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Page last updated at 13:50 GMT, Saturday, 2 July 2005 14:50 UK

Costlier pensions if rules change

By Paul Lewis
BBC Radio 4's Money Box

An advisor with a client
The FSA admitted the move could lead to higher pension prices

The cost of buying a personal pension will rise if a planned change to the rules governing pension sales is brought in at the end of the year.

The change, proposed by the Financial Services Authority, will relax the rules about what financial advisers have to tell customers when pensions are sold.

That is expected to lead to price rises as customers will be less well- informed about the choices.

At the moment anyone who is sold a personal pension has to be told in writing why that pension is being recommended rather than a stakeholder product - which is normally cheaper.

The effect of the rule has been to bring down the cost of personal pensions.

In the past customers could find themselves with a hefty initial charge, with a lot of their first year's premiums going to the adviser rather than into the pension.

In addition, there was an annual charge of 2% or more of the total value of each person's pension fund.

Written justification

In an effort to bring charges down, the government introduced stakeholder pensions in 2001.

The stakeholder label meant there was no upfront fee and the annual charge was capped at 1%, raised this April to 1.5%.

To make sure advisers told customers about the cheaper stakeholder choice, the regulator introduced a specific rule - called RU 64 - to make any adviser who recommended a personal pension justify in writing why they had recommended that rather than a cheaper stakeholder.

We expect that pension prices will rise. I can't say how much
Mary Hollinshed, FSA
Such a justification is hard to make and pension charges generally fell to the stakeholder level.

But the insurance industry claimed that at those prices it simply could not afford to sell pensions to individuals who needed advice, and pension sales fell.

The Financial Services Authority, which imposes the rule on insurers, has decided to deal with those concerns and wants to scrap the rule from the end of this year.

Speaking on BBC Radio 4's Money Box, an FSA manager, Mary Hollinshed, claimed a rule which brought prices down was not necessarily in the best interests of consumers.

"It's good for some consumers, but not for all because the effect of bringing prices for all products down to a particular level is that there may not be enough money to sell pensions to a wide range of customer," she said.

Industry delight

Ms Hollinshed admitted that scrapping the rule would make pensions more expensive:

"We expect that pension prices will rise. I can't say how much. If I said how much the pension industry will see that as a benchmark."

The problem is these pensions are not being sold and people are not saving
James King, ABI

The pensions industry is delighted the rule is to be scrapped.

The Association of British Insurers (ABI) has claimed the announcement as a "success for the ABI campaign".

James King, a policy adviser at the ABI, said that prices may rise but pension sales will grow.

"What may happen may be a modest increase in charges upfront. But this will probably be offset by lower annual charges," he said.

"The problem is these pensions are not being sold and people are not saving.

"Where an advisor is needed to stimulate saving that advisor does need to be paid."

Necessary evil?

Patrick Connolly, a certified financial planner from John Scott & Partners has some sympathy with advisers but thinks that prices must inevitably rise all round.

If there is more inclination for advisers to sell... more consumers will end up with pension policies
Patrick Connolly, John Scott & Partners
"It's a difficult position for advisers who need to make their living by selling products," he said.

"If margins are low that causes difficulties for them. The purpose of the change is to put commissions up, and the knock-on effect is to put prices up, and consumers will need to pay more.

"If there is more inclination for advisers to sell products then more will be sold, and more consumers will end up with pension policies."

But he thought it a "very real possibility" that some financial advisers would simply stop selling the cheaper stakeholder pensions altogether and concentrate on personal pensions with their new higher charges, limiting consumer choice.

The Financial Services Authority is consulting on the change - comments should be submitted by 28 October - and it has promised to monitor carefully the effects of the change on the market for pensions.

BBC Radio 4's Money Box was broadcast on Saturday, 2 July, 2005 at 1204 BST.

The programme was repeated on Sunday, 3 July, 2005, at 2102 BST.



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