Treasury Committee calls on FCA to intervene early if new products are defective
FCA may have already failed its first test on one-year annuities which benefit providers, not customers
Committee also calls for guidance to be independent of products and providers
by Dr. Ros Altmann
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The Treasury Select Committee has issued its verdict on the 2014 Budget changes to pensions and savings, welcoming the decision to stop forcing savers to buy an annuity or income drawdown product if they want to take any money from their pension fund. It rightly warns the Financial Service regulator (FCA) to be vigilant and to intervene early if new products to replace standard annuities are defective.
Unfortunately, it seems that the FCA may have already failed its initial test. The first new products to be launched since the Budget changes have been ‘one-year’ annuities. These products are being advertised as a stop-gap that allows customers to take their tax-free cash, but not have to make a lifelong irreversible commitment to buy an annuity until the new system is in place in 2015. The products may sound appealing, but it is almost impossible to see how they can be in the customer interest.
If someone has a pension fund of £100,000, they could take £25,000 as tax free cash and then £75,000 goes into the one-year annuity. This is actually an income drawdown fund that allows the customer to take out up to 150% of the GAD rate limit during that year, but the balance of the fund earns only around 0.5-1% – a much lower rate than most one year investments would pay.
Worse than this, however, some of these one-year annuities can be sold on a ‘non-advice’ basis, with those selling the products receiving around 1.5% or even 2% commission. So, after one year, the customer could have paid 2% commission to earn 0.5% return on their money – a guaranteed loss. And at the end of the year they may then have to buy another product and pay yet further fees.
In reality, customers should not need to buy these products at all. Under the new rules since Budget 2014, they would be able to just take their tax free cash and leave the rest of their fund alone. However, some pension company systems cannot cope with paying out tax free cash, unless the customer moves the rest of the money into another product. Therefore, these one-year annuities help pension companies overcome their own technological shortcomings while offering no benefit to the customer.
The one-year annuities pay commission to firms which sell them without offering any advice to the customer at all. Again, great for the firm but not for the customer.
Finally, are the customers being warned of the potential tax implications of buying these products? If they die within the year, the money in the one-year annuity – which is not an annuity at all but an ‘income drawdown’ fund wholly in cash – will be taxed at 55%. Within a pension fund, the money would pass on tax free on death before age 75 if it had been untouched.
Overall, this is a good test for the FCA to respond to the Treasury Select Committee’s calls for early intervention. I cannot see what customer benefit there is in these one-year annuities, they do not give them any better options than they would have without buying the product, they could lose some of their pension fund and only needed to buy the product because pension providers’ systems do not allow the customer to do what the law now allows them to.
The one-year annuity sales also endorse the Treasury Committee’s calls for the free guidance promised from April 2014 to be demonstrably impartial and certainly not biased in favour of products or providers.
It is time for customers’ interests to be properly safeguarded and the Regulator has a duty to act quickly to prevent significant detriment from new products that fail to deliver value.