Missing historic features on old pension schemes can be a costly blunder and will give advisers a bad name. To avoid being tarred with the same brush as sales-driven bank advisers, IFAs must take more care over this vital step, even if this means avoiding the open market option (OMO).
In my specialist area of at-retirement advice, we have been smeared in papers as being ‘dodgy’ and ‘sharks’. This has happened because of situations where the role of an at-retirement adviser has been reduced to being a middle-man who skims a commission just for quoting rates.
Review for the best rate
Getting the best rate for an annuity at retirement is vital, but it is the easiest part of the seven steps: when to take the income, a guaranteed income versus a possibly higher variable income, inflation protection, providing for a family, health and lifespan, price versus security of provider, and securing rates.
When considering these steps, it is vital that existing policies are reviewed properly. We find one in seven customers has an historic feature that means they should not take the OMO, even though the headline rate looks better.
- Every client should ensure they check for:
- guaranteed annuity rates, when they can be exercised and in what form;
- tax-free cash higher than 25% of the fund. Policies written under earlier tax regimes can have substantially more cash;
- bonuses due to be added in the near future;
- penalties being applied at the current time;
- life cover attached to the policy.
We write to the existing scheme to confirm the treatment. We often find details that are not covered on a customer’s computer-driven illustration. It takes time to do these checks and therefore costs money. Some customers don’t understand the importance of this, especially when they are being offered a quicker, easier process by other brokers. The result is that many probably play Russian roulette with their savings.
I have seen a statement showing an annuity rate of 5% for an existing scheme. The best rate on the open market is 5.7%. The statement was an illustration produced six months before retirement age, and at retirement we discovered a guaranteed annuity rate of 7% applied. On a £50,000 fund, that check was worth £10,000.
Until there are rules in place forcing all brokers to act better, some will continue to profit from their client’s misery. We need support for an industry standard of conduct for at-retirement advice, particularly when it is not ‘advice’ in the regulator’s sense of the word but rather the Money Advice Service (MAS) form of advice.
Insurance companies that offer these guarantees could be better at sharing this knowledge. It is not possible to rewrite their systems to cover every historic policy, but it is not right to take four to six weeks to answer a letter asking for details of the entitlement.
If it was easier to find out the facts, the incentive to cut corners would be smaller.
Alan Higham is chairman of Annuity Direct.