From 1 March 2018, every firm issuing guaranteed annuity quotes must comply with new rules set out in the Financial Conduct Authority’s policy statement PS17/12. In simple terms, firms will need to ask customers for their consent to use personal information in order to produce an annuity comparator.
The annuity comparator is simply a new type of annuity illustration that informs the customer if there is another company in the market offering a higher rate. If, for example, Company A offers an annuity paying £2,500 a year but Company B offers £2,600, the customer must be told there is another £100 a year on offer from another company.
The idea is to make it easier for customers to shop around for the best annuity and avoid them rolling over into substandard annuities offered by their pension provider. This is clearly a noble aim and everybody who signs up to achieving better customer outcomes should agree this is a good news story as more people should end up get higher incomes when they purchase an annuity.
Some commentators have, however, portrayed this as a bad news story because some people might not obtain the full medical enhancements they are due. All of which begs the question – is the new annuity comparator good or bad news for customers?
The important thing to remember about annuities is almost everyone is personalised in some way or another – whether that be by postcode, size and weight, drinking, smoking and so on. These factors will typically add about 5% or 10% on top of a standard annuity. If a client takes prescription medication, say, or has a medical condition, they should get more – perhaps 20% to 35%. Some firms advertise up to 40% but that is probably overegging it for most people.
Annuity quotes are therefore like a computer – enter the right information and you get the right answer; if not, then it is ‘garbage in, garbage out’. So, with an annuity the amount of the income depends on the quality of information given at the outset.
This brings me to the most important thing about the annuity comparator – its success or failure will depend on the right information being entered at the outset. Some customers may not agree to having their personal information used so they will not benefit from the comparator. Where consent is given, however, will the right information be collected in order to obtain the highest annuity?
Clients using a financial adviser or a non-adviser broker should be asked for the correct information and end up with the highest annuity. In fact, some non-adviser brokers seem to know less about pension options and more about which medications and illnesses qualify for an enhanced annuity. This may well reflect the selling culture based on commission sales.
The right questions
Customers approaching insurance companies directly should also be asked the right questions because the teams have many years’ experience in arranging enhanced annuities.
The problem is, customers requesting annuity quotes from their existing pension providers may not be asked for the right information. This is because they may not have the experience of dealing with annuities and their quotation process may not take the relevant medical details into consideration. In this case the annuity comparator may not show the best rate the customer could get.
It is worth noting some providers operate a panel of annuity providers. Companies offering a limited panel may find the annuity comparator will show there is a better rate on the open market, so they may be forced to open the panel to all annuity providers.
All things considered, the annuity comparator should be seen as a good step forward but there is clearly more work to be done – especially where advisers or specialist brokers are not involved.
One final point – annuity rates are on the rise and so, if the annuity process takes a lot of time, a good adviser will monitor annuity rates and, if necessary, arrange for an even higher annuity. This does not happen if customers go direct.
William Burrows is retirement director at Better Retirement. If you are interested in seeing how annuities rise or fall from week to week, you can follow his charts here