Only later do you find you have been fleeced out of thousands of pounds that could have gone towards your pension. This, potentially, is the fate of hundreds of thousands of people who in the past 10 years have taken out expensive personal top-up pensions, called Free-Standing Additional Voluntary Contribution schemes (FSAVCs).
This week, the Financial Services Authority (FSA), the City's top regulator, announced plans for a review of up to 110,000 FSAVCs. It believes that the total cost of compensating those who may have been mis-sold one of these schemes could be up to pounds 240m.
FSAVCs are extra pension payments, separate from your employer's company pension scheme, and sold directly to individuals by investment firms and advisers.
But company pensions must have top-up facilities of their known, called AVCs. These often offer employees a better deal than FSAVCs, because many employers subsidise them. Buying an FSAVC from an adviser also means that part of your investment pays for his advice.
The FSA wants all firms that have sold FSAVCs since April 1988 to review their high-risk cases. The starting date has been chosen because that is when the Financial Services Act came into force.
The FSA estimates that firms will have to review up to 10,000 individual cases, and says the likely compensation bill will be between pounds 122m and pounds 241m. It believes there are four categories of FSAVC sales where buyers may have been given bad advice (see table, below right).
Philip Telford, senior policy researcher at the Consumers' Association, says: "We went anonymous shopping for pension top-ups, and found that advisers were recommending FSAVCs when there were not only perfectly good, but often much better, in-house AVC schemes available. It wasn't just restricted to certain people who were given FSAVCs rather than AVCs. It was across the board."
Buying an FSAVC from an adviser means he keeps as much as two-thirds of your first year's premiums as a commission payment.
Typically, there is no more commission to pay for 27 months, but after that 2.5 per cent of each contribution you make disappears in commission payments.
One category the FSA plans to investigate covers employees sold a personal pension while waiting to notch up the length of service needed to join their company scheme. If the adviser told his client to turn the personal pension into an FSAVC when they joined the company scheme, the FSA says that may amount to mis-selling.
But Thomas McPhail, pensions development manager at independent financial advisers Torquil Clark disputes this. He says that selling the client a personal pension would still have been the best option.
Mr McPhail says: "I am surprised they have selected that category as being worthy of inspection. I was talking to a colleague of mine who used to work for Midland Bank, and they had a minimum entry age of 23. In the unlikely event that a 19-year-old did want to start a pension, those extra four years of personal pension funding before going into the company scheme would be worth a great deal to him when he got to 60."
FSA spokeswoman Sarah Modlock replies: "What we're saying is that this is a category where an FSAVC might not have been the best advice. We're not looking at the sale of the pension here, it's purely the sale of the FSAVC.
"Can you justify that against the knowledge that somebody was about to have an opportunity to join an AVC that could have given them greater benefits?"
PENSION TOP-UPS - ARE YOU A VICTIM?
THE FINANCIAL Services Authority says you may have lost out through buying an FSAVC if:
l You are in the Armed Forces pension scheme, where a different method of boosting your pension could be more suitable.
l Your employer would have matched your contributions to an in-house AVC if you had bought one of these instead.
l Your employer paid a subsidy for AVCs or other pension arrangements, which you didn't get because you paid into an FSAVC instead.
l You bought a personal pension while waiting to be eligible to join your company scheme, following advice that you could turn the personal pension into an FSAVC when you joined your company pension scheme.
If you fit into one of the four categories above, there is no need to act until contacted by whoever sold you the FSAVC.
You can then have your case reviewed. "If you have lost out as a result of bad advice, you will be compensated," the FSA promises.
If you suspect you may have been badly advised, and want to find out more, contact whoever sold you the FSAVC. Don't just stop paying into your FSAVC, as this may mean you lose out financially.
To obtain a free copy of the Financial Services Authority's factsheet `FSAVC Pension Top-ups - Were You Badly Advised?', call 0800 917 3311Reuse content