IFA or no IFA?

norfolkwriter

Any advice on the following would be greatly appreciated…

I have been self employed for the last three years and am now terrified enough to finally sort out a pension (I am 31; I also have a final salary pension from previous employment worth almost £3k per year). I have seen two IFAs but the advice they offered contradicts each other.
The first suggested I could invest in a personal pension, with a portfolio of funds that the IFA could help me choose. He told me that if I went down the stakeholder pension route I didn’t need an IFA to help me sort that out.
However, the second IFA suggested I invest in a stakeholder pension, which they would help set up and keep an eye on.

Is it a good thing/standard practice for an IFA to manage a stakeholder pension with a very well known insurance group? I thought they were only used when people opted for slightly more complicated personal pensions involving funds that might need changing from time to time. No-one I know with a stakeholder pension uses an IFA.

The fee structure seems confusing, but it looks like the pension provider pays the IFA out of their commission from my contributions. If this is the case is there no reason why not to use an IFA (apart from any annual fees they charge for reviews etc)?

DavidLaGuardia

Stakeholder provides cheap but resricted investment. It should only charge 1%p.a. through an IFA (there are still enough Stakeholders sticking to 1%) You could save on this charge by going theough a discounted borker where there is no advice. In ther long run you might get advice when to move to alternative plans from an IFA though plus the benefit of any other advice ,but this is a a difficult thing to measure. The relaity is that Stakeholders are often (though not always) sold for upfront commission which isn't large enough to cover much beyond the intial sale and since the range of funds will be small, it will rarely be re-examined
Personally I prefer the honesty of the IFA who has said that Stakeholders are simple things for people not requiring much advice and who is only willing to offer his/her services where they can offer a service and added value for what they are paid for. They can also chose a pension where a larger range of funds can permit some form of review to take place.

dunstonh

The first suggested I could invest in a personal pension, with a portfolio of funds that the IFA could help me choose. He told me that if I went down the stakeholder pension route I didn’t need an IFA to help me sort that out.
However, the second IFA suggested I invest in a stakeholder pension, which they would help set up and keep an eye on.

Nothing wrong with either solution.

Stakeholders are basic products for lazy investors who dont necessarily care much about the returns and dont intend to review the investments. If you want a professionally managed portfolio then you wouldnt use a stakeholder.

If you as the client wants a simple option then the stakeholder will be recommended. If you want a professional option then the personal pension will be recommended.

No-one I know with a stakeholder pension uses an IFA.

Loads do.

The fee structure seems confusing, but it looks like the pension provider pays the IFA out of their commission from my contributions. If this is the case is there no reason why not to use an IFA (apart from any annual fees they charge for reviews etc)?

An IFA is unlikely to service a contract that they are not agent for or would price the servicing higher due to the inconvenience.

norfolkwriter

Thanks very much for your replies. The charge is only 1%, 0.2% of which goes to the IFA as i understand it. My perception of stakeholder pensions was basically the same as both of yours, which was why i thought it a little odd i was being recommended one after i had sought advice from two IFAs.
My big concern was employing the services of an IFA for a pension when one was not needed and could lead to extra costs for no real gain. If, as you say, loads of people are doing exactly this and believe they are receiving valuable help then that is good enough for me.
I am sure you will detect that when it comes to pensions i haven't got a clue about much of it, which seems to be very similar to a large proportion of the population...
Thanks again.

dunstonh

My perception of stakeholder pensions was basically the same as both of yours, which was why i thought it a little odd i was being recommended one after i had sought advice from two IFAs.

My own stats show more stakeholders than personal pensions. Basically, the FSA take the view that if the person doesnt want servicing then really they ought to end up in a stakeholder with lifestyling funds.

My big concern was employing the services of an IFA for a pension when one was not needed and could lead to extra costs for no real gain. If, as you say, loads of people are doing exactly this and believe they are receiving valuable help then that is good enough for me.

It depends on what you put value on. Having periodic reviews with fund switches taking place to rebalance the portfolio and not having to use internal insurance company funds for the whole amount (insurance companies tend to be good at fixed interest and property but awful at equities) can potentially result in higher returns over the long term. Its not guaranteed that it will happen but if you ask any experienced investor if they would want their money in a stakeholder pension and being forced to use 100% internal funds they would say no. A portfolio of funds on a personal pension could use some internal funds where they are good but you would expect to see a lot of external funds in there.

Remember that with investments there is no right answer. There are a lot of wrong answers but you have different strategies which will result in different opinions. Each strategy has its own merits. Some use sector allocation, some use asset allocation, some use high yield or another. Some more put more weight on certain sectors than others. Its all opinion though at the end of the day and in some periods one strategy will be better than another and vice versa.