Your Money: New test for commissions

The Treasury is trying to hit a moving target with its sideswipe at commissons last week.

It is, quite rightly, demanding that daylight be shone on the commission payments made to tied salesmen and independent advisers, to allow consumers to see where their money is going.

How many realise that a salesman will receive over 11 months' worth of premium payments for selling a 25-year endowment policy? This is cash that is not invested at the outset and which dents the final outcome - and pretty well obliterates the returns on policies cashed in early - as many unhappily are.

The Pru and other large insurers are gearing up to swap to a system of paying commission as premiums are paid along the life of a policy. This will help those who need to bow out of long-term commitments they probably should never have entered, though consumers will have to beware that a substitute charging structure imposes reasonable costs.

A percentage charge on premiums is fine, but as some investors in personal equity plans are discovering, such deductions from a growing fund can result, in the end, in huge charges in cash terms.

The with-profits policy is serving out its last days.

Financial alchemists have found a way of delivering the good parts of these policies and eliminating the bad.

With-profits endowment polices or pensions gradually build up in value with annual bonuses. In the last year a final bonus is added to give fair value over the whole term and make up the total payout. This delivers much smoother returns in equities than a simple unit-linked policy that can be up one moment and down the next.

But the bonus system is arbitrary. It depends on the decision of the life company's actuary and remains beyond the control, comprehension and scrutiny of investors.

If investors withdraw from an endowment policy before the final year, the payouts will be disproportionately smaller than if they had stayed the whole course.

The alternative is to look to the futures market to buy the guarantees. A pioneering pension from Mercury Asset Management has managed to offer the comforts of with-profits without the fudge. The drawbacks are that the workings are complex, and it is only open to individuals or schemes with at least pounds 500,000 to invest.

At the outset 1 per cent is creamed off into a parallel guarantee fund, and invested in the same equity units as the main fund. Five years away from a 'guarantee date' - the expected date of retirement - 0.5 per cent a year from the annual management charge is added to the fund, which begins buying futures and options on the FT-SE 100 index to lock in the gains built up in the main fund.

The fund also offers a ratcheting guarantee according to the average price of units in the previous year, and has insurer Munich Re standing behind the guarantees.

The plan thus has a crystal-clear charging structure - even if it is hard to understands on first meeting.

Returns do not depend on the whims of the company actuary, and those who depart early only sacrifice the guarantee, and can take any healthy gains that will not have been held back - as in a with-profits plan - by the need to keep a stack of stodgy gilts to deliver the promises of the annual bonus.

Other schemes along these lines must, and should, surely follow.

The furore over Nat West Bank being allowed to hold information about its customers' political and religious leanings has led to an increase in the number of customers exercising their rights under the Data Protection Act and asking to see the information held on them.

Credit reference agencies can charge no more than pounds 1 for a data search, but under the Act, registered bodies such as banks are allowed to charge up to pounds 10. And, guess what, that is what most of them charge.

Abbey National says it holds information in 23 categories and can levy pounds 10 for a search in each one, but points out that it will normally make one pounds 10 charge on a single inquiry covering several different lists.

When the maximum charge was set six years ago, there were protests that it was not enough to cover the cost of searching clients' files. Let's hope there is no move to uprate the charge, which might deter inquiries from those keen to check their files held by the banks - which can have so much power over an individual's path to happiness.

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