Your Money: Readers' lives

Financial advisers ... mortgages for non-smokers ... pension plans. Each week we answer your letters on everyday financial concerns
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I recently sought the help of a financial adviser. I believe in a fair day's work for a fair day's pay, but is the massive amount of commission paid fair to the investor? WW, Staffordshire

Commission paid on some financial products can be high. For example, a financial adviser might receive commission worth 33 per cent of the value of the first six to 27 months of premiums on a pension plan, plus a smaller renewal commission if you keep up the premiums. The upfront commission alone could amount to more than pounds 1,000. This commission comes from the company whose product the adviser recommends and is not a payment you directly make.

At the other end of the scale, even a 3 per cent commission on a PEP investment may not seem insignificant. It would work out at pounds 180 on a pounds 6,000 investment, and the adviser may get a further 0.5 per cent renewal commission a year.

A justification of these seemingly high commissions might include the point that the money covers all running costs of an adviser's business - not just pay. Also bear in mind the inefficiency of the distribution system for such products. An adviser might scoop around pounds 800 for selling you a pounds 100-a-month pension plan, but will get nothing for the other, say, nine out of 10 clients he sees who buy nothing.

You could consider a fee-charging adviser, but hourly rates can be pounds 60 to pounds 100, making fee-based advice expensive for small investments. You may, though, have more confidence in the impartiality of the advice.

If you prefer to stick to commission-based advisers, visit two or three. Compare their prescriptions and discuss with each whether they are prepared to rebate some of the commission. See which one offers you the best deal.

Some firms of brokers sell products on a high-turnover, low-margin basis. These "discount" brokers give an automatic rebate of part of their commission, but you often get no advice and may need to know exactly what you want to buy.

Another option for those who dislike the idea of paying commission is to go direct to a company such as Virgin which does not pay commission to financial advisers. Note, however, that just because a company's products are commission-free it does not make them the cheapest or the best.

What are the advantages and disadvantages of endowment, pension, PEP and repayment mortgages to a non-smoker?

AN, Newcastle

The question is more relevant to life insurance than to mortgages. Smokers generally pay higher premiums for life insurance. So if you go for an endowment mortgage, which includes an element of life insurance, or you want a separate life insurance policy as security on another type of mortgage, smokers are likely to have to pay more.

The real issue is which is the best type of mortgage. Despite their bad press, endowment mortgages still take a sizeable chunk of new mortgage business, but endowment loans are inflexible. You don't get full value unless you keep a policy going for its full term. In practice, only a minority of people manage this.

There is also a concern that many policies won't have sufficient value at maturity to pay off the mortgage.

Alternatives to the traditional repayment or endowment loan are PEP and personal pension plan mortgages. As with endowments, you pay only interest on your loan and build up capital separately to repay the loan.

Pension loans can be highly tax-efficient because you get tax relief on premiums but, like endowments, they are inflexible. You can't get at the money to pay off your loan until at least the age of 50. They may leave you short of actual pension income in retirement unless you make substantial contributions.

PEP mortgages are more flexible than endowment or pension loans, because you have access to your capital at any time. They also tend to have lower costs and, unlike endowments, are wholly tax-free.

You recently suggested that people in company pension schemes should consider making AVCs (additional voluntary contributions) to boost their pension. Shouldn't they in fact use "carry back" provisions to invest their money in a personal plan instead? BB, Hampshire

AVCs are the only option for many employees in company schemes. And in some company pension schemes, additional contributions buy extra years' membership of the scheme and this can be valuable. Normally you cannot belong to a company scheme and pay into a personal plan at the same time. But, as you suggest, someone who has recently joined a company scheme could make payments to a personal plan for an earlier period when no pension contributions were made.

Possible advantages of this option are that you can convert part of a personal pension plan, but not an AVC, into a tax-free lump sum at retirement, and that the tax relief limits are higher for a personal plan. However, this course of action is probably only suitable for someone who has a lump sum to invest.

This is a complicated area and it is recommended you get advice from a competent specialist pensions adviser.

q Write to Steve Lodge, personal finance editor, Readers' Lives, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a telephone number. Do not enclose SAEs or documents that you want returned.

We cannot give personal replies and cannot guarantee to answer every letter in Readers' Lives. We accept no legal responsibility for advice.

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