The diversity and sophistication of the annuity market offers considerable opportunity for advisers who can provide a multifaceted level of research and admin. In practice, however, few firms have the time and resources to specialise in a market which is growing rapidly in complexity and range. The time has come to take stock and, where necessary, outsource.
The implications of providing a poor annuity service are manifest. First, the FSA is hot on the heels of advisers who deliberately or unwittingly sell unsuitable products through its Treating Clients Fairly initiative.
Second, advisers who do not provide a full range of annuity solutions will face a highly charged backlash from clients at a key and emotional time in their lives. Arguably, no adviser should offer an annuity service unless the firm is fully conversant with the entire range of enhanced and impaired life, investment linked and flexible annuity products. Moreover, it is counter-intuitive to sell an investment-linked or flexible annuity without first considering the investment and estate planning opportunities offered by income drawdown and phased retirement arrangements.
A comprehensive fact-find and risk profile assessment are essential elements of the annuity service. Only a thorough analysis of the client's circumstances will enable the adviser to make a recommendation based on the individual's risk tolerance and income needs throughout retirement, not just at the outset. The same is true of any health issues that could qualify for a higher annuity rate.
The FSA training & competence regime makes it clear that where an adviser is not fully conversant with an aspect of financial planning, the firm should refer the client to a specialist. There are numerous advantages to this strategy, not least of which is a robust audit trail for the adviser who makes the referral.
Understandably, advisers may be concerned that they will lose a valuable client if they make a referral to a potential competitor. What is required, therefore, is a clear legal agreement between the two advisers that eliminates any opportunity for cross-selling and also sets out the commission-sharing arrangement in terms of initial and any renewal or trail payments.
The level of commission payable on standard annuities is small at 1-1.6 per cent of the fund but the more sophisticated investment-linked annuities generally pay a higher rate while complex impaired life annuities and drawdown arrangements offer substantial prospects for remuneration.
Specialists can demand bigger commission than non-specialists due to the high turnover of cases and the streamlined documentation. When all these factors are taken into account, the argument for outsourcing is compelling.
Of course, it is not only advisers who need to question whether they have the relevant skills and admin capabilities to offer a first-class annuity and drawdown service. Trustees of occupational defined-contribution schemes should outsource as a matter of course. Members of trust-based occupational schemes such as contracted-in money purchase schemes, who feel they have not got appropriate advice on the annuity purchase may complain to the Pensions Ombudsman and to the courts. The position of trustees will be precarious as they have a clear duty to act in the best interests of the members they represent.
Members of defined-benefit occupational schemes who pay additional voluntary contributions should also be offered the opportunity to shop around for the best annuity. AVC funds are often modest in size but the individual who has a substantial salary-linked pension may want to take a more aggressive risk/reward strategy with the top-up fund. In this case, an investment-linked annuity might be preferable to a conventional contract.
Finally, while most DB scheme members will be better off taking the salary-linked pension, in certain circumstances, they may benefit from the enhanced investment flexibility and estate planning opportunities offered by income drawdown or phased retirement. Senior executives in particular might be interested in the move to a DC environment while those who have no dependents or who have a serious health problem may find that an annuity provides a higher income than the DB scheme offers.
Tim Morgan is managing director of Alexander Forbes Financial Services