13th February 2014

Fidelity: Response to FCA Thematic Review of Annuities

The findings of the FCA review are a welcome development and confirm what we have known for a long time - that many aspects of the at retirement market place are not functioning properly. 

The FCA has  confirmed that people who do not pay for advice at retirement don't get a better annuity rate. They can however miss important, complex and technical points that a good adviser won't miss. As it isn't likely to cost you any more to have an expert help you, then there is no reason for people to feel they should do-it-alone.

The first step that the FCA must now take is to ensure that insurance companies cannot sell badly priced annuities to their own captive customers without being able to clearly show that their customer made an informed choice to deprive themselves of £1000s of income in retirement that they can ill afford to lose.  The FCA should enforce its existing rules that firms selling annuities to their clients must be able to show that they provided sufficient information to make an informed choice.  It is simply not good enough to say we sent out a pack that had all the information when clearly customers were making choices that were consistent with a total lack of understanding of the issues.

At Fidelity we make at retirement advice easily available but where customers want to buy investment products at retirement we also take our responsibility seriously to make sure that customers are aware of the issues they face in making that decision.  All our execution only customers benefit from a free conversation with a qualified retirement expert so we can be confident our customers make an informed decision about their retirement.

Secondly, the FCA should look at the impact of the aspects of its regulatory policies that create bias in the at retirement market.

Too many people buy an annuity too early in their retirement process.  The annuity is suitable for most people at some point in their life but too often it is sold as a commodity product without considering the alternatives due to the regulatory biases that exist; namely:

1. Annuities are regarded as a safe, no risk product, which can be sold without any checks that it is suitable for customers' needs

2. Despite the RDR, the annuity still suffers from commission bias and it is now time to remove that from the process by requiring all firms to agree their charges with a customer regardless of whether the product is sold as a result of advice or not.

It is now time for the industry to improve the quality of service it provides to customers at retirement.  Every year there are hundreds of thousands of people looking for expert help in making the right decision for them.” 

 What consumers can do in the meantime:   

Alan Higham’s Seven Killer Questions that he believes people need to ask their broker or adviser to ensure a good retirement outcome:                                        

1. Will you look at the whole range of choices for taking retirement income?

The answer should be a clear ‘yes’. If the answer is ‘no’, it means they will not look at all the choices available. Only go with an option if you are absolutely sure that the choices excluded are definitely not for you.  If you are at all unsure, turn them down, you can always go back later.

Many people will decide to buy an annuity.  It is our belief that annuities are likely to be suitable for most people at some point in their life, the question is when?

2. How can you help me decide when is the best time to buy an annuity?

Some firms want to sell you an annuity right now, before someone else does, so that they get the one-off commission.  That's fine if you are sure that now is the right time, but it is worth speaking to people who are more concerned that you buy an annuity at the right time for you. These firms will tend to ask you more questions about what you want out of retirement to make sure they get the timing right for you.

3. When I buy an annuity, will you look at all the rates available on the market or do you miss some firms out?

Why use a broker or adviser who doesn’t look at every option? You could stand to lose the chance of a better rate.  Insist on dealing with firms who are whole of market.  If they don't say clearly that they are whole of market, then the chances are that they are not.

4. Will you make sure my full medical and lifestyle information is properly collected and given securely to every insurer to provide their best, guaranteed quote?

This information can make a significant difference to your overall income in retirement. You don't want to buy without seeing the very best rates; nor do you want firms to tempt you with 'estimated' rates that assume things about you (which aren't likely to be true) and then disappoint you with the real, much lower, rate. 

5. Will you check the small print of my current pensions to make sure I'm not missing out on any extra benefits or will be caught by a penalty that I wasn't aware of? Will I have to pay you extra to check that?

One in seven customers have something in the small print that materially affects their decision. It could be a guaranteed annuity rate that beats the open market rate, but you can only use it in certain situations. Or, it could be you are entitled to more tax free cash than the standard 25%. There could be penalties that apply when you retire three months before age 65 but they don't apply at age 65. Make sure you understand what the small print is about. 

6. If you are not giving me formal advice will you still check what I choose and tell me if you think I might have made a mistake?

Research* suggests that 50% of consumers make a poor decision at retirement in some aspect.  Not all of them are obvious, but many are to an expert.  A salesman wants your commission; an expert wants you to make the right decision. Use this question to explore how the firm is going to make sure you have all the facts, even the answers to questions you don't ask but should have asked!

7. How much is this going to cost me?

Everyone pays to buy an annuity. The difference is that some people are dealt with honestly, told what the charge is and given the choice to have the charge paid from the pension fund or by writing a cheque. Don't deal with people who tell you it doesn't cost you anything or that the insurer pays for it all.  That isn't true and if they can't be honest about something so simple, the worry is they are probably not going to be helpful in other more complex areas.  Make sure you know what the cost is.  For example, paying the cost out of your pension means you spread the payment over your life.  A £1,000 charge sounds a lot but it reduces your pension by around £5 a month. So if someone charges you £600 and someone else £800 then it is really only £1 a month difference for you.  Pick the firm that sounds like good value for your money, not the cheapest; someone who has made sure that you have made the right decision. After all, the chances are that you will be making a one-off decision on £50,000 and for the sake of £1 a month extra charge, you could save yourself a lot of money in the long term.

Alan Higham,  Chairman of Annuity Direct and Head of Retirement Insight at Fidelity

Regulation, FSA/FCA