12 January 2013
PICA Annuity Directory is such a disappointment
A wasted opportunity to really ensure customers achieve good outcomes
Bias against independent advice and towards non-advice broking is dangerous
PICA has just released its long-awaited Annuity Directory (called ‘Pick-A’) which is supposed to help people get better value for their pension savings in retirement. I had high hopes that this would be a major step forward to ensure customers are clear about what they need in order to achieve the best outcomes from their hard-earned pension savings. Sadly, this Directory is more likely to mislead people into buying without advice, from non-advised services which claim that their ‘guidance’ is at least as good for the customer as ‘advice’. Taking independent advice is almost always likely to be better than trying to make this complex decision on one’s own.
Biased wording in favour of non-advised ‘guidance’ rather than best for customer individual advice: The definition of ‘guidance’ is worded in a way that many will be misled into believing the do-it-yourself route is better for them than using an expert adviser. This is simply not the case and the bias against advice is likely to lead many customers to try to manage the complex annuity process on their own, resulting in sub-optimal outcomes. Here are some examples of the glowing terms used to describe guidance –
‘helpful’, ‘comfortable’, ‘explain everything’, ‘all the information you need’, ‘highly qualified’, ‘put you in the driving seat’, ‘less expensive’.
In contrast, these are the negative words describing advice:
‘complex’, ‘time-consuming’, ‘ask you questions about your finances’, ‘appropriate qualifications’, ‘have to charge you a fee’, ‘more expensive’.
IFA will help decide on timing of purchase: Only an IFA can help you decide whether you actually need to buy an annuity at this point in time and help you assess the benefits of waiting. There will be circumstances in which people would be best to decide not to buy an annuity, but the directory does not help people understand that only an independent adviser would ensure this.
No distinction between full independent advice and tied sales – both called advice!: The Directory does not distinguish between full independent advice that covers the whole of the market, and tied advisers who only represent certain insurers. A tied adviser can only sell products from a limited range of providers, while a fully independent whole of market provider can access rates from all providers and all products.
How can 75% be ‘whole of market’?: The Directory misleadingly asserts that covering 75% of the market is as good as the whole of the market. To get the best possible outcome, customers need access to all the providers in the market, not just three quarters of them. By leaving out one quarter of the providers, there is inevitably a significant risk of missing the best rates.
Important issues for those not in perfect health also not highlighted: The Directory does not highlight the specific issues relating to impaired life annuities. Guidance will not enable customers to receive the best quotes if they are not in perfect health, whereas advisers will often be able to provide better quotes either by ensuring individual underwriting, or by calling more providers and bargaining with them to achieve better rates.
Using an adviser can often be cheaper than guidance as commission can be higher than fixed fee: The Pick-A site says that using a guidance service that takes commission should be cheaper than using an independent adviser and cites a typical fee of 1.5% commission and £300 compared with £600 for an adviser. These examples are misleading. In many cases, advisers’ fees will be lower than the commission charged and, especially with impaired life annuities at enhanced rates, the on line services charge 3.5% and even more, so clients could end up paying far more for non-advised guidance than if they used a whole of market adviser who could get them better rates.
Inadequate explanation of what advisers provide for their fee: The Directory tells customers that ‘it’s not just about the price. Make sure you understand what you’re getting for your money.’ But in the section on advice, there is no description of what a fully independent, specialist whole of market adviser provides for their fee and how much more the advice gives customers than guidance. Here is a list of services that an independent adviser’s fee will give you, which guidance does not.
- Help you assess whether actually buying an annuity is the right thing to do at this time (many customers have no idea that they don’t actually have to buy an annuity, but a broker will not tell them this). Those who are still working or have other pensions may be better to wait, rather than buy when they are relatively young and still in good health.
- Ensure that you will buy the right kind of annuity and that you understand all the complicated terms used when describing annuities. If you have bought 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.
- Ensure that you have access to all the annuity providers in the market and can therefore be sure you get the best rate.
- Can shop around for better rates and haggle with insurers to get them to improve their offer if they want your business. Guidance services do not do this.
- If you have any health issues, an adviser can make sure that they are fully and properly taken into account when buying an annuity. On-line guidance broker services only include generic health questions which will not cover the detailed health status of each individual and, therefore, lead to lower rates than can be achieved by individual underwriting.
- Check all the paperwork for you and liaise with your pension company to try to make sure the forms are all dealt with promptly.
- Full regulatory protection. If you have bought the wrong product you have a claim under FCA rules, but if you use ‘guidance’ you are on your own and can never change the wrong annuity for a better one.
Here are some additional examples of the misleading narrative in the Directory which is clearly designed to make ‘guidance’ sound as attractive as possible and bias people against taking advice by describing it in more pejorative terms.
‘Advice’ means someone will ask you questions about your finances and personal circumstances and make a recommendation’…
In contrast ‘guidance’ means you’ll receive helpful information and explanations to help you make the right decisions’
In the detailed description of advice, the Directory says advice ‘can be more complex and time consuming than receiving ‘guidance’. There’s one other difference you should be aware of: Firms offering advice can’t take a commission and have to charge you a fee for their services (though this can be taken directly from the pension fund). This may be more expensive than choosing a ‘guided’ solution, but it’s not always the case.
In describing ‘Guidance’ in more detail, the virtues are extolled. For example, it says:
‘People in firms providing guidance can be as highly qualified about retirement as people offering ‘advice’. They put you in the driving seat, give you all the information you need and explain anything that isn’t clear’…’this can be less expensive than firms offering ‘advice’ particularly for smaller funds (though this is not always the case).
Whole of market is said to be as good as 75%:
The directory says ‘The firms listed in this directory offer rates from a number of companies that together account for at least 75% of the open annuity market, so you can be assured you’ll get a highly competitive rate’. It then goes on to describe what it calls ‘Whole of market’ and says ‘This provides you with solutions and quotations from all, or most, of the companies in the market. It’s the only way to be certain of getting a highly competitive rate. all the firms listed in this directory must provide quotations from a number of companies that together account for at least 75% of the open annuity market’.