NAPF: 'unfair and opaque' annuity market costing savers £1 billion

I know, lets have a group of advisers, all financing themselves (so no tax payers money) to advise these people on OMOs. We could call them IFAs, oops sorry we had them but the FSA is closing them down!

Maybe, like mobile phones, they could fund the advice over the life of the product so that the advice could be available to a wide audience. They could even disclose the real cost of the phone (oops) advice

OR maybe the post office could take over the FSA capture the budget of £600M a year to give every worker in the UK (24M) £25 each year of web site time to have a full in depth analysis of and access to the web site to execute on an self advice basis and advisers could then get a job which pays properly without all the negative bashing that goes on maybe in Frankfurt where commissions are still based on a sum assured or premium basis.. pass-ported into the UK maybe if you want to live here any more

Word of the day, week, month - "toxic"

Good news: NAPF slams annuity shambles.

Bad news: The ABI will defend the status quo because that £1bn is going to their members.

Were the FSA to stipulate that the most prominent item in any pre-retirement pack issued by providers must be a single, brightly coloured laminated sheet emphasising the importance of seeking WoM advice, then surely a great many more people would do so instead of just going for the default option.

I'm proud to be able to report that my last two new pre-retirement clients said at the end of my first meeting with them: Thank you coming to see us. We feel so much better now knowing that we're in good hands. I imagine that many of my colleagues have similar stories to tell. Advice is available, IFA's are keen to provide it and the upfront cost of it need not be very great, even if it can't be as trifling as some people might (unrealistically) wish.

So why isn't the FSA doing more to ensure that providers communicate effectively to clients approaching retirement the importance of taking advice? It's a simple enough message, isn't it? And an inexpensive procedure to implement. Improvements to the way in which the system worls that are simple and inexpensive just seem to pass the FSA by. If it doesn't cost everybody a bomb, starting with a 750 page consultation paper, then it can't be worth pursuing. Oh no ~ let's instead spend £XXX,000 commissioning research to tell us what everybody already knows, namely that IFA's are the most popular and trusted source of advice.

"The Regulators’ Compliance Code is a central part of the Government’s better regulation agenda. Its aim is to embed a risk-based, proportionate and targeted approach to regulatory inspection and enforcement among the regulators it applies to.

Our expectation is that as regulators integrate the Code’s standards into their regulatory culture and processes, they will become more efficient and effective in their work. They will be able to use their resources in a way that gets the most value out of the effort that they make, whilst delivering significant benefits to low risk and compliant businesses through better-focused inspection activity, increased use of advice for businesses, and lower

compliance costs."

Perhaps it's because the FSA is more concerned (obsessed?) with Grand Projects such as the RDR which, perversely, looks set to reduce rather than improve access to advice. You couldn't make it up.

hugely unfair and opaque FSA costing pensioners a combined £1 billion a year in future pension income

Opacity in the form of pooled risk is at the heart of the consumer benefit that annuities provide. A superficial knee jerk approach to opacity in pricing is to scream 'consumer detriment' as loud as you can! This tends to get you noticed. NAPF is body that is trying to reinvent its relevance in a world where DB is tottering towards extinction, it is no surprise that this is a bandwagon it has jumped onto.

The OMO issue is also one that is not as simple as some would have you believe, e.g.those who business model would benefit from enforced shopping around or those politicians looking for a feel good sound bite.

A cautionary tale - Pooled opacity in with profits was also a consumer benefit but similar complaints did for that as a good conservative investment for the majority. Helped albeit by regulators who paid no attention and allowed equitable life to make the idiotic gamble that there would be no rainy days and with their pants down acted perhaps looking more to what was around their ankles than to the investment interests of policyyholders.

Ban life offices who habitually offer poor rates as "we are not in the market for annuity business" from offering these awful returns in the first place and narrow down the provider range for annuities.

Not the solution to the problem but a good start.

MSD: I made this suggestion at the Annuities and Drawdown Conference run by Westminster & City a couple of years ago.

An actuary from a fairly large Scottish office replied that they were in the market for annuity business, but only on profitable terms! She claimed that policyholders wanted to stay with the company they knew and trusted - even when they could get 15% more income for life from the likes of Aviva and Canada Life.

That thinking from an ABI member highlights what we are up against!!

PS: I quoted this in a GapFill presentation for the PFS and the company concerned complained to Fay Goddard.

Who is at fault for this situation?

The FSA of course!.

All it has to do is make it compulsory for annuity providers to refer their retiring customers to IFAs as a group, through Unbiased.

End of problem!

There will remain people who dont want financial advice as they feel they can best manage their own affairs and whether thats a shared sentiment or not pushing them to an IFA may alienate them.

The FSA need to challenge the top brass of the large providers with a "shape up or ship out" of the at retirement market. Its incredible that they will allow them to market a range of pension drawdown options but not provide a decent annuity product which I still firmly beleive currently suits the majority of retiring planholders.

The big life offices will "woo" you with amazing (!?) products (hands up who actually wants a corporate wrap.......)until you then want to use this fund for annuity purchase at which point there special offers oddly dissapear and they will offer you a measly return for the inconvenience of rewarding unfaultering loyalty.

Will it also be necessary to ban your insurance company from renewing your car/house insurance etc., if they do not offer the best rate?

They should do - I am always having to change insurer !

The point I am trying to make is if you are not willing to be competive then step aside to help the consumer rather than table an offer that goes against fair outcome.

Grab any retiree off the street and give them the following list, then ask them to explain in detail the way each one works, and which option is the most suitable for them. (all workings out and calculations to be shown please)

Level annuity

Escalating annuity

With Profits Annuity

Third way or temporary annuity

Enhanced Annuity

Income drawdown

Flexible drawdown

Whilst your'e at it, get them to explain what is meant by some of the following terms;

Spouses Pension

GAD rate

Protected rights

Enhanced tax free cash

Pension commencement lump sum

GMP

Guaranteed annuity rate

Get them to also explain the death benefits including the tax position of each option on death after retirement.

If they understand all this and are able to make their own choices, then say congratulations! Here is your Diploma.

If not, reccommend they seek the help of an IFA. Proffessional people who are educated to understand these things, a cost effective mechanism already in place, and that works.

Simples..............

It's a bit of a nonsense really - in every market there are economic hurdles and very few people get the best deal all the time. Sometimes your local car dealer is more expensive than one 200 miles away - people will still buy from the local car dealer because it is convenient. In this case the insurance company that holds the pension policy is the local car dealer - they need to tell you that you can shop around and that other deals might be better than their deal but they should not be banned from selling your the car at their price if you are not willing to go through the hurdle. Renewing your insurance without shopping around, paying more for the same flight as the person sitting next to you, sitting in a restaurant and paying the full menu price when the person next to you has got a voucher off the internet. Hurdles that some people are willing to go through to get a better price - some aren't that's the way the economy works.

@MSD and @robert c

I did not say ban the product provider from selling their own uncompetitive product , but if the NAPF seriously wanted to solve the problem in the interests of the consumer they would lobby the FSA to insist that retirees were told of the existence of IFAs and what they can do for them. If the retirees prefer the convenience of their existing provider after that then so be it. You cannot legislate for stupid buyers!

The NAPF accusation of sharp practice and murky pricing by the annuity providers is pure tosh. The providers will sell at the highest price they can get, and if that means taking advantage of lazy customers then they will do that.

To Robert C ~ Your point is well made and it would perhaps be unreasonably restrictive if a provider was banned from setting up an annuity for a client using their own rates if that's what the client specifically wants, instead of having considered advised alternatives from the open market. However, this whole thread is about the disadvantage/s that many clients are apparently suffering as a result of not bothering to consider advised alternatives.

It might be better if in-house annuity purchase were to be made subject to a specific declaration from the annuitant that:-

1. I have been made aware of the potential benefits of seeking WoM advice on the alternative retirement income options available to me, but

2. I have decided not to seek such advice because:-

a. The aggregate value of all my pension funds is too small to render the exercise cost-effective or

b. I do not wish to pay for such advice.

For those indicating that they do not wish to pay or such advice ~ more fool them. But, as the saying goes, you can lead a horse to water.............

Of course, the holding provider could still provide the lifetime annuity (if that's the client's best option) subject, of course, to their quote coming out best in an OM comparison.

The regulator should have a responsibility to government, who in turn should have a responsibility to the people. The onus has therefore to be on the FSA / FCA to ensure that people are as unreliant on the state as possible. Part of this should be ensuring that retirees get the best deal.

Simplest way is to ban direct annuity purchase, and have each annuity signed off by a WoM adviser.

If the FSA relaxed its rules, then there could be a part advised sale - ie client says I want the best annuity on the following basis. IFA charges nominal sum for this.

Or client wants full advice package and pays more, but obviously only a WoM adviser can transact the business.

I have no problem with providers not wanting the business - it's an open ended liability after all, but the OMO must be the default option.

In Utopia all pension plan holders reaching retirement would have a fund that would make seeking professional advice worthwhile. Alas in the real world this is not the case and many people retire with piffling funds and will gain little if any benefit from shopping round if this means paying fees.

Nevertheless the efforts to promote take up of the OMO should be reinforced. This is an area where the rules on commission could be relaxed as it is rarely beneficial for this advice to be offered on a fee basis as it will take many years before the paltry additional income from a nil commission annuity will equal the fee that has been paid.

The FSA again disadvantaging consumers through its own blinkered ideology.

To Mike Morley ~ It'll still (as I understand it) be possible for intermediaries to be paid by the deduction of an Adviser Charge from what's to be invested, i.e. the client's pension fund. The difference will be that the amount will be subject to client assent, as opposed to being just as much as you can get the provider to pay you. I can live with that and, I imagine, most other quality IFA's will have no difficulty with it either.

Julian - I am sure you are right which just shows what a nonsense the whole system is. Commission on annuities is paid out of the fund and the client is shown exactly what the figure is in the illustration that we provide to them. Of course they will have to "agree" the "fee" but I am pretty sure that they more or less do that at the moment as if they feel the figure is not reasonable they can challenge the adviser - not that this has ever happened on any of the cases I have dealt with. I think my (badly made) main point is that there are many thousands of clients whose funds simply do not justify the payment of a fee even if this is going to be deducted from the fund.

With only the most rudimentary, over-the-phone FactFind, Hargreaves Lansdown's annuity desk appears to operate on the basis of 2.75% commission, regardless of fund size. Potential buyers are hounded relentlessly to complete (phone calls every other day with dire predictions of a soon-to-happen fall in rates), whllst questions about the level of commission and/or alternative retirement income options are routinely brushed aside (No, no, an annuity is definitely your best option).

This is just one example of why I support CAR.

As someone who has a SIPP now invested in a 'Toxic' fund. I would ask:

What is the point in getting advise from an IFA, if the FSA know there is a problem with the fund, but do not make their knowledge public because telling tales about the fund would cause it problems.

So - given that IFA's have to second guess the FSA, the FSA then compound the problems by not making public the knowledge they have of improper/inappropriate, and to them, unacceptable actions by the 'IFA' management of the firm presenting the toxic investment to investors.

Surely a major question to ask is

Is the FSA capable of acting properly as a regulator, and if so, why did we not get told of the banks liabilities, keydata's inherrent? problems etc.

And being able to levy IFA's to cover compensation costs for situations they should have stopped from happening -

Sort of like increasing insurance costs to pay for the added cost of crime that there are not enough police to record, let alone properly deal with!

James

I am so sorry to hear of your problem, but how come your SIPP is invested in one 'toxic' fund?

All investments should be well diversified, you can get allsorts to go in a SIPP everything from Cash to Commercial property. i would look at using funds from across all sectors and assett classes to build your SIPP. I would build this assett allocation in line with your risk profile. I would use the Sipp as part of your pension planning, and take into consideration your needs and goals for retirement. This is the least I would expect from an IFA these days. Maybe a SIPP wasn't the right choice for you..........

IFA's are already levied to pay for the Financial Services Compensation scheme, we each have a duty to due diligence, research and treating our customers fairly.

I have just left some clients this evening, I have done a lot of work for them, their business and their children. When I arrived at the house, I got a big hug. I departed with another big hug , a bottle of wine and a thankyou. this is how it should be.

Please do not leave this forum with a jaded opinion of IFA's, there are a lot of us out there working hard to build a reputable, ethical and fair industry for all.

Kate,

Thanks for your reply.

I do not have an adverse opinion of IFA's, and would reccomend that anyone investing a substantial amount should discuss their needs and fears with appropriately qualified and experienced advisors.

My concerns are about the FSA's actions, or should I say inactions relating to protection of the public.

The Toxic is a definition applied by the FSa to investments in SLS's

Now, to me, I can take an annuity from an organisation such as a UK insurer, and have all my 'apples' in the 1 place , or I can believe Rockingham (regulated by the FSA) and buy into SLS's via Catalyst (Regulated by the FSA), where the SLS's are selected from a wide range of insurers and the larger american ones are covered by the USA government.

Thus my risk is spread over many sources.

What I did not expect was that the FSA should have protected the public by keeping quiet abo problems they knew of with Rockingham's IFA services, and the ARM investment being sold by Catalyst not having the 'licence?' to operate in the manner they were doing, and appeared to need to do in order to fulfill their advertised returns, followed by the ARM investors apparently being paid 'coupon' from their investment

As I have commented in other Citywire threads - I should, perhaps have avoided buying into any 'investment fund', or annuity, and just considered fixed term savings such as the Scottish Widows 4.6% return for 5 years

Better than the proffered annuity returns of perhaps 5%, requiring me to live for 20 years before that becomes more than just a return of the invested capital.

-------------------

For more about my 'investment' have a read of the entries at http://arminvestors.com/armforum/

Timeline of FSA & CSSF actions, the implications of their actions and the interconnections of the management and associated organisations.

Looks to me as if there is soon going to be another levy on IFA's

James

With the greatest love and respect..If you Ski off pist you risk hitting a tree.

The 4.5 % Scottish Widows account ...are you referrring to Scottish Widows bank? The rate has now dropped considerably and you would be paying 20% tax on income.

If you can find an annuity paying 5% can you let me know?

I understand that the concept of an annuity can be gauling for some people, but there are other options. Rockingham? ARM?

How much do you have in your pension pot and do you want serious remedial advice? Go to www.unbiased.co.uk and find a qualified IFA ASAP.

..and if you don't get satisfaction, refer them to me!!!!

"Better than the proffered annuity returns of perhaps 5%, requiring me to live for 20 years before that becomes more than just a return of the invested capital."

Sorry to break into the James and Kate blogfest ...

When you are buying an annuity you are buying insurance against outliving your money. When Henry Allingham died in 2009 aged 113 he had been receiving an income from his annuity for 53 years (and his state pension for 48 years). So if he got his money back after 20 years I think he did rather well thereafter!

Kate,

I don't really feel the need to get into a personal discussion but:

see for £5K pa on £75K after taxx-free £25K see

http://www.ft.com/personal-finance/annuity-table

Ski off piste - agreed it's dangerous, I thought IFA's are there to provide guidance as to the appropriate routes for your level of experience and risk.

My point was - how can IFA's do that if the facts are hidden from them by the FSA

4.6 was the rate shown yesterday - and you can get it gross, re tax - you'd have to pay that on income taken from a fund saved as a pension, but save it ououtside of a pension fund to avoid the constraints, and what you take from the capital is tax free as you already paid tax when you saved it.

Rockingham? ARM?

Google, or just follow the link to the forum at

http://arminvestors.com/armforum.

David,

Yes - but what if he had managed the capital himself.

Taking an annuity is spreading the 'risk' of living a long time.

But with the current returns, it seems to me that the low returns are not commensurate with the interest currently obtainable with the Base rate at 0.5%.

James, "Yes - but what if he had managed the capital himself.?"

It would have run out.