IFA Fee Percentage advice

[friendlycat]

Would value some advice from any IFAs out there. Just turned 58 and recently seen a truly independent IFA recommended locally to do a pension review. Never had one and knew current private pension was in high risk funds.

Somewhat naively I thought I would pay the fee, that was fair at £2,100, IFA would recommend lower risk level funds within current pension provider and I would instruct a swap and off we go again.

IFA doesn't think current pension provider offers best solution and is advising a total switch to Royal London which does only have fund charges of 0.40% but then IFA fee of 0.50%.

Having never taken a pension review before I suppose I didn't know what to expect and had my own blinkered view as to how this might work. With 9 more years to retirement and looking at the table illustrations that clearly show how much money the IFA will be getting over 9 years I'm questioning whether this is the way forward.

I realise that any IFA needs to be paid for their work, but is it completely normal that an annual fee of 0.5% is levied across the pension transfer and my future contributions for the next 9 years?

I rang and asked if I could not have the yearly review and thus negate the IFA annual fee charge and was told no.

Am I just not understanding that this is how it works never having had a pension review? IFA tells me that the combined charge of fund management fee and their fee is actually less than if I stayed with current pension provider but moved into less risky funds - so perhaps I just haven't seen the fee structure so starkly illustrated in a table before?

Pension pot is only £250k.

If this is how the system works that an IFA takes a yearly % fee in all instances, and it's standard practice, and that the charges seem reasonable then so be it. But as said, I had imagined I would pay a review fee, they would recommend funds and I would do it - hence I'm trying to satisfy my head that I got the scenario wrong and that paying the IFA their yearly % fee for the next 9 years is the way forward.

I have other fixed rate bonds of double this pension amount and ISAs so am not completely looking to this pension to fund my retirement.

Very grateful for thoughts from any IFAs out there.

You are under no obligation to continue to pay for an ongoing advice service if you do not want one. You contact the pension provider (Royal London) and tell them to switch off any ongoing advice fee.

0.5%pa is a reasonable fee. Some people feel the benefits of ongoing service more than others, depending on their personal needs. It sounds like you are content for the new arrangement to be set up and then left alone to do its thing for a few years, so you'd be pretty low maintenance unless something major happens.

Sunseed thank you for responding.
What has just astonished me though is that last night I was reading the document and had a lightbulb moment of my own as I may not be employed after the age of 61. I have my own funds that will carry me to age 67 prior to private pension and state pension.

The IFA knows this and even states in her document to me about retiring at 61 but not drawing on the pension, but IFA mentions throughout about keeping my current contributions at the same level until age 67.

I do a spot of digging on the web and can see that if I am not employed there is a maximum of £3,600 I can pay into a pension annually. Nowhere in the document from IFA does it mention this, all the illustration from Royal London is then wrong as my current contributions are £500 per month.

I now have no confidence that I have found out myself about this, it's not in the document, I have paid £2100 for specialist advice, plus the IFA would like a 0.5% ongoing yearly fee and has not covered off something so basic as this. I could cry.

It sounds like she has illustrated what may happen in the event that you do keep working beyond 61 rather than taking it as a definite that you will stop at 61.

The point about the £3600 limit is that is the maximum upon which you would get tax relief, in the absence of higher earnings. You could theoretically keep putting the £500pm in as fresh contributions, but without the tax relief bonus then an ISA would probably make more sense as an investment vehicle because of no tax on withdrawals.

Thank you Sunseed for your help. So I can keep on making the £500 contributions (after I stop working) but I just don't get the tax relief on top?

No she has assumed that the contributions remain the same with the added tax relief for the period after which I will not be working and all the illustrations show this even though it is not legally correct.

I just don't see how I can proceed with her going forward giving such incorrect advice at the outset. Presumably I can't?

Have you queried it with her? I'm not trying to defend her but we all make mistakes and if she's been researching different scenarios it's easy to get muddled. Having said that, you do need to be able to trust the advice that's being given.

Whilst many people bash advisers who are part of networks as opposed to being independent, one huge upside is that they often have a strict set of advice processes to follow and a Quality Control checker of some sort in the background which helps avoid this sort of thing happening.

On your point about continuing contributions, there is another factor that may come into play called the Money Purchase Annual Allowance. If you have made a taxable withdrawal from any personal/DC pension then the maximum you can put in would be £4000pa. Go above and there's an MPAA tax charge.

I did query it with her and at first she started "waffling" back and trying to minimise the mistake. I calmly stated she was wrong as in between I had spoken with my accountant who confirmed this. Somehow trying to minimise the mistake just compounded the issue for me as it is such a fundamental flaw in a 9 year plan when 6 years worth of contributions cannot be made at the same level.

In the end the IFA held her hand up and said she had made a massive mistake and said she would re run the report. But I've got to be honest I don't feel confident now and feel I need to look for somebody else as the trust is broken for me.

It seems such a huge mistake to present me with a plan that cannot be executed with the level of contributions once I am no longer working and to not make any mention of this in her own personal document to me. I feel back to square one of approaching a new IFA to transfer my pension for me and give advice going forward that I trust.

Perhaps if she had held her hand up and admitted the mistake right at the outset it would have softened the blow. But to compound it with trying to minimise and blatantly muddy the water a bit before I corrected her once again just made it all worse somehow.

I use many companies illustrations systems to produce pension illustrations for clients and unless Royal London has changed recently, their system (and everyone else I have come across) is not sophisticated enough to illustrate varying levels of contributions. You either enter the amount of current contributions and it assumes these continue until the retirement age of the plan, or you put in zero contributions, which also won’t be accurate. The most accurate way of showing what you want is to just put the retirement date of the plan as 61 and then it will assume contributions cease at that time. There is no way to input £500 pm contributions for 3 years until 61 and then reduce to £300 pm (£3,600/12) for the next 6 years. So the adviser isn’t able to get an accurate illustration that’s bespoke to your planned varying future contributions

honey. I do completely accept what you say about an illustration cannot illustrate the different levels of contributions.

But my lack of confidence comes from the supporting document from the IFA who makes no mention of the fact that I cannot legally continue with the level of contributions as they are when no longer employed. In fact she highlights I should definitely maintain them at their current level even when I stop working when technically this is not allowed.

There are two pages of achieving my financial goals and that I’m on track to do so, but it’s incorrect as I can’t maintain the level of contributions legally. The fact her supporting document is so incredibly incorrect is rather a worry.

Like you, if I paid an IFA a lump sum for advice, I don't see whyI would pay an ongoing 0.5%. I would also worry that the IFA is steering me towards a fund that pays the advisor an ongoing fee. I don't know if this is the case, but a 0.5% ongoing fee of a £250k pot is £1,250 annually for the IFA for what service? I've read time and again that fees are a considerable drag on the performance of a pension, so you really don't want to be paying duplicate fees (to the pension provider and the IFA).

I don't understand the above comment from a previous res ponder that varying contributions are difficult to model. If your business is providing pensions or advice as an IFA, you should be able to model changing circumstances.

I don't know if Royal London is a good pension provider or not. Their Trust Pilot review score is low, although online review sites should be treated with caution as reviews can be faked and people are more likely to review if unhappy than if satisfied. Has the IFA said why they recommend Royal London vs, other options, e.g. SIPP.

You say your £250k pension is in high risk funds and you wish to reduce the risk, but you also have £500k in low risk bonds (or maybe not so low risk if interest rates increase) and £x in whatever risk ISA's. Your retirement planning should review them all (pension, bonds, ISA's) not just the pension element.

@friendlycat

honey. I do completely accept what you say about an illustration cannot illustrate the different levels of contributions.

But my lack of confidence comes from the supporting document from the IFA who makes no mention of the fact that I cannot legally continue with the level of contributions as they are when no longer employed. In fact she highlights I should definitely maintain them at their current level even when I stop working when technically this is not allowed.

There are two pages of achieving my financial goals and that I’m on track to do so, but it’s incorrect as I can’t maintain the level of contributions legally. The fact her supporting document is so incredibly incorrect is rather a worry.

Yes she should have mentioned that in the report and put a caveat in explaining that Royal London system cannot take into account varying contributions so the illustration assumes contributions continue at the current level for the term of the plan.

Unfortunately this is a problem I encounter a lot with life companies who do not want to spend the money on upgrades to their systems to be able to bespoke illustrations - the majority of them are very simple and fit the average person’s needs so that’s all they want to provide

But is it actually possible to find an IFA who will charge a fixed rate fee for a suitable pension transfer and not take their own service fee yearly.

I’m coming to the conclusion that this is what I want having experienced this somewhat negative experience. I fully expect to pay for a service. But being told the yearly percentage fee is non negotiable jars when I just want a pension review and suitable ongoing funds selected.

She admits she’s made a massive mistake in instructing that I maintain contributions at a level that’s legally not possible. Therefore it makes me question why I would want to pay an annual percentage for her services going forward as how can I trust her advice? What benefits am I actually getting for continuing fee coming out of my pension when the pension provider is charging understandably a fee to manage the fund at the risk level I want?

What benefits am I actually getting for continuing fee coming out of my pension when the pension provider is charging understandably a fee to manage the fund at the risk level I want?

None.

I used an IFA once, and also paid high fees for a useless, error strewn report. And I was once talked into taking out a with profits endowment mortgage that ended up not even covering the mortgage, but no doubt the on-going commission paid for the IFA's annual holiday over it's 25 year term.

I'm sure there are many good IFA's out there offering a valuable service. But for some it is a licence to print money, getting paid for advice that might be good and might be bad, no-one knows because the investment outcome is unknown until years or decades later. But one thing that is known is that fees will reduce the pension, so don't agree to duplicate fees, i.e. both the IFA and pension provider.