Annuities and the RDR

February Retirement Strategy

In the annuity market, it could be argued that the current model for adviser remuneration is reasonably well balanced. Commission levels reflect thin margins and what is affordable from annuity providers in order to maintain competitive market rates.

Certainly, in the mass market, conventional annuity products all look similar, pay similar commission and offer the same fully guaranteed benefit.

So in determining the choice of product and provider for a customer, the annuity rate is the primary driver for advisers. There is little evidence to suggest that the “provider bias” issues identified in the investment market are applicable to annuity business.

From a consumer perspective, the commission amount, although clearly disclosed, is an expense that is implicitly included in the annuity rate. So in many cases, the perception may be that the cost of advice is not borne by them, even though in reality it is reflected in the annuity income they receive.

Implementation of the retail distribution review proposals will change the current commission payment model for annuities.

First of all, commission will only be payable if the product is sold without advice and advisers will not be able to sell investment products, including annuities, with any built-in commission.

Instead, adviser charging will apply where the adviser agrees a fee with the customer, which can then be deducted from the pension fund or paid direct by the customer in return for advice.

So the cost of advice will become an explicit reality for consumers to consider and in the majority of cases it is likely to be paid by a deduction from the pension fund.

Assuming the fee charged is at an equivalent level to current commission rates, the actual amount of annuity should be the same because the absence of a comm- ission loading in the annuity rate will be countered by a smaller fund to purchase the annuity.

However, consumer perception is then likely to be that money is being taken from their hard-earned pension fund and this may be unpalatable for some, particularly when you consider the impact this will have on those with smaller funds, bearing in mind that around 50 per cent of funds are under £10,000.

Also, the adviser charge could, of course, be more than the current commission levels.

Firms offering advice on annuities may well deal with this by establishing a non-advice or self-select route for customers that runs alongside the adviser-charging basis.

This will allow customers who do not want to be charged a fee to make their own choice of product and options and will also mean that the advisory firm is still able to receive commission.

Therefore, worryingly, in this new world, there is a possibility that more people, especially those with smaller funds, could be deterred from seeking financial advice while those requiring advice may focus on searching for an adviser offering the lowest fee rather than seeking the services of a specialist annuity adviser.

So, while the underlying philosophy behind RDR makes perfect sense, there is a risk in the annuity market that this aspect of the RDR proposals could actually do more harm than good.

 

Tim Gosden is head of individual annuity product development Legal & General

 

 

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