Pick-A Annuity Directory another look
Suggestions to build on the initial work
It is essential to explain properly the value of independent whole of market advice
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
My comments on the Pick-A Directory have really upset those who put it together. It is such a shame that the wording was not tested on consumer groups or shown to independent advisers before the site went live. Now that the service is launched I have had a chance to look at it in more detail, rather than only seeing the wording on the test site. Here are my further comments.
Site looks good: The Pick-A site is easy to use, it looks really good and clearly a great deal of work has gone into it. The operational aspects of the Directory and its functionality work well and are user-friendly.
Content needs adjusting to remove bias against advice: The content, however, needs adjustment to ensure it is fairer. I am pleased that some of the wording that was so biased in favour of non-advice and against advice is being changed and hope there will be further developments. The Directory should help provide better outcomes for people reaching retirement, especially if they have small funds, rather than just staying with their current pension provider.
Need clear explanation of difference between whole of market advice and non-advice: The description of ‘advice’ and ‘guidance’ needs to be developed to explain clearly the difference between fully whole of market independent advice, tied advice from a limited panel (albeit covering 75% of annuity companies) or non-advised brokerage and guidance. I have put together some alternative wording which I hope will be helpful for a future version.
Separate section for whole of market IFAs: It would be really useful if the Directory had a separate section for independent, whole of market individual advisers, to distinguish them from tied advisers and other sales channels. Although there are fewer whole of market IFAs than tied or non-advice services, these IFAs offer the best chance of delivering optimal outcomes for customers, especially for enhanced or impaired life annuity purchases and for those who do not have very small funds.
Bias towards non-advice should to be removed: Implying that non-advised ‘guidance’ is at least as good for the customer as ‘advice’ – or even better – has raised significant concerns and is misleading I am pleased that some movement towards removing the biased wording has already started. Taking independent advice will almost always be better than trying to make this complex decision on one’s own. I have also seen many examples where full advice actually costs less than the 3.5% or higher commission taken by a non-advice service.
Show fairer examples of fees and commissions for larger and enhanced annuities: For small funds, using an adviser will often be more expensive than non-advice services, but those with average size funds and who qualify for enhanced rates could find full advice is actually cheaper. Unfortunately, the examples of fees and commissions used in the Pick-A Directory relate only to small funds and standard, rather than enhanced annuities and are therefore potentially misleading. The needs of those with smaller funds should not drive this Directory, it should cater for all size funds and include examples of fees and commissions for both standard and enhanced rate products.
The alternative Pick-A wording – that highlights value of advice: I have drafted alternative wording that might have been put together by those who want to ensure people understand why using an IFA has significant value! This wording could better describe the relative merits of advice and non-advice to help people with their retirement options and annuity purchase. By not differentiating those who only cover 75% of the market from those who cover all providers, the Directory implies both are equally valuable. This is not the case, albeit for smaller funds there will be a cost issue. Including a separate section for individual whole of market advisers would help clarify those who cover all providers and take responsibility on the customer’s behalf for finding the right product. The following draft is designed to promote discussion, but I hope it will be helpful in developing this long-awaited annuity Directory further.
NOTES FOR EDITORS:
THE ALTERNATIVE ANNUITY DIRECTORY
NEW WORDING TO DESCRIBE ADVICE AND GUIDANCE
The following is the alternative text I have drawn up to more accurately reflect the value of seeking advice from a whole of market independent financial adviser. It explains the benefits of using an IFA but does also point out that those with small funds may not find advice cost-effective. With larger funds or for those who qualify for enhanced rates, the IFA advice route can even be cheaper than using a non-advice service which takes high commissions. Here goes…
Buying an annuity is one of the most important decisions you will ever make. Once you have bought one, you can never change it, so it’s vital to make the right choice before you buy. It is also important to know that you do not actually have to buy an annuity at all – and in some cases, under certain conditions, you may be able to take the entire amount of a small fund as cash. You can leave your fund invested to benefit from future market returns, or you can take some tax free cash and use income drawdown. You can also buy a fixed term annuity or investment-linked or guaranteed annuity products. It is important to understand all your options.
You need help to make the right decision:This Directory aims to help you make the best choices and find information, advice or guidance to help you to understand your options, before you make an irreversible decision. With something this important, it is worth your while taking time to read through this site carefully, so you fully understand the ways in which it can help you do the right thing for yourself and your family. You have saved for so many years to build up your pension fund and it now needs to work for you for your own and your family’s future. Make sure you give yourself the best start when deciding how to use your hard-earned savings. The decisions you make now may need to last you for twenty or even thirty years and if you do the wrong thing, you will be stuck.
Who can help me? This Directory contains the names and details of thousands of firms who can help you. It is really important not to just take the annuity offered to you by your pension company, even if that seems very tempting and is the easiest thing to do. The company may try to entice you to stay and buy its products by telling you it can pay you your tax-free lump sum very quickly, but that should not be the most important factor for you. If your pension company is offering you a very poor annuity income for the rest of your life, then being swayed by receiving your tax free lump sum a bit sooner could end up costing you thousands of pounds over your retirement and you should look for a better deal. You will most likely get the same cash amount from another company, albeit you may receive it slightly later, but you should also have a higher ongoing income for your retirement needs if you find a better rate. It is, however, important to just check that your current provider does not have valuable annuity guarantees, or pay higher tax free cash amounts, before you move your fund. You may need help to do this. By using an adviser or an on-line guidance service to shop around, you give yourself a much better chance of maximising the value of your pension fund for yourself. In some cases, you may be better to wait, and you may even be able to take the whole fund out as cash. It is important that you understand you don’t have to buy an annuity at all if you don’t need the extra money now.
This Directory lists advisers who can help you with these decisions.
There are different types of services available to you. In fact, you may first want to call the Pensions Advisory Service, who offer a free national pensions helpline on 0845 601 2923. This service might also help point you in the right direction, explaining the benefits of shopping around or taking advice and perhaps helping you realise that you do not need to buy an annuity at all at the moment.
There are different types of adviser. Some are tied to particular annuity companies and will only offer you products from those firms. Others will give you access to every provider out there.
Whole of Market, independent advice: There are independent financial advisers who cover the whole market and are not tied to any particular providers. They can discuss all your options with you, including not buying an annuity at all, or buying a different type of product. If an annuity is right for you, they will help you decide which type of annuity you should buy and can shop around with all companies that are offering annuities at that time to find you the best rate. They will agree a fee with you before they advise you on the best option for you, so you know how much the advice will cost.
Multi-tied advice: Some advisers can only offer you annuities from a few different insurers. These ‘tied advisers’ represent a number of different firms and if the annuity providers they cover include the larger ones who make up at least 75% of the market, then they will be included in this Directory for you. They should be able to get you a good rate.
Single-tie: Some firms are tied to just one particular insurance company and can only sell you an annuity from that firm. These types of firms are not included in this Directory.
Non-advice brokers: There are many firms which offer to sell you annuities on-line or over the phone, and have easy-to-use websites or telephone operators to give you information and guidance, offer explanations for the complex terms involved in annuities and help you find the best rates on their database. These firms will try to ensure they help you make the right decision, but if you do not properly understand what you read, and buy the wrong annuity, you have no regulatory protection. These non-advice services charge commission if you do buy through their website or over the phone. They will get between 1.5% and 4.5% of your fund, depending on which company and type of annuity you choose. You may not know how much until you actually decide to purchase.
This is the term used to describe services that are designed to help you make your own decisions, giving you information about the complex terms and jargon used in the annuity markets, guiding you through the process of deciding what is best for you, and helping you to understand all the terms for yourself. Annuities are complex, with phrases that you have probably never heard of before so you will need to take time to learn what these terms mean. If you use ‘guidance’ and you do not properly understand all the issues, which results in you making the wrong decision, there is no comeback on anyone. Sometimes, guidance will be cheaper than going to see an adviser, especially for those with small pension funds, but for others the fixed costs of individual advice can even work out cheaper. Certainly, guidance is available to help you understand what your choices are and help you shop around for a better deal than that offered by your current pension company.
How much will advice or guidance cost? Whichever way you choose to buy an annuity, you will have to pay charges. A non-advice service receives commission which will often be around 1.5% of your fund for a standard annuity, and 3.5% or more for enhanced annuities. Independent, whole of market advisers cannot just take commission but will agree a fee with you early on. The Regulator requires independent advisers to tell you what fee they will charge you soon after you ask for their help, although the fee can be taken out of your fund later. This may seem off-putting but it is important to bear in mind two things. Firstly, whether or not you actually do use an independent regulated adviser you will have to pay money to buy your annuity. Even if you just take an annuity offered by your existing pension company, they will take money from your pension fund for selling it to you. You will also pay for non-advised brokerage services who take commission. They will be paid a percentage of your pension fund when you buy, but do not have to tell you how much straight away. Secondly, an IFA will be working with you to ensure you can make the best possible decision, helping you find the right product, and getting the best rates available. If you have been badly advised and make the wrong decision, you are protected by the Regulator. The fees charged by independent advisers will vary, but a fixed fee can sometimes work out cheaper than the commission charged by a non-advised service, especially for people with health conditions and larger funds.
What do independent whole of market advisers do for their fee? Before making a decision as important and complex as this, make sure you understand what you’re getting for your money.
An independent, specialist whole of market adviser will provide the following for you:
- The whole of market adviser will help you assess whether you actually need to buy an annuity at this time. Just because you have reached your scheme’s pension age, does not automatically mean you have to take an income straight away. For example, if you are still working or have other pensions you may not need one, or you may be able to take it all as cash.
- The whole of market adviser should ensure that you understand all the complicated terms used when describing annuities and help you buy the right kind. If you buy the wrong type of annuity through a non-advice service you are stuck with it, but an IFA is liable if you buy the wrong product. For example, if you need to provide for your spouse, or if you could have qualified for an enhanced rate, your adviser should make sure you do the right thing.
- Only whole of market advisers will ensure that you have access to all the annuity providers in the market and can therefore be sure you get the best rate.
- A whole of market adviser can also haggle with insurers to achieve even better rates and sometimes get them to improve their offer.
- If you have any health issues, a fully independent adviser can make sure that these are properly taken into account when buying an annuity. On-line services only include generic health questions which could result in you receiving lower rates than an adviser would achieve.
- The independent adviser will check all the paperwork for you and liaise with your pension company to try to make sure the forms are all dealt with promptly.
- If you have bought the wrong product because your adviser did not consider your needs properly, you may have a claim against them, but if you relied on ‘guidance’ without actual advice you are on your own and can never change the wrong annuity for a better one.
Using an adviser can be cheaper than guidance as commission can be higher than fixed fee: You would normally think that using a guidance service should be cheaper than using an independent adviser, but this is not always the case. People with larger funds and those entitled to enhanced rates because they are not in excellent health may actually find advice cheaper than non-advice. For those with small pension funds and who have no health issues, however, non-advised routes are usually cheaper.
Here is an example of the costs of annuity purchase:
You have a £35,000 pension fund and are entitled to better than standard annuity rates because you have high blood pressure. An independent adviser might charge you a fixed fee of £600 for finding you the right product and best rate. Paying this fee means there is someone to ensure you choose the right path for your retirement income, explains the different options to you face to face and is responsible for finding you the right solution rather than leaving you to find the best route on your own. Using a non-advice service, the commission taken from your fund would be at least 1.5%, which is £525 – £75 less than a fixed advice fee of £600, but giving the benefits of advice for that money. However, around half of customers will qualify for an improved annuity rate due to a health issue and the commission for buying a non-standard annuity will often be 3.5%, which would amount to £1,225 – more than double the cost of using an adviser.
Will this take a lot of time?
If you want someone to help you make a decision that will last you for many years, you will obviously need to spend some time getting it right. Especially as you can never change an annuity after you have bought it (unless it is a special type of annuity such a flexible or fixed term product). Investing time in understanding the issues that will determine your pension income can pay big dividends in future – not only for yourself but also for your loved ones. Buying an annuity that covers your family, rather than just yourself, may make much better use of your hard-earned pension savings. Most of us hope to live to a ripe old age, but if you only live a few years after you buy your annuity, the majority of your pension fund will go to your insurer unless you have made provision for joint lives that ensure it pays a pension to your partner for the rest of his or her life as well.
Deciding whether or not to use an independent adviser or taking a non-advised route is an important decision. You need to understand the implications and relative costs of each route and this Directory aims to help you find firms who can assist you with this important decision.
How this Directory works for you:
Once you have given an indication of who you are, where you live and what type of pension fund you have, you can proceed to find the best firms to contact for help with this important decision.
Enter your details at Step 1 and follow the procedures outlined.
If you want to find a whole of market independent adviser, press Step 2.
If you want to find advisers who are tied to several companies but not all, press Step 3.
If you want to find on-line or phone-based guidance services, press Step 4.
Dr. Ros Altmann