Independent pensions policy expert Dr Ros Altmann says: "The strange thing about annuities is, even if you do not use an independent financial adviser, you will normally still have to pay commission anyway, just to buy the annuity."
If you go direct to your pensions provider, you won't know if you've got the best deal for your money. Plus, some big names in the annuities market often offer pathetic payouts on annuities in the full knowledge that you could do far better elsewhere.
The third option is an annuity broker but these do not usually cover the ‘whole of market’. For example, Hargreaves Lansdown the UK’s biggest annuity broker offers access to nine "top providers".
Meanwhile Frank Field, the prominent Labour MP has written to the Office for Fair Trading, requesting a full investigation into the non-advised annuity brokerage market. In his letter to the OFT, Mr Field said: "I am writing to you about the UK pensions annuity brokerage system, which looks as though it is operating as a 'cartel'." The letter continued: "With the introduction of auto-enrolment into pension schemes, I believe it is exactly the time to examine the high costs of both purchasing an annuity and engaging an annuity broker. These costs currently lack transparency."
By not officially providing advice, non-advised brokers are not subjected to the new ban on charging commissions.
Mr Field also urges the OFT to look at how many companies providing annuity broking services have got interlocked directorships, so they can appear to be freestanding - but not if the same people are running these companies.
Dr Altmann warns that annuity pricing is not straightforward and pricing by the same company can change from one week to the next. "If a firm has sold significant amounts of annuities recently, it may not have enough regulatory capital at that time and, therefore, will not want to take on much more business. It will therefore drop its rates, offering much worse value, and if you buy from the company that week, you will not get a good deal."
Financial advisers can haggle to get better rates, based on your personal circumstances. The questionnaires provided by many brokers are generic rather than being tailored specifically to you, so the annuity rates offered will be more general rates, based on broad information, rather than individually tailored to your particular circumstances.
But another key issue is that pricing of annuities is not transparent. Dr Altmann explains: "Annuity companies are exceedingly secretive about how they decide what pension income they will pay you. The way annuities are priced will depend on the insurance company’s models. If you offer your £100,000 pension fund, the insurer will assess how long you are expected to live and will make an assumption about the investment return it might make on the money it receives from you. It will then add a risk margin to its estimates in case its assumptions are wrong. And then it adds a profit margin."
However Dr Altman says the problem is that there is no control or disclosure required on either the risk margins or the profit margins. She says: "Some insurance companies' recent accounts suggest an 18 per cent profit margin."
If this puts you off annuities completely, an independent financial adviser will help you decide whether you should use income drawdown instead of an annuity. Under income drawdown you take an income directly from the pension fund, which stays invested in the market. Both options have risks attached but taking independent advice will mean you are protected by financial services regulations and, therefore, if you are not given the right advice, you can claim compensation.
READ MORE....
Read more articles by Moira O'Neill in Smart Money.
