I recently read a good article about non-advised annuity commissions and I think it is helpful to investigate the issue of non-advised versus advised annuities.
I have been on both sides of the fence
I start by saying that I have seen both sides of the fence and both advised and non-advised annuity services should result in the client getting the highest possible annuity income.
But the issue is not about getting the highest annuity income it should be about making the right decision when someone is converting their pension pot into income.
Annuity or Drawdown? - one of the most difficult decisions
It is helpful to remind ourselves that this is one of the most difficult decisions in retirement planning. On the one hand an annuity pays a guaranteed income for life with peace of mind and security. On the other hand, pension drawdown gives flexibility and control albeit with significant risks.
This question is further complicated by historically low annuity rates and the popularity of pension freedoms.
So, if this is such an important decision, do client’s get a better outcome by going to a non-advised annuity broker or going to an adviser?
To answer this question we need to consider access to advice and how it is paid for as well as what a good outcome looks like.
Access to advice
The move to no-advice annuities started before RDR but it was the introduction of the ban on commissions for advised sales in 2013 that accelerated the increase in activity in annuity brokers. I am still surprised by the number of people who don’t realise that commission still exists because they though all commissions had been outlawed.
One of the unintended, but predictable consequences of RDR was the creation of the so-called advice gap where a significant number of people were given the impression that financial advice was outside of their reach. Many people have the mistaken belief that advice is not for them because it is too complex and too expensive.
It’s hard to do it yourself
Therefore, many people think they can make complex decisions themselves by simply shopping around for the best annuity rate. This message is reinforced by marketing that suggest they can get up to 40% more by shopping for an enhanced annuity.
It can be argued that non-advised annuity services fulfil a useful role because they allow people who fall into the advice gap to get help when arranging their annuity.
One of the problems with this analysis is that the help that most people need involves some sort of advice.
No-advice is not cheap
Another problem is that no-advice is not cheap. If you go to a popular annuity broking site and get a quote for a £ 100,000 smoker annuity you see the commission is over 3%, i.e. £ 3,000.
Unbiased produced a useful guide to the cost of advice and showed that full advice for a £100,000 pension pot was £ 2,000.
This supports my assertion ‘why would anybody go for non-advice when they can get jolly good advice for less than the commission’.
If a good outcome can be described as getting the highest annuity I would have no issue with no-advice but as any good adviser will tell you there is much more to take into account.
Generally speaking, a good adviser will separate the strategy form the tactics. The strategy is about the planning and the tactics is about getting the best deal.
No-advice brokers do not and cannot deal with the planning aspects and just deliver a tactical solution.
It is little use getting the highest annuity if it is the wrong solution in the first place or it is being purchased at the wrong time.
For instance, at the time of writing annuity rates are at the lowest levels ever and before recommending someone purchased an annuity today I would want to examine the relevant options including fixed term income, drawdown and possibly deferring annuity purchase. This is easy for an adviser but a non-advised broker cannot do this.
An annuity is a serious business
This famous quote from Jane Austin has never been more relevant and I do wonder if such an import decision should be made without advice?