Comparison sites are no answer to annuity market failure
According to a new FCA report into annuities, eighty per cent of consumers could secure a higher pension income by shopping around and are losing thousands of pounds from not doing so.
Whilst the Retail Distribution Review (RDR) has certainly forced many of the charlatans out of the world of financial advice and improved transparency over costs, it is becoming ever more apparent that it has also made too many consumers fearful of seeking financial advice altogether because of an unfounded fear about fees, and the problem is getting worse.The percentage of annuities purchased on an advised basis fell from 61% in 2012 to 37% in the first six months of 2013; a trend that seems destined to continue.
Buying an annuity, or any of the numerous alternative retirement options available, is one of the biggest purchases of almost everyone's life, possibly the second largest after purchasing a home, and it is essentially "one off" in nature. Yet recent research from Legal & General suggests that despite of the gravity of the decision, 12% of people take less than one hour arranging their retirement income. Bearing in mind that there are hundreds of options out there it is essential to make a seriously informed decision, yet more and more of the public are turning away from advice.
In a worst case scenario, consumers are now buying the 'free' annuity from their existing pension provider or, at best, are buying an annuity online from one of the numerous and growing number of Execution Only (EO) web comparison sites. Of course, the reality is that neither of these options are free as these comparison sites are remunerated by hefty commissions, of the type the FCA have driven out from the world of advice and are also in the process of removing from fund supermarket platforms. Terrifyingly, a Financial Services Consumer Panel report found payments of up to 6 per cent commission for enhanced annuities and up to 3 per cent for standard annuities and their probe found that 12 out of 13 price comparison websites breached rules on treating customers fairly.
It needs to be highlighted that the cost of seeking fee based annuity focussed advice is by no means prohibitive, nor do any fees have to be funded from your cash savings. Any fee levied for providing fee based advice can be taken directly from an individual’s pension fund and this fee should prove to be money well spent. The reason for this is that a £100,000 fund (assuming no fee) could provide an annuity of circa £6k per, whilst a £99,000 fund (i.e. net of a 1% fee) would buy an annuity income of £5,940 per annum – a difference in rate of just 0.06%. To completely offset the cost of the 1% fee for advice an adviser would therefore only need to secure for their client a higher annuity rate of just 0.06%, which could typically be secured using the open market option.
I think it is clear from the above that individuals approaching retirement need to start seeking impartial advice again, and the FCA needs to turn its attention to commission for Execution-Only annuity sales with the same rigour it has applied for advice and fund platforms.
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Buying an annuity to convert your pension fund into an income for the rest of your life is an important one-off decision. You won't be able to change your mind once your annuity is in payment, so it's important that you make an informed decision.