When should you pay for advice? - pension planning
So you've got a financial decision to make, but should you pay for advice or go solo?
Which route you take will depend on your confidence with money matters as well as your specific needs – for example, whether you need to sort out a tax problem or just want to set up a regular savings account.
Charges for financial advice should become clearer from January next year, following changes known as the 'retail distribution review' or the RDR. From then, you'll face an upfront fee from independent financial advisers if you do decide to seek their help.
But how do you know when it's wise to pay for help? Here are some key financial milestones and guidance on whether you can do it yourself or need to call in the experts.
SETTING UP A PENSION - NO
Getting a retirement plan in place is often a simple case of choosing a personal pension with low charges, and there is an array on offer from well-known providers such as Scottish Widows and Aegon. It's easy to apply for one online and do the basic research yourself.
And if you want to take charge of your own pension savings, rather than simply hand your money to an insurance company, you might opt to start a self-invested personal pension (SIPP).
However, if you're new to investing you might want to get some expert advice when it comes to choosing the funds for your portfolio.
TRANSFERRING A PENSION - MAYBE
This financial decision typically affects savers with sizeable existing pensions accumulated through a company scheme, for example, or with several pension pots. In this case, getting an adviser to work through the situation might be sensible.
"The key is to check exit and entry costs, and any benefits that might be lost," says Lowcock.
ANNUITIES - YES
These are what you trade your pension pot in for when you retire to produce an income for the rest of your life. It's a large one-off transaction, about which you can't change your mind, so getting it right is crucial.
"An IFA can help you decide how best to arrange the annuity: spouse's pension, guarantee periods, increasing or level payments, frequency of payments - all of which can affect the amount you receive," says Francis Klonowski, IFA at Klonowski & Co.
Why can I no longer get 'free' advice?
There are currently two ways of paying for financial advice – an upfront fee or commission.
Commission has enabled advisers to seemingly act on a 'free' basis for clients, with charges then deducted from investors' funds each year – eating into returns – or added to premiums. This makes it difficult to gauge the real cost of advice.
Analysis by the Financial Services Authority (FSA) suggests consumers were losing £43 million a year because of advisers, driven by commission, encouraging them to switch pensions.
As a result of the controversy surrounding 'commission bias', from January 2013 customers will instead be charged an upfront fee. These changes are designed to make the cost of advice more transparent and help consumers have a better understanding of what kind of service they are being offered.
It will be important that you ask and agree what the fee will be upfront, and exactly what it covers. For more information, see the FSA's guide to financial advice changes at fsa.gov.uk.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.