Income plans hit by fees

James Patterson on the costs of the alternative to annuities

ARTICLES in previous weeks have discussed the choices available to investors who want to take the benefits from their personal pension contracts - namely whether to buy an annuity now or take cash from the contract and buy an annuity later.

Now very little is for free in this world. And life companies and life salesmen in Britain charge investors for the contracts and services provided. So what will it cost investors to take the benefits from their personal pension contracts?

Under the disclosure requirements of the Financial Services Act drawn up by the Securities and Investments Board (SIB) and the Personal Investment Authority (PIA), life companies must inform investors of their charges on contracts and the reductions in the ultimate benefits received from making these charges.

Intermediaries, whether independent or company representatives, must also disclose to their clients the remuneration received (usually in the form of commission) for selling a particular product.

However, investors ought to have a general idea of the format of charges being made by life companies and the remuneration received by intermediaries when considering these choices on personal pensions ahead of being officially informed under the SIB/PIA requirements.

Buying the annuity

The charges levied by life companies, which are leaders in the annuity market, on annuity contracts are comparatively low compared with charges on single-premium life and pension contracts.

Charging formats do vary between life companies, however. One company makes a direct charge of around 3 per cent of the amount invested, while another charges 1 per cent of the amount invested with another 1 per cent taken off the annuity payment to cover the cost of paying the annuity. This compares with charges on single-premium personal pension contracts in the 6-8 per cent range.

These charges are lower primarily because commission rates paid to intermediaries are somewhat lower, 1 to 1.5 per cent of the amount invested compared with over 5 per cent of the premium on single-premium personal pension contracts.

Taking income

To date very few life companies have actually launched their income withdrawal facility, so the only details on charges that are available relate to these companies.

The charging structure can be split into two parts. These are:

q The cost to the life company of handling the income payments, managing the underlying investment funds and dealing with the administration.

q Payment of commission or other form of remuneration to the intermediary.

Some charges made by the life company will be fixed in money terms, while others will be a percentage of the premium or cash sum paid to the life company. Charges on the investment funds are a percentage of the value of the fund, so as the fund increases in value each year, so the charges rise in money terms.

Investors using the withdrawal facility need expert advice on both the amount of income to take out each year and the investment of the remaining funds.

As such, the work pattern is tailor-made for the adviser to be remunerated by fees based on the amount of work done.

If advisers are remunerated by fees, then the life company has only to charge for its expenses. The charging structure from Winterthur Life, one of the first life companies in this new area, is structured for a fee-based remuneration of advisers.

However, most investors in life and pension contracts are still reluctant to pay fees, and accept the commission system of remunerating advisers even though it could well cost them more.

All indications are that the income withdrawal facility will be used primarily by high and medium net-worth investors, at least initially, and for these investors fees are probably cheaper than commission. Still, as long as investors know and understand the different systems of remunerating advisers, the choice is theirs.

So commission is still likely to be the method of remunerating most intermediaries, and National Mutual Life has structured its charging format on a commission- based system of remuneration. As such it is com- plicated with several layers of charges.

However, most investors are not interested in the structure and level of charges as such, but what effect they will have on the benefits they receive. The general effect of charges should be assessed from the illustration that accompanies the product details. These can be complicated, however, and investors need to ensure that their advisers provide a full explanation of the charges and their effects.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003