront, and exactly what it covers. For more information, see the FSA's guide to financial advice changes at fsa.gov.uk.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.