I have strong but mixed feelings about the so-called decency limits, a cap to the level of fees providers will pay advisers, particularly with respect to pensions.
We had a client with two pension pots. 90% of the money purchase value of his funds had a guaranteed annuity rate. Despite being diagnosed with prostate cancer, we were unable to beat this rate with an enhanced annuity. On the remaining 10%, he took an enhanced rate.
Our fees for the advice were 1.25% of the total fund value, but well over the 10% of the money purchase fund. The provider was unwilling to facilitate our fees and the client had to pay a top-up, thus reducing his tax-free sum. In this case, decency limits acted to the client’s detriment.
Of course there is sharp practice: I have seen pension switches at 7% for negligible client benefit, and the banks have been rife with commission-paying products approaching double digit levels.
The cynic in me thinks some firms may still be selecting providers based on the relative generosity in their facilitation, and conversely avoid those with stricter rules.
Defining the minimum
Annuity providers have also introduced minimum fee payments, which brings us to a second dilemma: in facilitating adviser charges, should I expect the provider to pay my minimum fee as opposed to a generic acceptable minimum?
It is quite reasonable that as a business, we set our minimums such that in some cases it is not likely to be financially viable to provide advice for a client and they need to go without advice or seek advice elsewhere.
My preferred approach would be providers applying decency limits at a reasonable level. However, I would not be in the least bit surprised if these limits just happened to be at the same level as commission the providers were historically paying.
Given sufficient justification, the providers would be able to disregard these limits. That may be more difficult to police, and care must be taken to avoid unintended consequences such as unauthorised payment charges from using pension funds to cover non-pension related financial intermediation.
Alistair Cunningham is financial planning director at Wingate Financial Planning.