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Nic Cicutti: End this Wild West of online annuity sales


Once upon a time, back in the very early 1990s, a fresh-faced whippersnapper with a portfolio of local newspaper cuttings attended an interview for a post as a Money Marketing reporter.

The editor at the time must have seen something he liked because he offered that person a job. Some 22 years later, slightly less fresh-faced, with a thicker-set figure and a lot less hair on my head, I find myself still writing for this paper.

The key difference is that now, instead of plotting my next step up the media career ladder, I am beginning the process of positioning myself for the moment, hopefully at least another decade away, when I will be making use of the many pension pots I have saved into over the past few decades.

Which helps explain why in the past year or two, ever since potentially being able to annuitise my pension savings to date – and discovering how pitifully small the annual income might be worth – I confess to reading newspaper articles and other media reports about retirement matters with an increased, even avid interest.

More than ever before, I am aware of how much decisions being made in this sphere today will affect my retirement income tomorrow. It also makes the current discussion about non-advised annuities and commission that much closer to my heart.

Last week, the Financial Services Consumer Panel published a report in which it found, according to Money Marketing, “huge differences in commission payments from non-advised annuity services”.

The FSCP examined fees charged by 15 online firms and using the example of a pension pot just shy of £50,000, minus the 25 per cent tax-free lump sum, discovered that the charges involved in buying an annuity ranged between 0.75 per cent and 3.35 per cent.

The variation in actual fees paid was almost £1,000. The panel’s report has come at a critical time in the debate over non-advised annuity sales. 

On the one hand, the opportunities for an online service that offers a self-guided approach to buying an annuity are more exciting than ever before.

Many years ago, when I first became interested in internet-related financial services, not only was the technology not available but the parameters within which it might be used were barely understood.

Today, a more sophisticated market exists that could help many online users to research and, subject to all sorts of caveats, make use of that technology to actually buy an annuity.

The problem is that the FCA approach appears to be the same in respect of non-advised execution-only annuity services as it is for buying personal lines insurance. Not only is commission an acceptable form of remuneration but the regulation of firms operating in what is a very new market is based on very much the same principles as for home and contents cover.

Ironically, in the past couple of weeks, following a serious fire at our house, my wife and I have discovered how important it is not just to have buildings insurance but for it to be appropriate to our needs. In our case, the sale was fully advised by a broker.

Be that as it may, the FSCP’s findings have provided ammunition to those who find the prospect of a free-for-all in the burgeoning online market highly disturbing. It feels like a form of Wild West out there, where consumers are ripe for the plucking – and unless something is done soon, some will lose significant parts of their retirement cash.

No wonder that Money Marketing’s group editor Paul McMillan wrote in a column: “The very strange decision to allow commission … on non-advised annuity sales whilst banning it for advice under the RDR is looking even more bonkers.”

The key question is that of what should be done about it. In that regard, it seems there are several issues to be addressed.

First, it strikes me that the huge disparity between online firms in terms of commissions paid is a product of a highly immature market, where charges are dreamed up almost willy-nilly. It suggests the true value of the services offered by online firms and what consumers should pay for them is still being tested.

Second, and equally important, what we are seeing is a failure of appropriate regulation. If a consumer is not able to spot easily the difference between firms charging 3.35 per cent and those charging 0.75 per cent, something is wrong with the way the FCA allows that information to be presented.

In other words, it is not that a transactional charge is bad per se but that it is highly opaque and that the firm applying it is not required to be very clear whether its services are whole-of-market or restricted.

What this implies is that regulation cannot be universal in its application for different segments of the financial market. An annuity is a far more important purchase than car insurance and the FCA should treat it differently.

In exactly the same way as IFAs have long argued for a regulatory premium to apply that takes account of the fact that their businesses are less risky, the opposite should apply with the annuities market.

Only then will we see effective protection for consumers – and a more level playing field for advisers.

Nic Cicutti can be contacted at 


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. Although the intro to this piece reads like a lower sixth English assignment Nic makes some valid points.

    The vesting of pension funds is a big event in the financial life of Joe Public, second only in magnitude to house purchase. What’s more, the decision to buy an annuity is not something which can be put right at a later date.

    What the Joe deserves is a gatekeeper to protect him, a guide to steer him clear of the many pitfalls involved. It should be compulsory for EVERY annuity purchase to require the sign off from an INDEPENDENT FINANCIAL ADVISER. With the IFA responsible for the advice, regulatory protection is also brought in, in the form of indefinite liability, PI cover and the FSCS.

    It is perfectly feasible to provide a full advice process, including the ball ache of actually doing the transfer work for £3-400 per pot. It should not be beyond the wit of this industry to design product shapes to pay for it. The FCA will no doubt prefer to obfuscate further on this very important part of the financial landscape.

  2. The question of commission in relation to non advised annuity sales is not the main issue. The main issue is that the options at retirement can be complicated and most consumers do not have sufficient knowledge to do this on a do it yourself basis.

    First of all there is the question of whether an annuity should be purchased or whether drawdown would be a better option? Assuming that an annuity is considered to be the best option what type of annuity should be purchased? There are so many factors to consider and I am quite sure that most consumers do not have sufficient knowledge in relation to the subject to take into account all the factors that should be considered.

    Consumers should be encouraged to seek out good independent advice and pay a fee for advice as opposed to buying an annuity on line and then complaining about the end result after the event.

  3. Whilst I agree wholeheartedly that the consumer needs the right type of annuity for their needs, the charges to be honest, appear less relevant.

    If the average pension pot is £25k and one client pays £1000 more than the other for their annuity purchase, they will lose out on around £6 a month in income.

    Whilst I don’t want to make that seem a trivial amount, there are much more serious sources of detriment in the market that require attention.

  4. The 3 comments make interesting reading in the fact that even though each of them raise different issues, the overding concern I have is that there are so many points that need making in respect of the ‘at retirement’ market it’s knowing where to start….

    The issue of commission being payable on non-advised sales is a major one (IMHO) given that it can lead to bias. Furthermore, whem commission exists there can be a pricing disparity compared to advised sales. e.g. if a client buys ‘direct’ who gets the commission? If no one, is this priced back into the annuity? I’ve seen cases where the answer is no.

    Amongst other objectives, RDR was supposed to introduce transparency to charges and ‘commissions’. Annuities are a perfect example of what happens when there is scope to build commission into a product.

    The second issue is disclosure – as intimated above – clients seem oblivious to the advice charge given that they are simply looking at the bottom line. Yes the bottom line is important, but they need to be aware of what they are being charged by the 3rd party.

    Thirdly – when dealing direct, are annuitants clear on the fact they are buying a product (and therefore they are responsible). The case on the Scot Life annuity on Dispatches is a good example of that!

    Add to that the fact they could shop around and get enhancements (and Drawdown etc etc) I suspect many would panic at the very thought of dealing direct if they genuinely know the choice out there.

    Finally – do consumers really understand the regulatory difference between ‘buying direct’, a non-advised sale, a restricted advised sale and an IFA advised sale – I strongly suspect that the average consumer won’t and I continue to feel that this is an area that needs to be highlighted.

  5. £400 per pot. I’ve got a fund of 20k made up of 5 pots, you want to charge me 2k which in commission terms is 10%…….and you are grumbling about a broker who will take on average 2.5% and with the right questions and processes would come to exactly the same result as you did.

    Where do I sign up?!

  6. @Mr Steel – The trivial pension limit is £18k. Get the govt to increase it to £40 or £50k and you then don’t need advice OR a non advised sale where the broker gets more than. an adviser would charge!

  7. @ Mr Castle – ah but you are assuming the govt know what they are doing……

  8. Being at the coalface we all know that the ‘at retirement’ market is seriously flawed. As per usual the government hasn’t cottoned on to the fact as to just how flawed it is. I suspect that over the course of the next few years ‘at retirement’ is going to make up more and more of the work of advisers.

    Annuities are likely to become less and less the default option for a retirement income. The rates have dropped and people are living longer, there isn’t really much of a reason for annuities to ever go back up to historical figures.

    This whole sector of the market needs a complete review we need some new products which are going to require some thinking outside of the box by both industry specialists and the government. Unfortunately the industry isn’t interested in doing that unless they can see profits and the government hasn’t got a great track record of innovative thinking.

    In 20 years time we’ll look back at the ‘quaint’ time when people worked for 40 years then retired at 65. The landscape is changing and pensions needs to keep up.

    Just my humble opinion as usual.

  9. headbelowthe parapet 20th December 2013 at 2:15 pm

    It’s interesting to note that Which? offers two levels of annuity (only) service:

    • A non-advised service (no liability, no comeback, no consumer protection) with a commission agreement of 1.5% based on the purchase value of the annuity (maximum charge £2,000); or

    • A restricted advice service (annuity only – no other options will be considered) with an adviser charge of 1.5% based on the fund value (minimum charge £600 / maximum charge £2,000) – Which? members MAY receive a £100 discount

    So it’s heartening to see that the self-proclaimed consumer champion, with its newly endowed super-complainer status, isn’t particularly concerned about the ethics of participating in the free-for-all – it’s all for charity mate!

  10. @ Head below interesting, how can an advice service which can result in an annuity being sold where drawdown pension (capped or more importantly flexible) is more appropriate be an advised servixe OR do they advise to go to an unrestricted adviser if drawdown is more appropriate?

  11. As an example, I have a client who is a pensions OTHER than Occupational are £40k. All in flexible drawdown and will all be out of his pension within 2 years at 20% tax. If an annuity had been bought with the restricted advice service mentioned above how coulks that be deemed “suitable?”

  12. headbelowthe parapet 20th December 2013 at 3:10 pm

    @ Phil

    This is a reflection of the overly complex, unbelievably fragile legislation that is the RDR – I can already hear the collective groan, but it is the problem and it is the cause…why is restricted advice allowed to be so very restricted? Can advice on one product type, when there is a pool of suitable product types available for consideration, ever be thought of as ideal, let alone as Treating Customers Fairly?
    And don’t get me started on being allowed to claim commission just because you’ve managed to shirk your responsibilities to your client…

  13. @ Head below. Their being “destricted ” does NOT get round the suitability issue. The level 4 requirement means we all have to know when an annuity, drawdown, vct or structured product IS appropriate for the client. We cannot SELL the next most suitable I.e. an annuity where our fact find identifies a more suitable product. I look forward rk a few of ?which’s cases going to the FOS in she course.

  14. headbelowthe parapet 2nd January 2014 at 5:54 pm

    @ Phil – unfortunately you’re mistaken the 2012 RDR Finalised Guidance allows this – it’s called Simplified Advice:

    “Simplified advice is a form of restricted advice because it does not consider all types of retail investment products that may be suitable for consumers”

    You just have to disclose the nature of your service.

    The legislation is awful.

  15. @ Head below – I’ll have to go back and read it again then. I read so much of the earlier RDR stuff i’d lost the will to live by the time the finalized stuff came out. Just because FSA guidance for RDR says that, doesn’t mean that is how FOS decisions, nor the courts would view it.

    So Mr defendant says the judge, you told the person you were going to advise him and then advised him to do something KNOWING there was something more appropriate for him based on what you had learnt in your mandatory level 4 exams? How clear, fair and not misleading was that???

    Fully in agreement with your post of 20 December 2013 3:10 pm

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