Adviser > News > June 2010 > Personal pensions or stakeholder pensions. You decide.
Personal pensions or stakeholder pensions. You decide.
Find out why personal pensions can be as suitable, if not more so, than stakeholder pensions for some clients.
With the Financial Services Authority's increased scrutiny of pension switching advice, and the retention of the RU64 rule, it's never been more important to be able to fully justify your recommendations. So it's crucial to be able to demonstrate, and document, why personal pensions can be as suitable, if not more so, than stakeholder pensions for some clients.
Which product to recommend
While RU64 means you may have to work a little harder to justify your decisions, it is not a barrier to business. There are plenty of reasons why a personal pension or indeed any other type of pension could be as suitable, if not more so, as a stakeholder pension for most of your clients.
This suitability could be based on:
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Investment choice - For a client looking for access to lots of funds and extra investment options (now or in the future) a stakeholder pension may not be the answer. The average number of funds offered by an individual stakeholder pension is over 20 funds, compared to a personal pension of over 180 funds.1
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Charges - Stakeholder pensions do not always work out to be the low cost alternative they are supposed to be. With a stakeholder product the cost of the commission must be included within the annual management charge. This means the client is still paying for initial advice years later. This opaque charging structure makes it impossible for the client to know how much they will end up paying for the advice they received.
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Transparency - The FSA are trying to make charging structures more transparent and straight forward. Products that allow the cost of advice to be uncoupled from the product charges (factory gate pricing) are actually much closer to this than a stakeholder charging structure.
For example, our Financial Adviser's Fee (FAF) commission option available through our Pension Portfolio means the cost of advice is deducted directly from the client's plan which is then subject to much lower ongoing charges. The client then knows exactly how much they are paying for advice and also benefit from an extremely low ongoing management charge. This means that ultimately the client can often end up with a higher fund value if the advice is paid for up-front.
Source:
1. Defaqto Limited, March 2011, the average figures for personal pension are based on 17 providers and the individual stakeholder figures on 15 providers.
Personal Pensions vs stakeholder pensions - comparison
The following is a comparison of our Pension Portfolio and a typical stakeholder pension:
| Feature | Typical Stakeholder Pension Plan | Pension Portfolio2 |
|---|---|---|
| Charges | 1.5% in the first 10 years and 1% thereafter | 1.0% base charge |
| Investment funds | Limited range, usually few or no external funds | 36 internal funds |
| Self investment options | None | Fund supermarket |
| Income drawdown facility | None | Income Release facility allow clients to access their retirement benefits in a way that suits their individual circumstances. Additional charge applies. |
| Commission options | Restricted levels, which are term dependent, have long clawback periods and increase the ongoing management charges | Financial Adviser's Fee of up to 75% of first year's regular contributions and up to 7.5% of single contributions and transfer payments. Not term dependent and no clawback on single contributions and transfer payments. Keeps ongoing charges low and can lead to higher projected fund values over the longer term.3 |
Sources:
2. The Pension Portfolio comprises of two elements – Core Investments (insured investment funds) and Self Investments (fund supermarket, discretionary fund managers etc). Additional charges apply for the Self Investments.
3. The cost of the Financial Adviser's Fee is deducted directly from the client's plan, at outset for single contributions and transfer payments and over the first 12 months for regular contributions.
Find out more
To learn more about Pension Portfolio and how it can benefit both you and your clients, please contact your usual Scottish Life contact.
For professional advisers only
