Pension advice please/commission charges

Malthusian

Anything paying 8% per annum in the current market will be risky. Talk of a fixed-term investment spread over two plans paying 8% per annum makes me worry because it sounds like structured products. Which are rubbish value in the current market, are poorly understood and are not really ideal for someone's retirement income. But you haven't give us much information to go on so I will not say any more in case my assumptions are wrong. In general a non-deposit investment of £150,000 should be far better diversified than putting it "in two plans" but I don't know what you mean by "plan". What exactly is the investment and how does it work?

xylophone

Well, I think he will go for a fixed term investment of £150000 which the IFA tells us is currently paying 8% per annum?

Are you able to say what this is? And how long is the "fixed term"?

Did you discuss using drawdown?

Al.

High illustration rates are sub 5% - anyone guaranteeing 8% is curious. If it's a Structured Product, ask him/her about the Counterparty risk.

hethmar

Ah, counterparty, thats the word he used - Aviva, RSB, Lloyds are the names I remember. Its 6 year fixed term

Al.

Reverse engineer then, take a look at how FOS regards them in the event of complaints. Five or six years ago, the credit ratings for the counter parties (the companies underpinning the downside insurance) was shown to be unreliable.

http://www.financial-ombudsman.org.uk/publications/technical_notes/scarps.html

Malthusian

I've never heard of anyone being advised to invest their entire drawdown pension fund in structured products before. Your adviser knows far more about your circumstances than I do so it's not fair for me to second guess him. However two things to bear in mind about structured products, which you should take as general comments only and not as any kind of "advice":

- There is a possibility of 100% irrecoverable loss which there isn't with a diversified investment portfolio. Whether they are "with big institutions/banks etc" changes nothing. Lehman Brothers, AIG and Landsbanki (aka IceSave) were massive institutions/banks. These investments are sold as an investment in the stockmarket with protection, but what they really are is an unsecured loan to a bank with a funny interest rate.
- Usually there is some form of protection like "will return your original capital unless the FTSE 100 falls by 50%". The possibility of the FTSE 100 falling by 50% is often presented as unthinkable, but it isn't. In addition, if you are directly invested in the FTSE 100 and it falls by 50%, your investment will recover far more quickly than if you invested in structured products; because by investing directly you get the benefit of reinvested dividends, whereas with structured products the dividends are pocketed by the bank.

Anyway, you've told us very little about what you've been recommended so I have probably said more than enough.

dunstonh

I've never heard of anyone being advised to invest their entire drawdown pension fund in structured products before.

The FCA guidence on this (i.e. what they would expect to see) is no more than 25% of investable assets being in structured products and no more than 10% with one market counterparty. Anyone doing more than that is taking on excessive risk of loss and any adviser recommending more than that is taking on regulatory/liability risk.

Ah, counterparty, thats the word he used - Aviva, RSB, Lloyds are the names I remember. Its 6 year fixed term

You have to remember that when brand names are used, you can no longer think of the high street banks. One of the changes post credit crunch is the restructuring of banks which means that the investment arms can go on to fail without it impacting on the retail banking arms. So, should we see another credit crunch style even (or when may be a better way of putting it), you wont see the Govt bailing out the banks like before. The retail banking will not need bailing out the failed parts will be allowed to fail and if that failed part is a market counterparty to your investment then kiss goodbye to your money.

if you are within the 10%/25% guide and strong market counterparties are involved then its a feasible option. If you are outside the 10/25 guide then maybe raise that with the adviser as to why he thinks investing more in these higher risk products than the FCA suggest is a good idea.

hethmar

Many thanks for your information.

May be Im not putting it correctly? We have been told that the percentage is fixed for 6 years and the capital will be in several packages covered by the governments £75k guarantee? I assume therefore that it must high street banks/institutions. The idea of several smaller packages was because if in dire need we could actually cash in one or more of them during the six year period?

The plans are apparently released in tranches and limited?

He also said we must be able to prove that we have at least an additional £100k liquid assets apart from the pension pot capital. (Which we can).

Oh dear, we were so pleased we had an IFA to lead us through this and now we are worrying again. He is highly recommended and seems absolutely up front. May be Im not able to explain.

What should we be asking please?

Loughton_Monkey

hethmar wrote: »

......Oh dear, we were so pleased we had an IFA to lead us through this and now we are worrying again. He is highly recommended and seems absolutely up front. May be Im not able to explain.

What should we be asking please?

Reading this thread, I gained the impression you were reasonably 'conservative' (nothing wrong with that!), not least for automatically homing in an annuity, and wanting 'cash in hand' on state pension rather than the extremely generous and lucrative deferral options.

Now I feel you could be going from frying pan to fire. Quite a while ago, I had working experience in 'structured products' and found them to be amongst the nastiest investment products short of the pure 'cash in your pension' scams.

There's nothing wrong with annuities, but they do tend to be bad value. The 'ill health' enhancements are better than nothing, but to me, the existence of ill health is a huge alarm saying 'go into drawdown' where early death ensures the cash is easily available for spouse use.... or a worsening health requires extra cost, you can accelerate drawdown.

Yes, there are 'risks' to drawdown, but the risks are very little to do with drawdown itself, and mainly to do with what funds you use. These are your choice. They can be as safe or risky as you like although it will affect total income. A 'safe' drawdown could probably still produce more income than even an enhanced annuity.

The state pension, coupled with a drawdown arrangement, is one of the most powerful combinations [especially with underlying FS pension and other assets] because you can decide what "cash in hand" you want [and seem to be looking for] and let the very generous state pension deferral gain you lots more free money, while letting the drawdown do the work. Then you can take the state pension and might need to draw down very little.....

Your IFA (in my opinion) should have been going through all the "methods" or "structures" by which you can use the pension pots to best effect. Only then should a provider be found. Seems your IFA has just gone for a single 'product' [or group of products] without you [or us] really know what's going on.

Unless or until you fully understand what you are being advised, don't sign anything.

Malthusian

I honestly cannot tell what you have been recommended from the fragments and bits and pieces you have given us. You first said that the rate is 8% per annum. There are no deposits paying 8%pa, anywhere, so we guessed you had been recommended structured products. (These have terms something like "Will pay 8% per annum if after 6 years the FTSE 100 has gone up, but if the FTSE falls by more than 50%, your capital is at risk". Because there is risk, rates of 8%pa are possible.)

But now you've said "the percentage is fixed for 6 years" and that it is covered by the compensation scheme. I can't reconcile this at all. Capital-at-risk structured products are not covered by the FSCS. Without knowing more - well, anything - about the investment I can't say anything.

Re Al: Advisers cannot receive any commission, and have not been able to since 2012. If they were taking any money out of the structured product investment it would be disclosed upfront. Almost certainly it would be on the application form. There is no difference in this regard between structured products and conventional funds. In either case the IFA may deduct part of your investment before it is invested in accordance with your fee agreement, but this will be fully disclosed upfront.