Purchasing an annuity should follow a careful selection process in order to achieve the best retirement income.
The non-advised route, where a person chooses the annuity and related options (e.g. whether the annuity is provided to a spouse or partner on death, or whether the pension is level in payment or increases each year) goes some way in exploiting
the open market option. However, the absence of expert advice could result in the omitting of certain factors, such as lifestyle or health conditions, which may boost retirement income.
The reality is that although people may believe they thoroughly understand all their options at retirement, an important first step is to have a discussion with them to make sure they actually do. Good practice is to have a robust process to determine if a retiree should seek advice rather than following the non-advised approach. Unfortunately, this doesn’t always happen, with
examples of poor practice including brokers offering gifts in return for obtaining an annuity application, or making initial quotations biased towards showing high incomes by using extreme assumptions about lifestyle and health conditions.
To encourage best practice there should be tighter control of the enticements for individuals to complete an application via the non-advised route. Also the method of remuneration of non-advised brokers should be such that their interests are aligned with the consumers’ interest and there are no barriers to them suggesting an advised route (even if their own firm does not provide an advised route) or providing the best annuity outcome in favour of any pre-agreed commission arrangements.
In terms of the level of market coverage, non-advised brokers should ideally test the entire annuity market. However, it is not always possible when the size of the fund is below the minimum amount for some insurers, or because some insurers won’t quote for certain benefits, such as full inflation increases – although these are relatively rare. In practice, a good non-advisory
service should offer quotations from approximately 90% of the providers. Those that regularly exclude 25% of the market should cause concern, especially if insurers were excluded because they refused to pay the level of commission demanded by the broker.
In summary, there is a place in the market for non-advised annuity brokers, but their method of enticement and remuneration must be reviewed, together with a process to identify if advice is required.