People's pension under threat

The stakeholder pension plan, which becomes available next April, will be sold on the basis of its attractive tax benefits and low charges. But moves to charge extra fees for advice threaten to make the scheme much more expensive than originally envisaged by the Government.

To qualify as a stakeholder, a pension scheme must have no initial fee, and annual fees are limited to 1 per cent of the fund. This is much lower than the fees charged on traditional personal pension schemes, where initial charges often eat up all contributions for the first couple of years. But pension providers and independent financial advisers have argued that the 1 per cent annual fee is simply not enough to cover the cost of providing advice on taking out a pension.

Allied Dunbar, which announced the terms of its stakeholder scheme last week, plans to charge £2.75 a month (on top of the 1 per cent annual charge) throughout the life of a pension contract to cover the cost of advice from one of its 5,000 tied sales advisers. As this fee can be increased in line with inflation, it will amount to more than £825 for a 25-year contract. Kevin Ronaldson, marketing director for Allied Dunbar, justifies the charge, claiming that the fact-finding session to glean the information needed to make suitable recommendations about your finances and subsequent paperwork will take the adviser six to seven hours to complete. This does not include ongoing advice about your pension as your circumstances change.

Allied Dunbar is the first to announce such plans, but others will no doubt follow suit. Worse still, many independent financial advisers are saying that they will not be advising individuals on stakeholder pensions. They are deterred by the lower amounts of commission for selling a stakeholder pension, typically about one-third of the amount they have been paid for selling traditional personal pensions (an adviser would typically receive £800-£1,100 up-front for recommending a £100-a-month personal pension scheme, and after the first 27 months, renewal commission of about £30 for every year that the policy remained in place). One adviser says: 'Where you are advising an individual on a one-off basis, it's not economically viable.'

Many insurers and advisers are working on internet and telephone-based sales systems that provide information rather than advice, and the Financial Services Authority, the insurance industry watchdog, is drawing up 'decision trees' to help people work out whether they would benefit from investing in one. But financial experts believe both sources of information will be inadequate for people who have not invested in a pension before or who lack confidence in making financial decisions.

So where can you go for reasonably priced advice? Tony Filbin, director of pensions development at Legal & General, believes many independent financial advisers will be able to advise on stakeholders on a 'limited fact-find' basis. This means that the adviser will restrict his questions to the topic you are interested in - the stakeholder pension - rather than covering all other aspects of your finances as well.

Bath independent financial adviser Chartwell already offers a limited fact-find service called Focused Advice. The firm charges £350 for advising on pensions, and all commission earned is rebated to the client. Chartwell director Patrick Connolly says the charge may be reduced when stakeholder is introduced, to reflect the smaller amount of commission that can be rebated.

Some advisers may even be content with the commission that's on offer. Standard Life has developed three ways for commission to be calculated and paid to advisers, enabling them to choose. The first is level commission, a regular payment worth 3.5 per cent of every premium that is paid by the customer. The second is fund-based commission, an annual payment worth about 0.3 per cent of the fund. Both pay small but regular amounts throughout the life of the policy. Advisers who are used to larger amounts of initial commission will probably prefer accelerated fund commission. Here Standard Life calculates what size your pension fund will be 10 years ahead (based on premium size, assuming premium growth of 4 per cent and investment growth of 7 per cent) and then pays an up-front lump sum worth five times the commission that would be payable at that point. No further commission is paid until the eleventh year, when normal fund-based commission payments resume.

Regardless of which commission style an adviser chooses, the customer will still only have to pay a maximum of 1 per cent a year, but the choice can make a big difference to the adviser. An adviser setting up a £100-a- month pension scheme would earn £614 in fund-based commission in the first 15 years (including a £260 lump sum under accelerated commission), or £840 through level commission.

Nick Bamford of Cranleigh independent financial adviser Informed Choice, says this will be more than enough to cover his normal charges. 'We charge £110 an hour. I've just arranged a stakeholder-friendly personal pension for a lady who is contributing £200 a month, and we're being paid £533 in commission. That's about four hours' work on our fees basis, and it certainly hasn't taken four hours to arrange.'

In fact Bamford says it will take about two hours to conduct a limited fact-find, think about recommendations, print off illustrations of how much the recommended company's contract will cost, create a file for the new client and write relevant letters.

He says: 'We won't be charging hourly fees for advising on stakeholder unless the client requests us to rebate the commission and charge a fee instead.'

More information

Chartwell - 01225 321700
Informed Choice - 01483 274566