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MM Leader: Single-tied deals and servicing small pots

The growth of single-tie annuity deals should be treated with caution, although new thinking is required over how to economically service small pots.

Openwork and Partnership recently announced a single-tie deal for standard and enhanced annuities which commits Partnership to offering top-five rates. Openwork will retain its whole-of-market referral service for clients with greater needs.

Proponents of such arrangements suggest they are the only way to make advice economic for lower-value clients who will get a better deal than they would achieve through internal vesting. They argue that at least clients are being offered an enhanced choice, which can make a huge difference, at a time when too many people who may qualify for such annuities are not made aware of their options.

However, clients accepting single-tied deals could be shutting the door on the chance to potentially get a much better deal by shopping around.

A quick look at the current annuity best-buy tables shows a difference of 12 per cent to 16 per cent between the best and fifth-best standard £100,000 annuity deal. Such figures can make a big difference to retirement lifestyles.

Given the volatility over annuity rates and question marks over the long-term future of several players, we may well see this spread increasing in the years ahead.

Partnership has the top rate for enhanced annuities but providers which become more reliant on such distribution deals have less incentive to offer market-leading rates.

Given the amount of time and effort many in the industry have devoted to promoting the message of shopping around and the growing political interest in the issue, it may seem strange if such deals gain significant market share. However, after the RDR, the industry needs to confront the question of how to service very-lowvalue clients in a way that is economic for the client and the adviser.

Advisers must be clear on the benefits that such services will offer their clients compared with what they are likely to achieve elsewhere. Firms must also ensure there is no commercial incentive to recommend the single-tie arrangement when a whole-of-market approach would be in the client’s interests.

Underpinning any such annuity debate should be the understanding that clients with pots above a certain size will benefit from shopping around. The size at which this becomes valuable is a point to be debated further.

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