Commission is the root of all evil

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The Independent Online
THERE WAS something deeply dodgy about the late 1980s, and I'm not just talking about the music. The period was also a golden age for pushy financial salesmen.

The personal pensions mis-selling saga started almost 10 years ago, and hundreds of thousands of people are still suffering because of it. Now it seems the sale of portable top-up pension contracts, which started in 1988, may be exposed as another mis-selling scandal.

A report last week from Bacon & Woodrow, a firm of actuaries, suggests that many of these contracts, known as free-standing additional voluntary contributions (FSAVCs), may have been mis-sold.

You might be encouraged to buy an FSAVC if you pay into a company pension scheme but have scope to make extra contributions. The selling point of FSAVCs over additional voluntary contributions paid through your company scheme (called AVCs) is that an FSAVC is independently run so you can keep paying into the policy when you change jobs. Or you may be able to turn the FSAVC contract into your main personal pension if you stop working for a company offering its own pension scheme.

The big problem with FSAVCs is that you pay to set them up and run them, whereas an employer bears the cost of an AVC scheme. But a recommendation to opt for an in-house AVC isn't going to win any commission for a financial adviser to whom you have turned for help with your retirement plans. It is easy to make a case that an FSAVC would be a better choice.

Bacon & Woodrow says the arguments in favour of FSAVCs are largely illusory. The investigators interviewed pension scheme managers and looked in detail at the cost and performance of FSAVCs against in-house top-up schemes. More than half the pension scheme managers interviewed by Bacon & Woodrow believe the majority of FSAVCs taken out by their members were mis-sold.

As if that was not enough, it is slowly coming to light that many people have been given bad advice on reaching retirement.

Income drawdown schemes were introduced in 1995 and allow you to reinvest the bulk of your pension fund, rather than swapping it right away for a contract to provide you with an annual income - an annuity. The feature on page 21 highlights the problems with these schemes, not least the fact that some life companies have paid up-front commission rates of up to 6 per cent (of a six-figure pension fund) to advisers who persuade clients to buy an income drawdown scheme. Advising someone to buy an annuity pays just 1.5 per cent.

Anyone who is paid by commission is motivated by the need to sell, and it sticks in my throat to use the term "independent financial adviser" to describe those who depend on commission, rather than fee payments from clients, to make a living. Sales forces working for one company are usually paid a basic salary, but they won't be going on any foreign holidays unless they earn plenty of commission as well.

It is clear that commission causes mis-selling scandals, but that is just something we will have to put up with, unless the new Financial Services Authority forces a change in the way we do business in the UK. Don't hold your breath.

If you think you were mis-sold a pension, an FSAVC or even an income drawdown scheme, call the FSA helpline on 0845 6061234.