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Don’t be bitten by the regulator – or a litigator
12 August 2010
Bob Bullivant, CEO of Annuity Direct, warns advisers to proceed with caution when placing annuities. Placing an annuity is easy: just look at a set of rate tables and those nice people at the FSA compile them for you. How many times have I heard that? In my opinion, this is an extremely complex area of financial planning that is no place for those who dabble with the odd case. Well, as CEO of Annuity Direct, I would say that, wouldn’t I? So, read on and I shall tell you why you need to proceed with massive caution, if you are not to be bitten by the regulator – or a litigator. Firstly, before you get anywhere near placing the annuity, you need to examine the ceding scheme with caution. If you switch a pension fund pre-retirement, you need to carry out a full analysis of the ceding and receiving scheme before proceeding. The FSA is currently fining firms that do not do this, with no doubt more people being lined up for attention. Ways to stay the right side of the law There is no doubt in my mind that the same rules apply at retirement, and following discussions with the FSA, I am left in no doubt that they do. So, to stay on the right side of the law what should you be looking at? There are obvious things such as guaranteed annuity rates, penalties, MVAs and dates when terminal bonuses are added. Getting this information is critical because, owing to often weird product design, there is a date in the not too distant future when a penalty is removed or a terminal bonus is added that can often increase the fund substantially. The adviser needs to establish this and make the client aware. We have examples where, by waiting a short time, a fund can be increased overnight by more than 20%. There is also a list of not so obvious things that need to be taken into account. Old personal pensions and retirement annuities may have life cover attached. If you convert the policy to an annuity, you may congratulate yourself on getting an enhanced rate, but you have also established that the individual cannot buy life cover on normal terms and that at the very least the client should know that his life cover will lapse. It is often possible to negotiate with a provider to leave a segment of a policy in force that carries the life cover, if this is important. There is also the odd obscure rule. Top of my list is protected tax-free cash in respect of employer sponsored schemes that were effected pre-A day. Providers were very good, pre-A day, at selling schemes that were designed to fund maximum tax-free cash, but post-A day, they are not so good at establishing if the client can get more than 25%. This means that you will need to get the client to supply income details for his pre-A day employment, but it can be very worthwhile. I find the attitude of providers in this whole area worrying. They are trying to sell annuities direct with scant attention paid to these issues. We have an example of a client who was approached by their provider and quoted 25% tax-free cash and signed up for their annuity. They then found their way to us, and by careful questioning, we established that they could get tax-free cash of 40% of their fund. This raises two questions: why did the provider not know; and FSA, where are you? It appears pension switching is alive and well among annuity providers selling direct. Arranging a client’s income The next stage is to think about how to arrange a client’s income. There are a wide variety of vehicles, including USP. Again, caution is needed, because the ‘type A’ critical yield quoted by most providers is highly misleading. Space does not allow me to go further, but take a look at www.fairusp.co.uk. I will restrict comment in this article to guaranteed annuities. A good adviser will closely question clients about their (and their partner’s) medical history. You will need to obtain a common medical questionnaire if there is any hint of an issue. This needs to be sent securely (not over open email, because it is confidential data) to all providers who will underwrite an annuity. Please allow me one gripe: can we banish forever the term ‘enhanced and impaired’? It is an annuity that is underwritten. After all, we do not have enhanced and impaired life policies. Underwriting approaches Underwriting is varied and in broad terms there are two approaches an underwriter can adopt. The first is to use a computerised underwriting approach where the client is asked questions, the answers to which can be ‘scored’ by a computer programme and turned into an impact on mortality. The second approach is the good old-fashioned human underwriter. For once, the providers have managed to work together and there is a common medical questionnaire that can be sent to all providers who operate in the underwritten annuity market. Although we write substantial business volumes, we find it impossible to guess which provider will quote the top rate, with often significant variation between top and bottom. Twice in the past 12 months we have had a 100% difference between the best and worst underwritten rate, and a difference of more than 20% is not uncommon. This means that nothing short of a full whole of market survey is acceptable if you are to fulfil your obligations as an IFA. This market is complex and not a place for the amateur. We have not considered other annuity types or USP, which have their own issues. One thing is certain: do not be a dabbler in this market, because the regulator or litigator awaits you. Published by IFAOnline
