The remuneration option, where an adviser agrees a fee with the client which is taken out of the pension pot, is becoming increasingly commonplace.
Hargreaves Lansdown head of pensions research Tom McPhail believes this will not sit comfortably with the Revenue, which he says could soon restrict factory gate pricing by capping it or banning it.
He believes the Revenue will view using any tax relief to pay advisers as an abuse, despite the fact that it is a tax-efficient way for clients to pay advisers.
He says: “I am amazed that the Revenue has not acted on this already but it will look into this closely and when it does, I cannot see how it can view adviser remuneration as an acceptable use of tax relief.”
Scottish Widows, which offers this remuneration option, also believes the Revenue is looking at this area closely. Although it is quick to point out that it does not believe maximum commission levels are being abused, with only a “hand-ful” of advisers taking the maximum on its new Sipp product, it says it would be sensible to impose a cap.
Just as the Treasury insisted that alternatively secured pensions were only intended for people with religious objections to annuities, the Revenue restated that the sole intention of tax relief is to bolster savers’ retirement incomes.
A spokeswoman says: “The Government is aware of this type of arrangement and keeps all legislation under review. It offers tax relief on contributions to, and investment growth in, tax-privileged pension schemes in order for savings in those schemes to be used to produce an income in retirement.”
But some commentators, including Scottish Life’s head of corporate pensions Mark Polson and Skandia’s pensions marketing manager Nick Bladen, argue that tax relief has always been used to pay advisers – even on old-style commission-based products.
The only real difference between the two arrange-ments in this regard, Polson argues, is that the factory gate pricing system is more explicit and transparent.
He also says that over the life of the contract, the factory gate model works out cheaper than a stakeholder-style product – meaning that less tax relief is being taken out of the pension policy to pay the adviser in the long run.
McPhail says a crucial line has been crossed with factory gate pricing.
He says: “It appears that in the past, the Revenue has always been willing to tolerate a degree of leakage of pension assets for the purpose of commission payment. There has always been a veneer of respectability to this transaction, perhaps harking back to the days of the maximum commission agreement, in that the commission payment was made specifically in respect of the cost of the distribution of the product.
“I feel that life offices have crossed a Rubicon. They are now advertising grossly inflated commission levels and dressing them up as a fee mechanism. This is double-D hard-core commission pornography, designed to appeal to advisers’ baser instincts. I find it hard to believe that Gordon Brown will be willing to tolerate such a blatant attempt to get taxpayers to finance the remuneration of financial advisers.”
Polson says some companies trying to outdo each other in terms of the level of maximum fee they offer advisers. He says some firms are offering unacceptable levels of maximum commission but claims that even if an adviser took 100 per cent of the first annual premium, the adviser and provider could justify this by pointing out that the client had agreed to the charge.
He believes the transparency of factory gate pricing will make it difficult for advisers to abuse the system. He says: “I would have thought that most advisers would struggle to look their clients in the eye and take 100 per cent of the first year’s premium.
“As long as the market behaves sensibly and persuades the Government that this kind of transparent remuneration actually encourages people to save, we should be OK.”
Skandia’s Bladen claims maximum commission levels of 100 per cent are “slightly obscene” but he believes what the Revenue is really concerned about is the way that tax relief is apportioned in the UK.
He says figures from the Pensions Commission indicate that 5 per cent of the population are benefiting from 50 per cent of the tax relief.
Having said this, he says the Government’s treatment of pension term assurance, residential property in Sipps and Asps has demonstrated its capacity to change its mind over financial policy.