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The Personal Pensions vs stakeholder pensions debate

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.

In Depth

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Pension switching

The Financial Services Authority (FSA) issued a report in 2008 on the 'Quality of advice on pension switching'1. This was followed by a suitability template designed to help IFAs assess the suitability of pension switching advice. The suitability template helps advisers to evidence the reasons for recommending a transfer and specifically asks if they have adequately considered the merits of stakeholder pensions.

R U 64 - a brief recap

RU64 refers to 'Regulatory Update 64' a rule introduced in 1999 by the Personal Investment Authority (PIA) and subsequently retained by the FSA.

The rule is intended to make financial advisers document and justify their decision to recommend pension products other than stakeholder pensions. This is because when the government introduced stakeholder pensions in 2001 they were intended to be a low-cost pension that met a minimum set of standards. The FSA want to make sure if an adviser is not going to recommend a stakeholder pension, then there should be a good reason.

Which product to recommend

You may be deterred from offering alternative pension products because it looks like a harder task to recommend them. But often these products may be more suitable than a stakeholder pension for some clients - and ultimately this should be the main reason for your recommendation.

This suitability could be based on investment choice and on charges and transparency.

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 just over 20 funds, compared to a personal pension of over 180 funds.2 And if we compare stakeholder pensions with SIPPs the difference in investment choice is even greater.

Charges

Surely stakeholder pensions will always come out on top when it comes to charges? After all they are supposed to be the low cost alternative. In fact, alternative products, not constrained by stakeholder restrictions can often offer better value to investors.

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.

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, the Financial Adviser's Fee (FAF) commission option available through our Pension Portfolio enables the cost of advice to be deducted directly from the client's plan which is then subject to much lower ongoing charges. Not only does the client know exactly how much they are paying for advice, they 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.

So what does this mean?

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.

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.

Source:

  1. FSA Quality of advice on pension switching, 2008
  2. Defaqto Limited, May 2009

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