pension advice

happydaze_2

hi, i'm in my 40's and know I need to sort my pension out. I had looked into H-L SIPP but decided this wasn't my area of expertise so consulted an IFA. After four approx. 1 hour meetings I was recommended a plan with large monthly contributions. When I looked at % commission charges payable to the IFA, they worked out at 4k in year 1, to be taken from my contributions, with a small % annual charge ongoing and a future charge to be paid on any lump sum drawdown at retirement age. The IFA says that this charge is justified for the work that has been put in and for future advice and that this is a relatively low fee but it sounds high to me. I was never given an up-front estimate of charges and was naive in terms of IFA charges. Should I question this and/or does this sound a reasonable fee ? If I don't go with it I have a feeling I'm going to be given a similarly large bill for services which i had not considered and hence am very concerned.

dunstonh

The IFA says that this charge is justified for the work that has been put in and for future advice and that this is a relatively low fee but it sounds high to me.

What are the fees?

I was never given an up-front estimate of charges and was naive in terms of IFA charges.

If you are working on commission basis, then fees do not need to be agreed in advance or you are not paying fees. It may well be that fee basis is cheaper (often is).

Should I question this and/or does this sound a reasonable fee ?

You havent mentioned what the fee or charges are. Just the commission.

Have a look at the illustration and near the back you will see a figure that shows the reduction in yield. Something along the lines that the effect of charges will reduce growth of 7% to 5.9%. What are the figures there as they will give us an idea of the true cost.

happydaze_2

Thanks for replyng. Sorry, I wasn't clear. No fee has been quoted, only a commission of 10% of first year contributions and an annual 0.5% charge.

Loughton_Monkey

happydaze wrote: »

Thanks for replyng. Sorry, I wasn't clear. No fee has been quoted, only a commission of 10% of first year contributions and an annual 0.5% charge.

Do we deduce from this (together with your first post) that you are planning an annual contribution in the order of £40K?

Imagine after 5 years. Your funds are £200K plus a bit of growth. Say £225K conservatively. Already your IFA is bringing in £1,125 a year, and continuing to rise rapidly. Can he justify that?

For contributions of (say) £8K a year, I would suggest the IFA is being rewarded reasonably well. But at the level you are paying (if I am correct) I would strongly suggest a flat fee would be far better for you - and still represent 'reasonable' income for the work and expertise put in by the IFA.

It will by no means be a 'peanuts' fee, partly because the savings later on will 'repay' it to you 'with interest' perhaps. But at 10% up front and 0.5% thereafter, it strikes me you will end up with a worse deal than you could have got direct with a good provider.

dunstonh

No fee has been quoted, only a commission of 10% of first year contributions and an annual 0.5% charge.

Commission does not necessarily mean that is what you are paying. The provider pays a commission. You pay charges. A provider with a low commission can have higher charges than a provider with a high commission.

So, what are your charges? (look at the reduction in yield figure on the illustration as that is your guide.

If as LM says, your contribution is £40k a year, then using fee basis will be a better option rather than commission basis.

happydaze_2

Thanks. Yes, the monthly amount is big although figures i quoted are gross. We have virtually no mortgage but no pension and not much savings so diverting as much as affordable of salary to pension to get relief and build a pension pot to make up for years of pension neglect. Hoping that we'll be able to sustain this level. The annual charge is 1%, with 0.5% of that going to adviser for advice according to the illustration I have. This will reduce the estimated 7% a year growth to 5.5%. I really want to know is this reasonable or am I being ripped off here ? Thanks for your thoughts.

dunstonh

This will reduce the estimated 7% a year growth to 5.5%.

If externally managed funds are used then that is right where you would expect to see it. If internally managed funds are used then its actually likely to be a mis-sale under FSA rule RU64 (as the internal funds will be available on the stakeholder which will have a reduction in yield from 7 to 5.9). What funds have been recommended?

£4000 commission is a lot. Fee basis would be cheaper as the fee can be taken from the pension (and therefore get tax relief on the fee) and commission would be rebated to lower charges. A typical fee for a regular pension would be around £500-£1000.