In a nutshell the argument here is actually about perception in the main. In the black and white world of the popular press though, fees = good, commissions = bad.
But what if people are given the option of generating fees to pay for advice from within financial products as a way of reducing the cost of advice. There are good reasons why people should pay for financial advice from within a financial product rather than by paying a fee from other financial resources. The first is one of simple social exclusion, in most cases only the better-off would have access to financial advice if fees were the only route.
But, looking at pensions in particular, higher-rate taxpayers could also be advantaged by going down the commission route. For example, a higher rate taxpayer advised to invest in a pension may generate a fee of, say, £400. In real life they would go to their building society and draw the £400 from savings and pay it to the adviser, but they would have to withdraw an extra £60 from the savings account if the adviser is VAT registered and pay that on to HMRC. So, they could pay the £400 fee by drawing £460 from savings.
But, they could also pay the £400 fee in a way that will remove the £60 VAT liability and HMRC will also pay £80 of the fee for them. This is achieved through that "bad" process called ‘commission’. They adviser takes the £400 fee from the pension product through the commission system. Where this is done, no VAT is due and, in this case, £60 would be saved immediately.
However, although a saving has been made, the pension product has been "damaged" to the tune of £400 in the process. This can be fixed by going to their building society and drawing out £240, and paying it into the "damaged" pension as a single premium. HMRC are then obliged to add a further £160 to the personal pension as tax relief, thus fully reinstating the personal pension to its previously undamaged state.
The end result in both cases is the same; the adviser's fee has been paid and the pension left unscathed. The person being advised, therefore, has the option of raiding their savings of either £460 or £240 to achieve exactly the same result, the payment of £400 for the advice and service provided.
Fees = Bad, Commission = Good !
> More Advice taking out a Pension