IFAs always stoutly maintain they are not influenced by commission. But if
that were true, why do life companies vie with each other to pay more
commission than their competitors? If IFAs were all totally objective, the
amount of commission would have no effect on their recommendations.
Clearly, this is not the case.
Reports are circulating that several life offices are paying up-front
commission of 40 to 55 per cent on individual stakeholder pensions. In cash
terms, this is equivalent to £1,440 to £1,980 on a £3,600
Since most of the take-up of individual stakeholders, as opposed to
employer-sponsored schemes, has been by wealthy individuals keen to invest
with a 22 per cent tax subsidy on behalf of non-working wives, children and
grandchildren, much of this individual business will be executed for the
maximum contribution of £3,600. Some IFAs must be coining it in at up
to £1,980 a go. Nice work if you can get it.
Scottish Widows has confirmed it is paying 45 per cent initial commission
on stakeholder, as has Scottish Equitable. Scottish Mutual is also said to
be in this league and there could be several others.
Quite apart from the fact that £1,980 is excessive remuneration for
the relatively simple fact-find necessary to advise a wealthy client on
this very attractive tax shelter and inheritance tax avoidance device, this
is something the FSA should be monitoring.
The ABI says it is no longer responsible for recommending commission
levels. A spokesperson says: “It is up to the companies how much commission
they pay on stakeholder.” Perhaps more appropriate was the response
“Blimey” on being told some life companies are paying initial commission of
You do not have to be a mathematical genius to work out it will take 10
years for the life company to recoup the £1,980 commission from the 1
per cent maximum charge on stakeholder if it is lucky and the client
continues to pay the maximum £3,600 a year into the fund.
Even this allows no leeway for overheads and the cost of administering and
managing the investments. Life offices appear to be banking on being able
to cover their administrative and fund management expenses as well as
overheads – not to mention making a profit – out of the 1 per cent
management charge on the increase in the value of the investments.
Given the total lack of penalties for moving and the likelihood that the
more sophisticated investor will probably vote with their feet if the fund
does not perform well, the chances of some life offices making money out of
individual stakeholder look grim. Unless, of course, the life companies can
hide all the up-front marketing costs of stakeholder by charging them to
the with-profits fund – which is most likely what they will do.
This is an alarming prospect for with-profits policyholders and is
something the FSA should be monitoring on their behalf. The very least it
could do would be to carry out a survey of commission paid on stakeholder
pensions and ask life offices how they intend to cover these costs and what
effect it will have on the with-profits fund and future bonuses.
An FSA spokesman says: “It is perfectly valid for life offices to use
their reserves to cover the costs of launching new products. It is a long
established and perfectly reasonable way of using surpluses. But we are
reviewing with-profits products and looking at how they can be made more
transparent on costs.” Long established raiding the with-profits fund may
be but perfectly reasonable – tell that to the with-profits policyholders.
There is nothing unexpected about this latest development on the
commission front. Life companies have paid even higher commission of 60 per
cent of the first year's premium or more in the past. But that was in the
days when they could charge all the up-front costs to the policyholder.
With the maximum 1 per cent charge on stakeholder, they can no longer do
this so there is every chance they are ripping off the only people who are
unlikely to complain – the with-profits policyholders, who will not
understand what is happening. This is totally unacceptable and the FSA
should urgently address the question of ringfencing with-profits
policyholders' assets before it is too late.