Who should pay for pension advice?

MPs are apparently calling on Steve Webb the Pensions Minister to ban consultancy charging.

This is a practice where the cost of financial advice to employees joining their employer sponsored pension plan is paid for by the employees by such fees being deducted from their contributions.

It is estimated that such costs can be in the range of £250 to £500 and could account for as much as the first year’s worth of pension contributions.

Most employer sponsored pension schemes these days are of the ‘money purchase’ variety.

These are the type where employer and employee contributions are invested in funds and the ultimate value of the benefits that eventually become payable depend upon contributions paid in, investment returns achieved and to a large extent the interest rates that apply at the time benefits are provided (interest rates, well gilt yields really determining the annuity rates that might be available at retirement).

So who should pay for this advice? And indeed what advice is actually needed?

My answer to the second question first. Most employees probably need some degree of advice about the choice of investment funds for their and their employer ‘s contributions.

If our experience is anything to go by employees generally don’t understand the choices they have unless they have access to advice, and most people lack motivation to learn how to do this for themselves.

Some employees also need advice about suitable contribution levels and indeed what to do with any existing pension arrangements they have possibly from previous employment periods.

As the advice is to benefit the employee there is a reasonably compelling argument that the employee should pay. But a group of MPs disagree and believe this cost should be borne by the employer.

Employers retort that if they cannot pass on the cost of this advice to their employees then they may have to reduce the level of their contributions.

It seems to me that a sensible approach might be for both the employee or employer to share the cost of advice.

Or how about an alternative where the Government makes £250 available to each employee so that they can buy suitable advice? Yes, you are right that is a bit unlikely!

Photo credit