Despite the dictionary definition for the word ‘advice’, in the financial world, it’s seemingly not as clear. Annuity brokers, who act as salesmen, offer ‘guidance’ which sometimes has incentives that clash with your interests.
So when is advice actually advice?
What are Non-advised Sales?
A non-advised sale is where a person chooses their annuity themselves. There are several ways it can be done. You can speak to a broker, you can go to a provider directly, buy an annuity from your existing pension company or use a price comparison website.
For some this is fine and their retirement is meticulously planned with their circumstances very clean cut. However, the current system for non-advised annuity sales is in disarray.
What are the Potential Pitfalls?
- Some brokers offer gifts in return for an annuity application, which could unduly sway some buyers
- Extreme assumptions made on questionnaires give an exaggerated view of what income a buyer can expect
- Many salesmen are not ‘whole of market’ – they only offer a select list of annuity products and rates
- The way many brokers are paid can conflict with your interests – if they get paid more to sell a certain product, how will you know that product is right for you?
- Guidance doesn’t discuss which type of annuity to choose, or whether buying an annuity is appropriate to your circumstances – only proper financial advice can offer this
- People may think they’re getting financial advice, which is a specific legal term offering heavy regulation and protection – they may actually be receiving ‘guidance’, which can often leave people in the lurch
Financial Conduct Authority Investigation
The Financial Conduct Authority (FCA) has carried out a review into the annuity market. Shockingly, the regulator found that 80% of consumers could secure a more generous annual income by shopping around.
Nicola Hartley, Independent Financial Adviser at SM Financial Services, commented on the review:
“The fact that so many are missing out on a better deal elsewhere clearly shows the state that the annuities market is in. It seems to have become difficult to navigate and it would be interesting to see why so many are missing out on the right deal.”
What can often mean the difference between a good deal and a bad deal is whether you’re able to see the ‘whole market’. This simply means you need to be able to access every product, leaving no stone unturned in the search for the best annuity. This is because each provider will offer different rates, for different types of annuity, based upon answers to different questions. The variation in income levels quoted by each provider can amount to thousands of pounds over your lifetime.
At the end of the day, an annuity cannot be unwound once purchased and is designed to last you the rest of your life. It is therefore important that it’s appropriate from the start, particularly given that everyone is now living longer with many facing a retirement which could span several decades.