Historically, advisers were paid a commission for the advice they gave their clients. Although the commission was paid from the insurance company, it actually came from the pension pots paid to the insurance company by the client.

Advisers who provide you with recommendations based on your specific circumstances can no longer take commission. Instead, they have to agree a fee with you (though once the fee has been agreed the insurance company can pay it directly to the adviser from your pension fund money). An example of a typical fixed fee might be £600.

In contrast, organisations that don’t provide specific recommendations based on your precise circumstances, but give you the information you need and guide you towards making your own decisions, can still receive commission. Commission is usually a percentage of the fund, say 1.5%. So if your fund is £20,000, the commission would be £300.

Because the two methods are different , it can be difficult to compare easily. In some cases, a fixed fee may be less expensive. In other cases, commission may be less expensive.

Take a look at these examples.

Example 1

Helen Jones has a £30,000 pension fund.

First, she approaches a local financial adviser who quotes a fixed fee of £600.

Then she contacts a website that provides quotations and helpful information on the different products available (but lets Helen make her own decisions). The website takes a commission of 1.5%.

This means the website would charge Helen £450 based on Helen’s fund of £30,000. That’s £150 less than the financial adviser.

Helen has to weigh up whether she’s happy to make her own decisions. She might still prefer to leave it all to her financial adviser to make recommendations and then sort everything out, but it will cost her £150 more in this example.

Find out more about the difference between advice and guidance.

Example 2

Peter Adams has a pension fund worth £100,000.

He contacts the same financial adviser Helen contacted in the first example and is also quoted a fixed fee of £600.

Like Helen, he investigated websites offering comparisons and information to help him make the right decision. The sites he visited charged 1.5% commission.

That means the commission on Peter’s £100,000 pension fund would be £1,500, so it’s less expensive for Peter to seek personal financial advice.

What’s more, a financial adviser will make recommendations based on Peter’s personal circumstances.

In this example, Peter chooses the financial adviser.

Remember, it’s not just about the price. Make sure you understand what you’re getting for your money. See Advice and guidance for more information.