Pension Commision and S2P estimate

carl916

Hi all,

I'm currently looking into setting up a personal pension (via direct debit) and was looking to seek the advice of an IFA as I have little experience with the stock market and fund selection.
Initially I expected to pay a fee for the IFA as either commission, up-front or a combination. However, one pension advisor I was looking to use takes their cut directly from the provider, thus no fee. Could someone please explain how this works? Also, is there any benefit of using the provider to pay the advisor or vice-versa?

Also, whilst I'm here. I was thinking about opting out of S2P and re-investing this in my personal pension. How much of my NIC does S2P account for? Or, more specifically, how much could I expect to contribute to my personal pension by re-investing my S2P based on a salary of around 30k?

Regards, Carl Gilbert

dunstonh

nitially I expected to pay a fee for the IFA as either commission, up-front or a combination. However, one pension advisor I was looking to use takes their cut directly from the provider, thus no fee. Could someone please explain how this works?

You are misunderstanding the remuneration.

Commission is the method that the adviser is talking about when they take their "cut" from the provider. Commission in its purest sense is recovered out of product charges and whilst it is cheaper in the short term, it is more expensive in the long term as the pension provider will continue to take the higher charges long after the cost of the commission has been met. You dont pay the commission. The provider pays it but recovers it from you over time in product charges.

Fee is when you agree a fixed amount (can be by the hour which then ends in a fee) which you pay be cheque.

There is the hybrid option (quite useful with pensions in particular) of agreeing the fee/remuneration but having the fee paid out of the commission or as an explicit charge within the product. This method is referred to as Customer Agreed Remuneration (CAR) and if the FSA's proposals go ahead, this or Fee will be the only options available in future. Commission in its current form will not be available as an option. A lot of IFAs have already moved to CAR or are in the process of doing so.

Fee or hybrid (CAR) is the best way of doing it.

Also, is there any benefit of using the provider to pay the advisor or vice-versa?

If its an agreed level of remuneration (i.e. fixed fee of x amount or a percentage based of say 1% plus 0.5% p.a.) then yes, getting the product provider to pay it means the fee is paid after tax relief. So, as a basic rate taxpayer, a fee of £1000 has actually cost you £780 if the product provider pays it but £1000 if you pay it by cheque.

Or, more specifically, how much could I expect to contribute to my personal pension by re-investing my S2P based on a salary of around 30k?

The calculation would depend on a number of things. There are currently three different levels of rebate corresponding to the three different accrual rates.

Your IFA will be able to provide you that data as he/she will have access to your information.

jamesd

Commission is the name for the case when the adviser is paid by the provider. In a pension the annual charge on the investments can vary. For example, one I looked at could vary from 0.7% (fee only, no commission) to 1.5% of your whole pension fund each year. Part of this is used to pay the adviser; the higher the percentage, the more the adviser gets paid. The adviser sets the percentage, in theory after discussing it with you and making sure that you understand the effect that it will have on reducing your final pension.

Say you invested 100 a month with 9% return before investment charges of 0.7% or 1.5%. Here's the effect on final value:

year 5: 0.7%: 7385 1.5%: 7229 extra cost: 156
year 10: 0.7%: 18360 1.5%: 17554 extra cost: 806
year 15: 0.7%: 34677 1.5%: 32299 extra cost: 2378
year 20: 0.7%: 58897 1.5%: 53356 extra cost: 5541
year 30: 0.7%: 148394 1.5%: 126374 extra cost: 22020

Adjusting for 3% inflation 22,020 is 9,071 in today's money. Nine thousand for each hundred of your monthly pension contribution is quite a bit to pay and it just keeps on getting higher if you're more than 30 years from retirement.