Annuity comparator process raises issues for advisers


For many years, the numbers of people shopping around for the best deal at retirement has been shockingly low. A great many people have lost out by taking the annuity on offer from their holding provider rather than look for a better deal. The advent of pension freedom means more people are now using income drawdown, with fewer choosing to buy an annuity. But we still need to make sure as many of the 80,000 or so people who are buying an annuity each year get a good deal. Which is why the FCA are introducing an annuity comparator from 1 March 2018.

The process sounds relatively simple. Any guaranteed annuity illustration must either confirm the rate shown is the best in the market, or indicate the client could get a higher annual income elsewhere (when it should show that income and detail the difference in pounds and pence).

But there are some issues which will affect advisers, as well as providers and consumers. For advisers, the most significant impact is likely to be towards the end of the process, once they have chosen their preferred provider. Once that provider receives the funds from the transferring scheme they prepare a final illustration based on the funds actually received. This illustration also needs to include a comparator, and as the annuity market is fluid and changes regularly, it may show this provider no longer offers the best rate.

At this stage the adviser and client could cancel the purchase, re-broke the case and pass it to the new best provider. But by the time the funds reach that provider they may no longer be the best in the market. And adviser and client could be caught in a never-ending loop, chasing their tail. Alternatively, the adviser could proceed with the originally chosen provider, but what does that mean from a TCF point-of-view? Perhaps they could have a de minimis limit, going ahead with the original quote if the difference is minimal, and re-broking if it is a larger amount. And we need to remember many clients need the income and may not be able to wait another few weeks before they receive their money.

It may be more sensible if a comparator isn’t required at this late stage. But if the rules proceed as they are, advisers will need to develop a suitable process before next March, and tailor their client communications appropriately.

There is also a flaw in the comparator requirement itself. Figures must be shown on a like-for-like basis which, on first reflection, sounds entirely appropriate. However, this may not help clients understand the true benefit to be gained from shopping around. Let’s say the holding provider offers annuities only based on postcode and doesn’t take wider health or lifestyle considerations into account. The comparator within their illustration will show the best income available using postcode only. This may lead a client to think the potential benefit of moving isn’t worth the hassle.

But, if they have various health and lifestyle issues, they could gain many thousands of pounds by shopping around. This is much more likely to be a fundamental flaw for non-advised clients, who may not appreciate the distinction and could end up losing out significantly. Advisers will help people consider their individual circumstances including health and lifestyle, so their clients should end up with the best deal, even if that isn’t shown on the comparator. But even for advised clients there is potential for much confusion, with different illustrations having different comparator figures.

I wholeheartedly support the aim of the annuity comparator as it seeks to help consumers shop around the market for the best deal. However, while the aim is laudable, the implementation has some flaws, which mean advisers need to start considering how they will deal with this significant change, and how best to communicate with clients.

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