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Small print can hide better option than OMO

by Alan Higham on Dec 07, 2012 at 10:55

Small print can hide better option than OMO

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.

Russian roulette

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.

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7 comments so far. Why not have your say?


Dec 07, 2012 at 11:35

It proper annoys me when articles like this get published. Checking for GARs etc is not a superior service, this is an industry standard.

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Dec 07, 2012 at 11:43

I think you will find Matt that the point of the article is that many do not bother with such checks. Just because you do the right think do not assume everyone does. I have just seen a client who 5 years ago was advised to switch out of his PPP, which offerred guaranteed annuity rates, over to a SIPP and into drawdown so that he could access some cash. This client is very, very risk advsere and has no other retirement provision.

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sol trader

Dec 07, 2012 at 11:53

I actually found this article really useful and will be adding "future bonus rates" and "life cover" to my annuity compliance checklist.

I don't know if Annuity Direct is an online proposition but imagine that, post rdr, when physical advisers have disappeared and everything is online, MAS style advice but not advice there will be small print enough to worry about and no liability on the part of the website.

Have been dealing with enhanced annuities recently and it would appear that some online systems automatically assume clients are suffering from everything under the sun. Of course, the small print says this quote is not guaranteed etc. but it certainly caught the imagination of the client...naughty.

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Ian O

Dec 07, 2012 at 12:08

Absolutely agree with Alan. The At Retirement market is becoming dominated by non advised companies which should be a major worry for everyone. Although some do a good job within the limited confines of their remit, it has to a large degree become all about getting the best rate. Take as much commission as possible where you can get away with it, and then rebate as much as you have to in order to win the business. Purchasing the best retirement vehicle and correct shape of annuity are given little or no consideration. We are storing up huge problems further down the line as surviving partners have no income as the main annuitant was seduced in to taking a single life annuity due to the rate. Of course the non advised companies have not given advice, and so are not responsible for the choices someone makes. In the same way, they are not responsible if someone overlooks a GAR or pays unecessary penalties. We need to bang the advice drum and show added value of the checks Alan mentions to deter consumers from the quick fix of falling in to the hands of companies who do very little and charge so much.

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Kate Brookes

Dec 07, 2012 at 12:20

Is this not all standard practice? Isn't this what we all do?

What annoys me are these on-line annuity companies who offer the whole service for 'free' and nowhere on their website does it state that they will be paid by a commission, presumably this will stop post RDR?

What the article also doesn't mention is that at retirement planning is not just about annuities. There is more than one way to take an income at retirement, and one size does not necessarily fit all. There are often other issues at retirement as well, and a good adviser will look at the client holistically and provide advice on the clients whole situation after having done the proper research..........

or am I being naive?

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Chris Geeson

Dec 07, 2012 at 12:34

When reviewing older pension schemes for clients which are not under our control it is a standard question in the list that we ask regarding guaranteed returns. The difference can be extreme I completed a Scottish Widows annuity at 9% plus for a 60 year old male last week under guarantee. Very standard practice I would suggest

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alan higham

Dec 17, 2012 at 09:27

I'm really pleased that IFAs responding to this article are outraged that our practice at Annuity Direct of checking the ceding scheme is in any way special. It shouldn't be of course.

I was approached by Citywire to write this blog because they know there are large distributors out there who do not check the ceding scheme; they just take the OMO order. There is no hard data or evidence on how many people have exercised the OMO without the check and then how many of those have lost out.

Tom McPahil of PICA is totally opposed to bringing in a minimum standard for "advisers" selling annuities. It is hard to see that PICA aren't just motivated by the profits they make on the exercise of the OMO. They have done such good work on lobbying for changes at retirement that to lower the standards now to increase their own profit margins now rather ruins the good image they have created.

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