I am a 51-year-old in full time employment paying £200 a month into a stakeholder pension, which is now worth about £24,000.
In addition I have two other pots worth £12,000 and £110,000 and some benefits in a final salary scheme with another company.
I know I should be reviewing my pension arrangements every year through an independent financial adviser but I am confused.
‘I need advice about the advice!’ Financial advisers keep telling me to put all my pension pots with a new provider charging higher fees
They all immediately offer to take my pensions which are with firms with well-known established names and switch them to another provider with a vast team of financial experts to manage them, with the accompanying higher fees.
My problem is that I am unsure whether this is the right approach. I expected the financial advisers to look at the funds I could switch to within my existing pensions. Is there a reason they don’t do this?
Am I missing a trick here and should I hand over these three pensions via the latest financial adviser I have met with, or another provider, and pay higher fees for hopefully higher returns?
I feel reluctant to do this and now feel I need advice about the advice!
What happens if my financial adviser ceases trading? What if the expected returns don’t materialise or are eaten up by fees? Could I then take the money and put it back with the big pension providers I am with now?
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
I intend to work until 65 and clearly I need to grow my pension pots. Any thoughts would be gratefully appreciated. Incidentally, the pot I am currently paying into has grown by 43 per cent over the last five years.
SCROLL DOWN TO FIND OUT HOW TO ASK YOUR PENSION QUESTION
Steve Webb replies: You are right to ask searching questions before agreeing to move your money between different pension arrangements, especially if the new arrangement involves paying higher fees.
Paying more will sometimes be the right answer if you are clearly getting better value or an additional service, but the onus is on someone who wants you to pay higher charges to demonstrate that they can justify these extra costs.
To think this through, it is worth understanding that there are different types of financial adviser and different types of pension charge.
Independent vs restricted advice
With regard to advisers, the main distinction is between ‘independent’ financial advisers (IFAs) and ‘restricted’ advisers. Both are business structures regulated by the Financial Conduct Authority.
An ‘independent’ financial adviser is someone who will advise you as to what you should do with your money and will then search the market for the right product and the right provider to meet your needs.
A ‘restricted’ adviser should tell you at the start that they will select products from a restricted range, and this may include providers with whom the adviser has a commercial relationship.
Is your work pension up to scratch?
Proponents of ‘restricted’ advice would say that the adviser can focus on a narrower range of providers and potentially negotiate better terms for their clients as a result.
Critics of restricted advice will point out that in many cases there is a commercial relationship between the adviser and the product provider (eg the adviser firm is owned by the provider) and that there is a risk that the adviser will opt for the linked provider rather than another one in the market which might be better for the client.
It is worth stressing that the Financial Conduct Authority allows both forms of advice, but it does insist that restricted advisers are transparent about the way in which they operate.
In your case, if advisers often want to move your funds from their existing home to a new home it will be in part because as restricted advisers they have a set of products that they use and they are familiar with, and they may argue that they will be able to secure you a good deal compared with the products you are currently using.
Ongoing vs one-off advice
Another thing to be aware of is that there are many different sorts of fees and charges and it is important to be clear what you are paying for.
When you take out a financial product, you pay a fee to the provider of that product which is usually a percentage of the money that they are managing for you.
But when you use a financial adviser you are also paying the adviser for their time. Some advisers simply charge a fixed fee (eg an hourly rate) for advice and any ongoing charge is simply the product fee.
But many advisers will charge an ongoing advice fee which will be a percentage of the size of your pension funds.
Those who support this model of ongoing charging will say that financial advice is very valuable and that a small percentage of your funds each year will pay for a regular review of your financial situation.
For example, as you get older you may want to think about your options about retirement, about the possibility of reaching tax relief limits, about the financial needs of other family members if something were to happen to you and so forth.
The ongoing advice fee you pay doesn’t necessarily mean you will get a better return on your investments but it might mean your financial affairs are better organised and planned.
A sceptic would say that an adviser has an incentive to get you to move all of your money out of your existing arrangements into investment funds that they (or a commercial partner) manage because they then get a bigger fee.
One option, if you are concerned about potentially higher charges if you move your money, would be to find an adviser who will simply advise you for a flat fee. The amount of remuneration they get will not depend on where the money ends up.
You can also specifically ask an independent adviser to look at the investment fund options available inside your existing pension schemes, and whether it is a better deal just to switch them up rather than transfer out.
Bear in mind that if you are currently in a scheme’s main ‘default’ fund, that is probably invested in a relatively simple way to match the performance of the markets as a whole.
Tracker or active funds?
Trackers only match index performance but are cheap to own, while active fund managers pick investments to outdo the market but often underperform despite charging a lot more.
Read more here about the tracker vs active debate. This is Money
So, if you move into other actively managed funds that try to outperform markets – whether they are within your existing schemes or not – this will involve paying higher charges.
What happens if your adviser goes bust?
You asked what happens if the adviser goes bust. In general, there is a separation between the adviser’s business and the product where your funds are held.
Whether the individual adviser is there or not, your funds are still with the financial institution with which you saved, and most regulated investments are covered by the Financial Services Compensation Scheme if those institutions get into trouble.
In terms of reversing things, as long as there are no ‘exit penalties’ on the new products, and as long as the old products you were in before were still taking new money, you could in principle move your money back if you were unhappy with how things worked out.
Most financial advisers will do their best to recommend the right strategy for you.
But if you are being asked to pay higher fees and charges, perhaps particularly for ongoing advice or for claims of better investment performance, you should certainly seek clear information about what you will be getting for your money.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.