Buying RAs through LISPs

Many work-based pension schemes have failed pensioners. For many who wish to top up their work based pension funds, or are self-employed, the obvious answer is a retirement annuity and those offered by LISPs offer additional benefits.

A combination of conflicted trustees, poor investment decisions and the burden of disease have taken their toll on pension pay outs. Retirement annuities (RAs) could be the answer, and the RAs provided through LISPs offer investors added benefits.

The government has announced plans to introduce wide ranging retirement reforms, which will make it compulsory to contribute to a retirement plan, financed by a social security tax. Contributions are likely to be set at 13%-18% of earnings for everyone in formal employment, though the scheme will also encourage voluntary participation by informal sector employees.

But the complications of honing the finer details of such a plan in a country where 40% of the workforce is unemployed should not be underestimated - the implementation of compulsory plans is probably a long way off.

LISPs pay less commission

In the past, retirement annuity funds have mostly been sold by financial advisors in association with insurance companies, as the commissions on this 'sales route' have been much greater than commissions paid by linked investment service providers (LISPs).

While the terms and conditions governing the payment of commission in the life industry have become more negotiable, most financial advisors will know that commissions paid by insurance company RAs tend to be higher than commissions paid by LISP RAs. Commissions are generally received 'upfront', in the first two years of the life of the RA, and further commission become payable if changes are made to the premium. These terms and conditions are not always in the best interest of the client.

Benefits to investors

Investors who invest in a LISP RA, not only benefit from lower commissions in general, but stand to reap the benefit of compounding as investment grows off a higher base level as the costs are not loaded on the first two years.

As investors and potential clients have become more financially literate and the notion of selling a lifetime service rather than a once-off product has become more central in many advisory businesses, the linked investment service provider option has gained traction.

Choosing a LISP

LISPs that offer retirement annuity funds compete on fees, efficiency, service, turnaround times and the range of underlying collective investments that are available as RA building blocks.

One of the challenges facing investment advisors is choosing a safe service provider with sound business practices. They should therefore always ask for auditors and compliance certificates before entering into an agreement with a LISP. They should also ensure that the company's legal obligations are adhered to through a Risk Management Plan that is constantly being monitored by the FSB through a compliance audit.

Comparing fees

Not all LISPs have transparent, easily accessible fee structures, so it is not easy to compare services. In addition, most LISPs charge for their services according to a sliding scale, depending on the size of the investment. The sliding scale is also applied to different investment bands. There is little consistency in the 'gradient' of the sliding scales or in the range and variations within investment bands, all of which make the job of a financial advisor seeking value for money fairly difficult.

However, it is worthwhile to embark on this exercise on a periodic basis to ensure that you are getting the best deal for your clients.