With a huge variety of investment products on offer some intermediaries are tempted to outsource the choosing of an annuity for a client in order to sign up to the number one product provider at any given time
Picking the correct annuity for a client is becoming ever more complicated and ever more important to get right.
There is a constantly broadening range of products available on the market and as the lifespans of those in retirement increase, they are having to live longer with the consequences of annuity purchase, for good or for ill.
In such an environment a number of intermediary firms have sprung up specialising in annuity purchase and suggesting that unless advisers have a high level of knowledge of the market they should outsource the decision.
Beyond the standard products there is a massive choice of invested annuities, for instance unit-linked and with-profits. There are a number of niche players in the market place and the specialists claim to be better placed for spotting which individuals would automatically fit that niche. For example rates available via the MGM Select Annuity are related to the postcode of the annuitant. Individuals who contact specialist adviser the Bureaux Limited are automatically assessed for this annuity when they provide their basic address details.
'There have been a lot of developments in the annuity market,' says Paul Tinslay, head of pensions and specialist services at Towry Law.
'Since Equitable Life had its with-profits annuity in 1985/86 we have had various unit-linked annuities, some with guarantees like Canada Life which has the income guaranteed for each five year period. The Prudential Flexible lifetime annuity is another variant on the unit-linked annuity. We have the Merchant Investors Self Invested annuity and impaired annuities, lifestyle annuities, or market segmented annuities as they are referred to, and that's before you start thinking about income drawdown and phased retirement.'
The need for advice looks as if it is only going to increase, especially now that the FSA has intervened. The deadline for pension providers to make sure scheme holders have all the information they need on the value of their pension and the open market options available to them has arrived.
According to the FSA almost two-thirds of individuals buy their annuity from their pension provider. Yet by shopping around these people could get up to 35% more for their money.
'Most insurers have hidden the open market option away,' says Nicholas Flynn, annuities manager at Wentworth Rose, 'but now they have to make it far more obvious.'
Insurers must follow three pre-pension maturity rules set out by the FSA. These mean that four months prior to, six weeks prior to and at retirement the holder of the maturing pension receives not only information of the fund value and what they could purchase with their current provider by way of an annuity but full details of the open market option and how to use it.
The FSA has also set out basic knowledge requirements for individuals choosing an annuity in a consumer guide to annuities and income withdrawal published in May this year. The key requirement for the FSA is that consumers understand what an annuity is and their options at retirement.
The consumer guide, which includes a decision tree, sets out the basics such as the fact conventional annuities can provide a more level form of income than other annuities or income withdrawal but at a cost. It also points out that fixed incomes can be threatened by inflation and some individuals, ie those who smoke or are in poor health, can get a better annuity rate with an impaired life product.
The FSA outlines the basics for selecting an annuity starting with the individual's situation; whether they are married for example, in which case it highlights the need to consider a joint last survivor annuity.
If the annuity will not be the main source of income the regulator suggests the pensioner will want to consider a level annuity with the warning that with the impact of inflation it may buy less as time goes on. Other annuity options for those concerned about inflation or with larger pension pots are an escalating annuity, which will increase by a fixed amount each year, an annuity linked to RPI or a with-profits annuity.
While there is plenty of variety within with-profits annuity contracts there is a basic standard mechanism centred on the assumed or anticipated bonus rate (ABR). In the first year of the contract the annuitant picks from a choice of ABRs and that level of income is paid out. Assuming this is a 5% ABR and the declared with-profits bonus for the year is 3% then in the second year of the contract the income will fall to compensate for the extra money taken in year one. If the declared rate is higher, say 6%, then this will provide extra income in the second year.
In effect the higher the ABR chosen the greater the risk that in the long term the rate may not be met. Other forms of higher risk income include a unit linked product or income withdrawal. A further option is to guarantee the annuity will pay out on early death, either for five or 10 years while some products will pay a lump sum to the annuitant's estate.
Once the most appropriate type of annuity has been decided on, the next selection issue is often largely based on cost. For a basic, guaranteed annuity the choice is quite heavily rate driven but finding the best rate at any one time is not straightforward.
'As far as pricing is concerned a provider may change their rate once a week,' warns Flynn. 'They may be top for three or four months and then drop down again depending on their desire to take business. The market moves very fast at the best of times but with the way markets are at the moment rates are jumping around all over the place. What was great one day may now be completely different.'
The wide choice of products on the market and ever changing rates are two of the reasons put forward for outsourcing annuity picking decisions to specialist intermediaries.
Tinslay says: 'Purchasing an annuity is not nearly as simple as it has been in the past. A lot of what is happening in the market points towards specialisation ' whether utilising a recognised specialist to begin with or setting up your own specialisation within your organisation.
'If they are new to it I would advise IFAs to get specialist help. Intermediaries who refer cases to us do understand this is a very specialist field and they don't want to mess around with it and get it wrong.
'The FSA is calling for specialisation and looking at the whole area of qualifications in this particular field. It is looking to deal with annuities in a much more specialist way and this is the biggest indication so far the regulator is going to make this a permitted activity. In other words people will have to be specially trained along the same lines as for pension transfers.'
Flynn says: 'Being a specialist or going to one has its advantages. With annuities it is very common to miss annuity rate changes and it is not a simple transaction. When things go wrong, if you do a lot of business with the Pru or Standard Life and Canada Life they are far happier to bend the rules for you than a one man band doing one annuity a year. So influence is quite important.
'Also a broker may think of two or three impaired annuity providers whereas the specialist will be going to seven or eight. We use one standard form for the client to complete rather than individual insurer forms.
'The broker will have to fill in two or three forms and go to two or three providers. Also if you get it wrong the client really is stuck ' you can't change it. Its essential to get it right first time.'
The specialist annuity firms stress intermediaries do not have to be nervous of losing clients by outsourcing as the advice will be ring-fenced. The argument is that the specialist adviser will concentrate on the pension fund leaving the intermediary to look after the rest of the client's affairs without the compliance responsibility for the annuity.
If the FSA does bring in specialist qualifications intermediaries must have to deal in annuities, the decision to specialise or refer clients to a specialist will be made for them.
'IFAs have to decide if there is enough business to justify them doing the extra work,' says Flynn. 'They will need to understand the market fully and buy in the systems to source the rates. Is it worth doing that properly or going to a specialist who will do it for them and pay them an introducer rate? It works well because we do not cross sell to their clients ' it is very popular and I think it will become increasingly popular.'
He believes buying on brand name alone is not going to be enough in the annuity market.
Flynn adds: 'It's very tempting to say for example, 'Standard Life is good provider' and go with them but you do not want a good provider you want the number one provider at any given point.'
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