When is advice not advice? When it’s guidance

The UK financial services industry is anticipating a busy year in 2015, with the changes to pensions legislation and the way that pension benefits can be drawn from April 2015.

The media has started to engage with these changes and with the opportunities they create for those over the age of 55.

As you may have seen from the other pages on Chapters Financial’s website, the headlines of these changes are as follows:

• Normally 25% of any unvested pension fund can be drawn as tax free cash.
• No restriction on income levels that you can draw from your plan.
• Income can be phased to meet your needs.
• Any income taken is still subject to income tax. You should be mindful of higher rate income tax charges if you take significant sums from your plan.
• The 55% tax charge on your pension fund on death before 75 will end, reducing to nil.
• Benefits available to estates for those over 75 will be taxed at a lower level of 45% or the recipient can take income from the fund at their highest marginal income tax rate.

One of the key issues and concerns with regards to these changes is ensuring that those who are considering drawing their pension benefits take suitable advice on the ways that benefits can be drawn, to ensure that any short-term objectives may be tempered, with the view that many individuals are now living to around the age of 90. The anticipated longevity of an individual may be 25 years from the age of 65, therefore, the short-term view of possibly replacing a car or taking a long cruise needs to be offset by the likelihood that if the money runs out in future years, they may suffer austerities or even the possibility of returning to work in later life to make ends meet.

To counter this, the Government has established and plans to roll out in the near future a Guidance Guarantee, which offers those considering drawing pension benefits the opportunity to gather information on the options that are available to them and some of the facts that they need to take into account when making a final decision on what they do with their pension fund.

We have to bear in mind also that one of the main benefactors of these changes may be the Government, who could easily see the tax they take from pension income increased significantly, as people do draw pension benefits early and suffer income tax charges on the amount above the 25% tax free cash.

The key point in this blog is that guidance is not advice.

The Collins English Dictionary’s definition of guidance is:

‘Leadership, instruction, or direction’.

The Collins English Dictionary's definition of advice is:

‘Recommendation as to appropriate choice of action’.

The differences between the two are clear in the fact that ‘guidance’ is simply a process of instruction / direction on the range of options open to a client, whereas ‘advice’ is actually a recommendation as to what should be achieved for a client based on their individual needs and circumstances. To me it is almost like going to see a doctor with an ailment and them telling you exactly what it could be, but not actually making any recommendations on what they should do to solve the problem.

I am sure we will see much more information on the ‘Guidance Guarantee’ over the course of the next few months, as we lead up to April 2015. It is good to see additional engagement with the UK public on the issues of their financial planning, particularly pensions focused in this example. However, we would urge caution to those considering drawing pension benefits, to take into account their immediate needs and also their longer term objectives, to ensure that they really do enjoy a prosperous retirement: probably the reason why they started paying into a pension in the first place.

If you would like to receive further information regarding your own situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

No individual advice is provided during the course of this blog.

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.