Nothing much surprises me in the world of annuities nowadays but I was surprised to read that the Labour MP and former welfare minister, Frank Field, has written to the Office of Fair Trading calling for an investigation into the non-advised annuity brokerage market alleging that it is “operating as a cartel”.
He goes on to criticise annuity brokers for charging more for enhanced annuity services, suggesting “the most vulnerable in society are being given the worst deals”. He also describes the commission payments received by non-advised annuity brokers as “outrageous”.
I did meet Mr Field once while I was at Prudential. I told him to think of me as the customer champion at retirement and quick as a flash he replied, “that doesn’t sit well with the pension misselling does it?”. It seems that his concern about scandals has not diminished.
For the last twenty years I have advised individual clients in all aspects of annuities and have argued that most people need to consider all the relevant options before they make one of the most important decisions of their life.
I often quote Jane Austen and the words of wisdom she wrote in 1811 in her book Sense and Sensibility: “An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it.”
If annuities were a serious business 200 years ago, today they are critically important as those at retirement face the dilemma of how to balance the need for peace of mind and security over their pension income with the need to have flexibility to deal with changing circumstances including the prospects of higher interests and inflation in the future.
Turning specifically to Mr Field’s allegations, far from being a cartel, the annuity market has never been more competitive in terms of both annuity providers and, especially, annuity brokers. True, there seems to be less competition in the conventional annuity market but this has been more than compensated for in the enhanced market.
It is true that annuity brokers are paid commission where no advice is given and this is higher for enhanced annuities. The allegation the most vulnerable in society are being given the worst deals is completely wrong.
If anything those being offered the worst deals relatively speaking are the so-called ‘Middle Britain’ clients as postcode pricing tips the balance in favour of those living in less affluent areas.
Commission payments on annuities may not be such a bad thing because most clients prefer this system to paying fees. I have been at the sharp end of explaining to clients the fee paying options under RDR and trust me, far from making things better for many clients it has turned many people away from advice.
This is especially true for those who have above average size pension funds and in the past received advice through commission paid advisers but today think advice is too expensive and too complex.
I do think that Mr Field has a point but has not articulated it very clearly. The issue is not that people are being ripped off because they are not.
The issue is that people are not being encouraged enough to consider all the relevant options at retirement. If something is not done soon too many people will be shopping for annuities on price only rather than quality.
What is needed is something akin to a code of best practice. Such a code would ensure that before investing in an annuity, investors would be made aware of the key issues and the relevant options.
Put it another way, people should be encouraged to take a long term view of their annuity because it is a long term investment. Buying an annuity is a serious enough matter to put aside short term considerations and consider which type of annuity might suit each individual best to provide their income for the next 20 years or more.
Finally, there is an argument that the service many people need and should have cannot be provided under the current regulatory regime. Many people would benefit from an annuity broking service that sits somewhere between a non-advised guided sale and advice in its current form.
Perhaps this is something the politicians should get their minds around?
Billy Burrows is head of business development at Annuity Line