When considering the pension transfer advice fees offered by Financial Advisers it is not only the price to transfer that matters but also the long term costs.
As a simple example imagine you need a new printer. You find two models of interest in your local store, one is £99 the other £145. If working on price alone the £99 model is the obvious choice. However, printers have a long term cost of ownership.
What if the print cartridges for the £145 model are £20 and for the £99 printer they are £25. Assuming both print the same number of pages per cartridge then you need to account for the number of times you change cartridges. What if the £145 printer is much more robust and likely to last two or three years compared to the cheaper model that may not survive a year. You then need to account for how hard you work the printer.
It may be, given your specific needs the £99 printer is the best choice but the selection process is based on more than initial price.
What if you pay Adviser A £3,000 to transfer a final salary pension and 2% ongoing annual charges and Adviser B £6,000 to transfer and 1.5% ongoing annual charges. What is the long term cost to you of the higher annual fee?
What if Adviser B suggests a range of investments that deliver higher growth over the long term than the investments suggested by Adviser A. Does the difference in fund value many years in the future more than cover the difference in initial transfer costs?
Do you want ongoing contact with your adviser? If so what are you prepared to pay for that? Of course, based on your specific circumstances Adviser A may be the best choice. Again, the overall cost of ownership calculation is what matters not individual costs.
Pension Transfer Advice Fees – An example
Let’s assume a fund value of £100,000 AdviserA quotes 1% of the fund value and AdviserB quotes 5% to transfer. AdviserA quotes ongoing annual fee of 2.8% and AdviserB quotes 1.75%. Assume the investment, in both cases, achieves annual growth of 7% over 20 years.
The pension transfer fee is – AdviserA £1,000 AdviserB £5,000
Value of fund after 20 years – AdviserA £227,695 AdviserB £278,254
AdviserB has therefore delivered approximately £45,000 more value over a 20 year period.
Of course, it is possible the investments suggested by AdviserA suggested could perform better than AdviserB.
Let’s assume you retire at age 65 years with a £100,000 pension fund in drawdown. Imagine as an example you do not need to draw on that fund. AdviserA investment strategy delivers a 4% fund growth over the 25 years from retirement. Adviser B investment strategy achieves 5% growth over the same period.
Ignoring the impact of fees the Adviser A strategy would deliver a fund value of approximately £270,000 at age 90. Adviser B investment strategy would deliver a fund value of approximately £340,000.
Choosing An IFA
Independent Financial Advisers use various charging methods to deliver pension transfer advice. It is important to understand the charging model (both long and short term) and what is and is not included.
Model A A free initial meeting, calculations, report and recommendation to transfer (or not). A charge to complete the transfer with the fee taken as a percentage of the pension fund value.
Model B A charge for the initial meeting, calculations, report and recommendation to transfer (or not) paid when the meeting takes place. A charge to complete the transfer with the fee taken as a percentage of the pension fund value.
Model C A charge for the initial meeting, calculations, report and recommendation to transfer (or not) paid when the meeting takes place. A set fee (not a percentage of the fund) to complete the transfer with the fee taken at the point the transfer completes.
It is important to note annual fees will apply for managing the pension fund after transfer. The annual fee usually include three elements, the investment manager’s fee, the adviser’s fee and the platform fee. Some IFA’s quote only the advice fee and it is only later (often too late) that the other elements of the fee become clear.
The charge for the initial meeting in model B tends to range between £750 and £2,500. In Model A and B, the charge to complete the pension transfer tends to be tiered depending on the fund value typically ranging from one to five percent (although it can be higher).
The percentage charged to complete the transfer tends (not always) to be higher in model A than in model B. It is important to note in model B the initial fee applies regardless of a recommendation to transfer (or not).
Choosing a financial adviser that explains everything (including costs) in simple terms you can understand is crucial. You should be made fully aware of both the benefits and risks of transfer. Advisers should have extensive experience of pension transfers and hold all the relevant FCA permissions. Avoid anyone offering financial advice who are not authorised and regulated by the Financial Conduct Authority (FCA).
Much debate has focussed on ‘contingent’ charging. In model A the advice and implementation charge is contingent (occurring only if) on the transfer taking place. Contingent charging is allowed under Financial Conduct Authority (FCA) rules although this is currently under review.
Some take the view the initial free meeting in model A cannot be impartial. The adviser only gets paid if the transfer takes place and therefore has an incentive to recommend a transfer. An obvious conclusion to reach perhaps but does it stand up to scrutiny?
Advisers work in a regulated environment. If they give poor advice a claim could be made against the adviser firm at some point in the future. Any claim (be it upheld or not) made is a drain on resources for the firm under investigation as enquiries must be responded to and evidence collected.
A claim (if upheld) also has potential financial implications. Unless an adviser is operating outside the FCA guidelines (there will always be some bad apples in any industry) it is plainly not sensible to risk a claim by advising a consumer to transfer when it is not in the consumers best interests to do so.
In model B an adviser could collect fees for the review meeting but take an ultra cautious approach and advise everyone not to transfer regardless of what the analysis may show. The adviser may believe by advising against a transfer they have protected themselves from any future claim while still securing a significant fee for the advice.
In defence of the contingent fee model (Model A) some will argue it encourages those with a final salary pension to consider all their options. Although a pension transfer is not the right course of action for the majority it is for some.
If consumers must pay a significant fee for advice (Model B) it may discourage them from investigating what may be a valid option given their individual circumstances. In model C the adviser firm will seek to average out costs in some way to charge a standard pension transfer fee. The question may be asked is it possible to accurately assess what the cost should be. Is it fair to charge this amount to transfer smaller fund sizes.
The Issue With PI
Should an individual wish to proceed with a pension transfer after taking the appropriate advice the question then arises why should they pay more for the work (in models A and B) if they have a higher fund value? The answer relates directly to risk (to the adviser) and PI (professional indemnity) insurance costs.
The more transfers (value) a financial adviser firm undertakes the higher the PI insurance costs. Those costs are a significant business expense.
Special Financial Conduct Authority permissions are required to perform final salary pension transfer work. To secure the permissions the Adviser must have a higher level of training and experience (which comes at a cost). The FCA also (quite rightly) demands a rigorous reporting, calculation and recommendation process which takes, time, effort and a high level of skills. In any professional services business time and skills cost.
Ultimately, the various pension transfer charging models in the marketplace provide consumer choice. It is for the consumer to decide which pension transfer advice fees model will deliver the best long term outcome and how they wish to pay.
Past performance is no guarantee of future returns. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. All calculations shown are examples only and should not be relied upon.