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Insurers should be licensed to sell drawdown

I note that it is suggested that IFAs must get yet another qualification in order to sell drawdown products. But I would suggest this is more necessary for the insurance companies which have various traps for the unwary in negotiation of this contract.

1: The infamous question of critical yield. I have never seen such a wide range of spurious nonsense on a quotation and perhaps that is why some companies don&#39t offer a figure at all.

There should be a standard formula for this but it should be set on a case-by-case basis by the IFA. It should specify the details of the annuity that would have been purchased had the product been selected (with or without spouse&#39s pension, escalation, guarantee, etc).

This would identify the income pattern that would have been reached at the critical yield comparison date, and the critical yield would be the net growth needed to produce a fund to pick up that exact annuity. The fund needed for that annuity should be based on today&#39s purchase prices rather than the classic 5, 7.5 and 10 per cent rates used in quotes.

Annuity rates used should be based on current rates on the open market and, unless the quoting company can demonstrate that its rates are better, should be specified by the IFA.

2: The tax-free-cash trap. Most companies will automatically quote on the basis of 25 per cent of the fund. Yet, in many cases, the source of the funds will be an occupational scheme where the tax-free cash will be limited by final salary.

I even have one case where we were quoted 25 per cent, despite pointing out that this money had come from an executive plan previously run by that same company.

Companies must establish the source of the funds and amount of tax-free cash allowed.

3: Restrict quote systems to what can be provided. When asked for a particular quotation basis, say, income paid annually in arrears, please do not quote on that basis and then, only after the funds have been transferred, tell us you are planning on offering that some time but today it must be monthly in advance. A quotation must be something you are offering now.

Alastair Lyon

Credenda,

Horsell, Woking, Surrey

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