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Why do life offices fail to spell out guaranteed rates clearly?

Insurance companies never fail to astound me, in particular, the devious ways in which they can present information, creating better outcomes for them than their customers.

Consider the ways that life companies talk about that rarest of things, the guaranteed annuity rate. Once offered as a sweetener on some early pension contracts, providers now quake in their boots at the prospect of actually honouring these guarantees.

We have been doing some pre-retirement work for clients and reviewing contracts from several providers. Both the Aviva and Friends Provident contracts we reviewed came with guaranteed annuity rates, yet the way they packaged them was remarkably different.

Aviva did not think the guarantee was worth mentioning until the penultimate page of a six-page options letter. The letter opens with a section about buying an annuity, quickly followed by several references in bold type explaining the open market option. More pages follow, outlining different annuity types, including impaired annuities.

Finally, there is a paragraph about guaranteed annuity rates. This is compounded by not indicating what the guaranteed rates are. Anyone going online to compare rates may only end up comparing normal rates.

Friends Provident is more up front about the guarantee, although the first two pages of its options letter are all about transfer values. The guarantee is a with-profits fund. By way of comparison, Friends offers last year’s terminal value and this year’s terminal value, a difference of 11 per cent. Is this designed to encourage a transfer?

Friends redeems itself on page three, which is devote to its guaranteed annuity rates. Without ambiguity, the first line states: “This policy has guaranteed annuity rates which are more favourable than our current rates.”

Well done Friends, no smoke and mirrors in that sentence.

Then it goes on to give the rates. Brilliant. Apart from one thing – it has set out the data to suggest a single-life level annuity is better than an annuity with a dependant’s pension, making a single-life level annuity appear better than it is.

I know the rates are better, but by giving rates annually in arrears for single-life annuities and monthly in arrears for joint-life annuities, it steers policyholders into choosing single-life annuities.

This goes against the spirit of these companies’ commitments under the ABI’s customer impact scheme. Unfortunately, details of the scheme are in the members-only pages of the ABI website.

Dennis Hall is managing director of Yellowtail Financial Planning

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. What a balanced view the comparing of two life companies is suddenly indicitive of the entire market. How about this…..Seek independant financial advice where anyone worth their salt will be able to tell you this.

  2. Every time I post a comment on an article such as this, I ask why the FSA doesn’t stipulate that all pre-retirement packs must include a separate, brightly coloured laminated sheet highlighting the importance of seeking independent, WoM advice on the options for deploying to best advantage the value of one’s accumulated retirement fund/s. If you don’t, you could well lose out (known in FSA-speak as “a poor consumer outcome”). Why doesn’t the FSA do this?

  3. Well said Dennis. When we assume an agency on a historically plan with guaranteed rates (I wasn’t in the industry when they were still being arranged so any we end up advising on were sold by someone else), we send out a standard letter asking whether guaranteed rates apply to a policy (even if it has many years to go) so I can flag it for future reference. Now that many providers have a standard response, rather than answering our SPECIFIC questions, we often have to phone to question them again (on the record) as to whether a guaranteed rate applies….
    Personally if the FOS had any balls, I would tend to say that the existance of a guaranteed rate IS a KEYFACT and hence if a client proceeds without taking advice and the guaranteed is not highlighted with the words “Keyfacts”, if a consumer subsequently discovers they should have opted for a guaranteed rate, a valid claim against the insurer, even though advice was not sort or provided, could legitimately be argued.

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