IFA advising use of Transact for income drawdown

jaxxx

I am 60 on 1 June 08 and will have to continue working until 65 if I can. I have no company pension, just 3 personal pension pots totalling £118,000 (£55,000 of which is protected rights - some of my previous SERPS contributions). An IFA has advised that instead of taking an annuity now (when I understand annuities are at a 5 year high, and the best quote I found was around £5700pa from the Hargreaves Lansdown's annuity tables), I should go the unsecured pension/income drawdown route and take enough tax free cash to pay off my mortgage (£8000) plus £6000 that I wanted to put in cash ISAs this year (total tfc £14000). What is worrying me is the cost of the fees for this Transact platform/wrapper - I don't really understand what Transact is and if it really benefits me or him. From the piles of paperwork he has given me to read it would seem that I will be paying him 1% of the fund less the tfc as a start up fee plus 1% of the fund as an annual fee. In the first year this would total £2040 in his fees alone. The Transact fee he says "as a generalisation would be 0.6% but offsettable against that (where we buy funds) is the reduction in annual management charge we get from the majority of fund managers". Does this mean that if we don't buy funds - just leave the money in the same investments - we will be paying another 0.6% pa? All this seems a lot of money and I guess my worry is, is there enough time to make enough money to cover these fees and beat an annuity (taken now) with this size of fund and only 5 years max. until I retire? I have made it clear that I am averse to anything high risk. He has advised that this is a SIPP other than the fact that it cannot purchase commercial property and has the advantage of being much cheaper than a conventional SIPP.

Any advice on this would be very much appreciated - I have been pondering the paperwork and emailing him questions since February and feel I really have to make a decision soon.

Incisor

jaxxx wrote: »

I am 60 on 1 June 08 and will have to continue working until 65 if I can. I have no company pension, just 3 personal pension pots totalling £118,000 ...

Mmm, donuts, IFA's will smell that for miles

An IFA has advised that instead of taking an annuity now (when I understand annuities are at a 5 year high, and the best quote I found was around £5700pa from the Hargreaves Lansdown's annuity tables), I should go the unsecured pension/income drawdown route and take enough tax free cash to pay off my mortgage (£8000) plus £6000 that I wanted to put in cash ISAs this year (total tfc £14000). What is worrying me is the cost of the fees for this Transact platform/wrapper - I don't really understand what Transact is and if it really benefits me or him ...

A key question

From the piles of paperwork he has given me to read it would seem that I will be paying him 1% of the fund less the tfc as a start up fee plus 1% of the fund as an annual fee. In the first year this would total £2040 in his fees alone. The Transact fee he says "as a generalisation would be 0.6% but offsettable against that (where we buy funds) is the reduction in annual management charge we get from the majority of fund managers". Does this mean that if we don't buy funds - just leave the money in the same investments - we will be paying another 0.6% pa? All this seems a lot of money and I guess my worry is, is there enough time to make enough money to cover these fees and beat an annuity (taken now) with this size of fund and only 5 years max. until I retire? I have made it clear that I am averse to anything high risk. He has advised that this is a SIPP other than the fact that it cannot purchase commercial property and has the advantage of being much cheaper than a conventional SIPP.

Any advice on this would be very much appreciated - I have been pondering the paperwork and emailing him questions since February and feel I really have to make a decision soon.

Don't feel pressured. Unless you really know of a deadline, take your time. If you need the income now, then do something. If you think you are going to pop your clogs soon, then major on how ill you are and take an annuity. But otherwise, the money should grow if left alone, as should the annuity rate as you get older. Otherwise, only go with it when you really understand.

edit: fixed quotes

jaxxx

Thanks for that advice. I think the IFA is saying that the money will get more growth in a Transact/SIPP rather than being left in the 3 pension funds (which incidentally are Standard Life, Scottish Widows and L&G).

dunstonh

An IFA has advised that instead of taking an annuity now (when I understand annuities are at a 5 year high, and the best quote I found was around £5700pa from the Hargreaves Lansdown's annuity tables), I should go the unsecured pension/income drawdown route and take enough tax free cash to pay off my mortgage (£8000) plus £6000 that I wanted to put in cash ISAs this year (total tfc £14000).

Seems logical so far. Although if you decide not to do drawdown then remember that your IFA can beat HL on annuities.

What is worrying me is the cost of the fees for this Transact platform/wrapper - I don't really understand what Transact is and if it really benefits me or him.

Have you asked him these questions?

Transact is a wrap and allow they allow the IFA to set their fees to what you agree with the IFA. So, you could see two IFAs using Transact and one has lower charges than the other. Transact is the daddy of personal pensions. It allows funds, quoted stocks etc. it also allows drawdown on protected rights which does put it in a generally minority selection of providers.

From the piles of paperwork he has given me to read it would seem that I will be paying him 1% of the fund less the tfc as a start up fee plus 1% of the fund as an annual fee. In

The typical maximums are 3% or 4% up front with 0.5% p.a. So, yours is lower up front but higher per annum.

Does this mean that if we don't buy funds - just leave the money in the same investments - we will be paying another 0.6% pa?

The annual management charges are annual. It doesnt matter if you buy or sell or sit tight, you pay the annual management charge.

All this seems a lot of money

Its not.

I guess my worry is, is there enough time to make enough money to cover these fees

A portfolio may make 7-10%p.a. after charges as a long term average.

and beat an annuity (taken now) with this size of fund and only 5 years max. until I retire?

Only time will tell. However, the earlier you retire the more favourable drawdown is. The later you retire the more favourable annuity purchase is. Age 60 means that its another 15 years before you are forced to buy an annuity (ignoring a few exclusions to that).

I have made it clear that I am averse to anything high risk.

The pension is just the tax wrapper. The investments within it carry the risk. That risk can vary from very little to very high. Income drawdown does carry more risk than annuity purchase from an income provision point of view. However, a well managed portfolio "should" be ok and you can probably afford to lose a certain amount a year every year and still beat the annuity. Death benefits can be better on drawdown as well.

He has advised that this is a SIPP other than the fact that it cannot purchase commercial property and has the advantage of being much cheaper than a conventional SIPP.

I doubt he is using a SIPP but their personal pension which is basically like a SIPP but is insured so can take protected rights.

Any advice on this would be very much appreciated - I have been pondering the paperwork and emailing him questions since February and feel I really have to make a decision soon.

You need to understand the pros and cons. Annuity purchase is not risk free and income drawdown is not risk free. They have very different risks and you have to decide which is right for you. If you dont understand the risks then you are never going to understand the advice or make a decision.

It is also important to have confidence in your adviser and ask questions as much as you can. That also benefits the adviser as we need to know if you understand or not. Your comments seem to suggest you dont trust the adviser and that is no way to start a business relationship.

I think the IFA is saying that the money will get more growth in a Transact/SIPP rather than being left in the 3 pension funds (which incidentally are Standard Life, Scottish Widows and L&G).

All of those mentioned are product providers and give no indication of the investments themselves. However, Transact has access to std life, scottish widows and L&G funds if they really needed to be used. The adviser is almost certainly going to use unit trusts (i would) on a fund this size and give a much better and diverse portfolio that suits your risk profile and your aims.

The charges arent bad. You could do a little better by getting 1 to 1.8% up front but 0.5% p.a. but 1+1 is not unreasonable. The adviser must be a servicing IFA as to take more than the natural trail commission on a contract means you have to be able to justify it and that means not only doing work but being seen to do work on your portfolio and your other needs.

jaxxx

dunstonh wrote: »

Seems logical so far. Although if you decide not to do drawdown then remember that your IFA can beat HL on annuities.
Thank you so much for your clear advice - it helps enormously. I responded last night but it doesn't seem to have appeared on the forum so I am replying again.
You say that my IFA can beat HL on annuities. I was under the impression that getting a quote on the HL Annuity Supermarket tables - inputting all my data and fund etc - gave me the top 5 quotes from the whole market. Would my IFA get even better?


Have you asked him these questions?
Transact is a wrap and allow they allow the IFA to set their fees to what you agree with the IFA. So, you could see two IFAs using Transact and one has lower charges than the other. Transact is the daddy of personal pensions. It allows funds, quoted stocks etc. it also allows drawdown on protected rights which does put it in a generally minority selection of providers.
What you say about Transact being the daddy of personal pensions is very reassuring and gives me confidence.. Could you confirm that 'drawdown' is the same as 'unsecured pension'?


The typical maximums are 3% or 4% up front with 0.5% p.a. So, yours is lower up front but higher per annum.

Do you think I could negotiate 1% up front and 0.5% pa?

The annual management charges are annual. It doesnt matter if you buy or sell or sit tight, you pay the annual management charge.
So Transact's charge of 0.6% is a percentage of the current value of the total fund each year? But there are savings to be made on the AMC using Transact which offset this 0.6% - effectively reducing it?


Its not.
Again, reassuring to know this as I obviously don't have any experience of these type of fees.


A portfolio may make 7-10%p.a. after charges as a long term average.
What do you call a long term average? The 5 years I have until I retire, or 10-15+ years?


Only time will tell. However, the earlier you retire the more favourable drawdown is. The later you retire the more favourable annuity purchase is. Age 60 means that its another 15 years before you are forced to buy an annuity (ignoring a few exclusions to that).
I can't get my head around this I'm afraid. I understand that the later you retire the higher annuity you get as you have less time to live and therefore they pay out higher annuity (unless rates have generally fallen for other reasons). But do you mean if I do the unsecured pension with Transact, rather than taking an annuity now, then the sooner I retire the better? Why is that?


The pension is just the tax wrapper. The investments within it carry the risk. That risk can vary from very little to very high. Income drawdown does carry more risk than annuity purchase from an income provision point of view. However, a well managed portfolio "should" be ok and you can probably afford to lose a certain amount a year every year and still beat the annuity. Again this is reassuring. Death benefits can be better on drawdown as well. I do understand this.



I doubt he is using a SIPP but their personal pension which is basically like a SIPP but is insured so can take protected rights. Yes, I think that's what it is.



You need to understand the pros and cons. Annuity purchase is not risk free and income drawdown is not risk free. They have very different risks and you have to decide which is right for you. If you dont understand the risks then you are never going to understand the advice or make a decision. I have read as much as I can and think I know the risks of both. I'm just finding it hard to understand the way the unsecured pension works. Where exactly does the income come from? Is it from dividends from shares I will buy or the increase in value in the shares? I know my money is invested and hopefully growing with time, but I don't really understand how gilts/unit trusts etc work and where the income I will eventually take is coming from if not from the capital itself.

It is also important to have confidence in your adviser and ask questions as much as you can. That also benefits the adviser as we need to know if you understand or not. Your comments seem to suggest you dont trust the adviser and that is no way to start a business relationship. I trust him but just feel embarrassed at not understanding the finance-speak and jargon and having to keep asking questions. It's easy to feel an idiot if you keep having to ask for explanations of the same thing that you just can't grasp. But because this is one of the most important decisions of my life I feel I should do everything I can to make sure I know what is happening.


All of those mentioned are product providers and give no indication of the investments themselves. However, Transact has access to std life, scottish widows and L&G funds if they really needed to be used. The adviser is almost certainly going to use unit trusts (i would) on a fund this size and give a much better and diverse portfolio that suits your risk profile and your aims. Unit trusts were mentioned in the news this week when they were talking about annuities being at a 5 year high now and pensioners being the only ones benefitting from the 'credit crunch'. However I couldn't understand what they were saying about what was currently happening to unit trusts - yields etc. Could you explain at all and does whatever has happened to unit trusts have any bearing on my going down the unsecured pension route?

The charges arent bad. You could do a little better by getting 1 to 1.8% up front but 0.5% p.a. but 1+1 is not unreasonable. The adviser must be a servicing IFA as to take more than the natural trail commission on a contract means you have to be able to justify it and that means not only doing work but being seen to do work on your portfolio and your other needs.

Could you explain what a 'servicing IFA' is please? Do you mean that he will choose my initial investments and then regularly review them and adjust them? My IFA has said that he is a 'non-discretionary manager' and 'will keep an eye on the funds and suggest any moves that may be needed'. Moves will only be made with my authority. He is 'looking to place the funds in markets for the longer term rather than the shorter therm'. So this is what I am paying 1% pa for?

The money saved on paying our mortgage and pension contributions etc , we are considering putting into another SIPP for my wife in order to get the 20% tax relief as she has no pension. The IFA says we could do this and do it through a separate Transact account (presumably with the same fees again). It occurred to me that perhaps I could pay this money into my Transact/SIPP rather than us incurring more fees. Would that be possible and would I still get 20% tax relief or are my 3 pots of money no longer a pension once they are transferred to Transact?
Once again your advice would be much appreciated.

EdInvestor

You are doing very well with this negotiation in working out what is going on, well done.

I have read as much as I can and think I know the risks of both. I'm just finding it hard to understand the way the unsecured pension works. Where exactly does the income come from? Is it from dividends from shares I will buy or the increase in value in the shares? I know my money is invested and hopefully growing with time, but I don't really understand how gilts/unit trusts etc work and where the income I will eventually take is coming from if not from the capital itself.

The way your money is invested is the most important aspect of a drawdown plan, along with the charges.Speaking personally, I prefer to invest my drawdown in the way you envisage, in shares, funds and investment trusts, which pay dividends that make up the majority of my income. Because a drawdown enables you to take 120% of the annuity rate, you will normally need to top up the divis/interest with money from capital, as the divis will rarely exceed 6%.Many people do this by keeping an element of the capital in the cash fund, rather than cash in investments.

So the next step is to have your IFA run through his investment proposals in detail .One of the problems with unit trusts and funds is that the charges tend to be extracted from the dividends, and thus you only get the remainder.It's very annoying losing as much as half your income to charges A portfolio of shares and investment trrusts which incur no charges once purchased may be a more cost effective way of nvesting.It will be interesting to see if the IFA suggests this, as Transact allows you to hold these investments.

Regarding a SIPP for your wife, you may like to look at the DIY offerings as they are cheaper, with no annual fee and rebated charges..

https://www.h-l.co.uk
https://www.sippdeal.co.uk
https://www.alliancetrust.co.uk

I would also suggest you consider transferring your own fund to one of these later when you have got a better understanding of the investment system. At the moment proper SIPPs can't take portected rights money, so you are better off with Transact.But after October this is likely to change.Meanwhile you can get the feel of how to manage it yourself with your wife's plan.

dunstonh

You say that my IFA can beat HL on annuities. I was under the impression that getting a quote on the HL Annuity Supermarket tables - inputting all my data and fund etc - gave me the top 5 quotes from the whole market. Would my IFA get even better?

The online quote systems only include providers that quote online. A number of providers require the old fashioned telephone call and a few of them you can haggle with.

There are also some options available which are not present on the online sites so you are limiting your choice.

What you say about Transact being the daddy of personal pensions is very reassuring and gives me confidence.. Could you confirm that 'drawdown' is the same as 'unsecured pension'?

Drawdown is the same as unsecured pension. its the old name.

Do you think I could negotiate 1% up front and 0.5% pa?

If you dont ask you dont get. The ideal NMA IFA (new model adviser) is 1% plus 0.5%. 1.8% plus 0.5% is the average for collective investments (unit trusts etc).

So Transact's charge of 0.6% is a percentage of the current value of the total fund each year? But there are savings to be made on the AMC using Transact which offset this 0.6% - effectively reducing it?

Yes. It's getting the name "factory gate pricing" at the moment and is something the FSA seems quite keen on. Transact are one of only a few that currently do this. Expect to see more follow. They strip out the remuneration from the annual managment charge is a blanket AMC and show the breakdown as who is getting what. Transact also get access to some institutional funds which can improve the terms more as well.

What do you call a long term average? The 5 years I have until I retire, or 10-15+ years?

Long term average is probably around 7-10 years. Whilst you may retire in 5 years, if you intend to do drawdown the money will be invested potentially through to age 75. If you intend to do annuity purchase, the investment time will obviously be a lot less and the investment risk should reflect that shorter timescale.

I can't get my head around this I'm afraid. I understand that the later you retire the higher annuity you get as you have less time to live and therefore they pay out higher annuity (unless rates have generally fallen for other reasons). But do you mean if I do the unsecured pension with Transact, rather than taking an annuity now, then the sooner I retire the better? Why is that?

The younger you are when you retire, the worse the annuity rate. So drawdown looks more attractive than annuity purchase. The older you are, the higher tha annuity rate so annuity purchase may look more attractive.

Drawdown does also allow a greater amount to be withdrawn from the pension as an income (on standard health terms typically). This may appeal to those wanting to draw as much as they can from the pension and maybe place it into an ISA. Not always the best thing but can appeal to some.

Could you explain what a 'servicing IFA' is please? Do you mean that he will choose my initial investments and then regularly review them and adjust them? My IFA has said that he is a 'non-discretionary manager' and 'will keep an eye on the funds and suggest any moves that may be needed'. Moves will only be made with my authority. He is 'looking to place the funds in markets for the longer term rather than the shorter therm'. So this is what I am paying 1% pa for?

Transactional advisers or old model typically set up the transaction, got paid up front and you didnt see them again or only did when they wanted to sell you something. Servicing IFAs tend to take their remuneration more on an ongoing basis based on the value of your investment. The more the investment goes up, the more the IFA is paid and less if it goes down. It aligns your interests with the IFAs. Also the ongoing pays for the reviews and recommendations in future. Things like fund switches and rebalancing.

The IFA says we could do this and do it through a separate Transact account (presumably with the same fees again). It occurred to me that perhaps I could pay this money into my Transact/SIPP rather than us incurring more fees. Would that be possible and would I still get 20% tax relief or are my 3 pots of money no longer a pension once they are transferred to Transact?

The initial fee to get money into transact is one thing. However, once it's in transact it can be moved around the different accounts (general account, ISA, pension etc) without incurring any additional fees.

Draw a big circle and thats transact. Inside that circle you can draw smaller circles for each account and you can move money between those as you like. If any money leaves the big circle (i.e. paid to your bank account) or you want to pay money into transact that is when you incur the fees. So, annual switches into ISAs and your wife's pension are fine and very easy.

Transact does have a very comprehensive online system for both you and the adviser. It also has very good disclosure and documents every fee going. It documents fees individually whilst other providers will have a generic annual management charge that covers the lot. Sometimes too much information can be confusing but you shouldnt mistake the extra detail as extra charges that other plans may not have.

Everything you have said so far raises no alarm bells. The 1+1% commission is low upfront (can be as much as 4.5% with some) but the 1% p.a. is not as good. If you can get that down a bit (the natural figure is 0.5%) then you should be very happy. Also, remember that good advice is worth paying for. Paying less for no advice and getting it wrong or paying less for bad advice can be a false economy. So, if you cant get it down a bit then you will have to decide if the cost is worth it.

From Ed: It will be interesting to see if the IFA suggests this, as Transact allows you to hold these investments.

Thats a red herring and you know it. IFAs are not allowed to recommend quoted stocks.

Regarding a SIPP for your wife, you may like to look at the DIY offerings as they are cheaper, with no annual fee and rebated charges..

www.h-l.co.uk
www.sippdeal.co.uk
www.alliancetrust.co.uk

The charges on these may not be any different to Transact if the money for the Ops wife if going to come out of the funds already held in transact.

I would also suggest you consider transferring your own fund to one of these later when you have got a better understanding of the investment system. At the moment proper SIPPs can't take portected rights money, so you are better off with Transact.But after October this is likely to change.Meanwhile you can get the feel of how to manage it yourself with your wife's plan.

That would mean going it alone with no advice and no FOS protection. Thats fine for some but can be a recipe for disaster if you dont know what you are doing.

Ethelred2

This thread says it all. One pays x% for a financial advisor, then (if you intelligently want to understand your position) you have to go through the entire process they are supposed to do on your behalf. Its like, paying an architect to design a house, then because you have no faith in them, doing the entire drawing set yourself. IMO, the "Independent" financial advisor is a pretty rare animal, and the IFA who will actively earn their commission with "activity" is an even rarer animal. I say, either find yourself an IFA that lives up to the description, or say good riddance to the lot of them and manage your own pension with "no advice" services, HL etc. Anything is better than supporting these !!!!!!!!!!s with your lifes' savings.

Ethelred2

oh free loaders ellicited a load of !!!!!! ?????

dunstonh

This thread says it all. One pays x% for a financial advisor, then (if you intelligently want to understand your position) you have to go through the entire process they are supposed to do on your behalf. Its like, paying an architect to design a house, then because you have no faith in them, doing the entire drawing set yourself.

The OP's concerns had nothing to do with the adviser. They could be seeing the best adviser there is but that wont change their concerns as the whole thing was new to them. The OP was also looking at DIY services and the IFA and had a few misconceptions (although it was 2 years ago)

or say good riddance to the lot of them and manage your own pension with "no advice" services, HL etc.

HL's pension uses unit trusts and the AMCs are the retail AMCs that you would be charged if you used an adviser. Effectively you are paying for advice with HL but not getting it.

oh free loaders ellicited a load of !!!!!! ?????

Nice way to start your posting. Bring up a 2 year old thread, post a load of rubbish and be rude.