(Mark writes: this is Terry’s very first blog as a feline at the lang cat – we’re chuffed to have him here. You can email him at firstname.lastname@example.org)
After last week, we’ve now had two budgets in a row, and a not really in autumn statement in between, that have changed the savings landscape forever. Last year’s budget was the biggie; delivering no less than an actual revolution in the pension system! and not only that, a huge shot in the arm to the Isa market. The subsequent not really in autumn statement and this year’s budget have built on the core theme of encouraging savings and making them easier to access. Approaching April, the go-live for pension freedoms is almost upon us and for a few months now it has quite rightly been getting massive national coverage as the implications have filtered through to the mainstream media such as the BBC.
GYMBOA, but at a cost
Now, cast your minds back to 3rd December last year when the not really in autumn statement took place. Two of the additional measures announced were the ability to pass on pension savings tax free on death, and, any ISA savings passed over on death can retain their tax free status.
In adviser platform land, providers have already been stripping out GYMBOA (Getting Your Money Back Out Again) costs from pensions, because advisers wouldn’t wear them, and because it was one avenue left to compete on price when cutting core charges became unsustainable. However, some do still remain (when using equity trading instruments in particular) and watch this space for more on that at a later date.
However, with direct platforms things are a bit different and some rather hefty and more obvious GYMBOA costs are still the norm.
But it’s the charges on passing on ISA savings that has sparked a heated debate at the lang cat port authority. We’re a bit grumpy about it.
Plain English (sort of) example time:
Mr Johnson dies with an ISA holding of £18K. Mrs Johnson also has an ISA holding of £18K. What were the odds? Regardless of that year’s ISA allowance and future contributions, Mrs Johnson now has an existing tax-free holding of £36K, meaning the combined amount can benefit from tax-free growth in an ISA wrapper.
So far, so good. But!
…what we are specifically concerned about are the costs associated with moving the holdings to a different ISA, which Mrs Johnson may well want to do. The average UK ISA pot size is £16K*. For those who charge (and to be fair some don’t) £25 per line of stock is a typical charge to re-register off. Plain old withdrawal or transfer tends to come in at around £25 for the whole policy.
*HM Revenue and Customs 2014 (stats from 2011/2012, the most recent available).
In the name of fairness, I’ve generously added 12.5% to the 2012 average pot size, to give the Â£18K figure. If Mr Johnson had 10 lines of stock – pretty common these days, especially with providers encouraging diversity – the overall re-registration cost is going to be a whopping £250, or in other words 1.4% of the total holding.
This is not small beer. If Mr J had held the investment for five years, paying 0.35% as a platform charge and the average value over that period was £14K, he’d have paid around £245 in platform charges. So the account closing costs in this example doubles the overall charges taken on the account. Is this right? Does it really cost the provider £250 to close the account and cede the holdings?
A further issue is that although £25 per line to re-register is standard, it’s usually much less costly to sell down and transfer. This provides a cost-based dilemma to consumers because they might decide to transfer because it’s so much cheaper, when staying in the market is what they’d really have preferred.
So, dear providers, here’s a thought. Why not stop charging people to GYMBOA whatever the circumstance? O.K, so that is perhaps not going to happen overnight but there is an opportunity to at least remove these charges from policies that become the ownership of a deceased spouse. It is just the right thing to do but, surely, it’s also fair to allow inherited holdings to be consolidated free of cost bias.