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Firms facing 20-year wait for profit in 1.5% regime

Product providers say they face a wait of up to 20 years before breaking even on the new stakeholder products despite the 0.5 per cent rise in the price cap.

Scottish Widows says under 1 per cent it would have taken 12-15 years to make a profit, dropping to eight to nine years for 1.5 per cent. Another firm says the best-case scenario for 1.5 per cent would be profit in 10 years.

These calculations are made on a basis of capital loss simply becoming capital gain. Royal London has made calculations on what would happen if the up-front costs of product set-up were invested alternatively. Looking at 1 per cent on a 25-year regular-premium pension, with the IFA getting 25 per cent initial premium commission, it says it would take 25 years for the business to become profitable compared with 19 years and four months on 1.5 per cent.

These figures assume none of the cap increase is passed on to IFAs. If the rise is split between the provider and the IFA, Royal London says the time to profit would rise to 21 years and 11 months.

Prudential stands out among providers, praising the Government for its move and predicting profits much earlier than its competitors.

Royal London head of corporate communications Alasdair Buchanan says: “These figures show the increase will have very little effect on the charging structure of these products or on the market in which they operate.”

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