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
Life and Style
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
Arts and Entertainment
Lena Headey as Cersei Lannister
TVSPOILER ALERT: It's all coming together as series returns to form
footballShirt then goes on sale on Gumtree
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine