Annuities: Advised or non-advised, what’s in label?

The Retail Distribution Review, also known as the RDR, will come into full effect from 1st January 2013.

We’ve already written about the effects of the RDR and our view that it will change the face of financial services. We thought we would now take a look at how the RDR will affect those people planning on buying an Annuity in 2013.

Your options for buying an Annuity in 2013

There will be essentially three options for buying an Annuity:

Advised. This option, as the name suggests, means you will take advice from a suitably qualified Independent Financial Adviser (IFA), who should advise you on whether an Annuity is right for you in the first place, how any Annuity should be set up and which provider offers the best Annuity rate.

After January 2013, any IFA providing an ‘Advised’ service has to charge clients a fee instead of receiving commission; but don’t run for the hills just yet! A fee really isn’t as scary as it sounds, and there will be no need to get your cheque book out as fees can be taken from any plan recommended to you.

Read on to find out how fees will work, the benefits to you, and why they probably won’t be higher than any commission which would have paid.

Non-advised. Again, this means just that, you will get no advice from the company you use, they will simply offer you the best rate they can find in the market. They will provide absolutely no advice in regard to whether an Annuity is the right option for you and how it should be structured; all the decisions are down to you.

‘Non-advised’ brokers will continue to be able to charge commission.

Direct. If you don’t want to get a broker involved, either on an ‘Advised’ or ‘Non-advised’ basis, you can organise an Annuity directly with the insurer. If you take this option the insurer will still charge the commission, however, instead of paying it to the broker, they will simply keep this for themselves as a windfall.

Many people think that by going direct to the insurer they will get a better deal because no commission will be taken, this is not the case and is probably one of the biggest myths about Annuities.

Another problem with going direct is that not all insurers, including some very competitive Annuity providers, will accept direct applications.

Why should I take advice when I buy my Annuity?

That’s a good question, some of the main reasons include:

1. Taking advice will mean your adviser assesses the pros and cons of every possible way of drawing an income from your pension, for many people an Annuity might not be the best option

2. If an Annuity is the right choice, an IFA will be able to advise you on which options, for example guarantee periods, spouse’s pensions, and indexation, you should include in your Annuity

3. An IFA has access to all Annuity providers, there are a number, including Hodge Lifetime, Partnership and Just Retirement, who will not accept applications directly from the public

4. An IFA will be able to advise you whether a Purchase Life Annuity (PLA) should be considered, if you don’t want your tax free lump sum, instead of using 100% of your pension to buy a Lifetime Annuity

5. We can’t speak for other IFAs, but when it comes to Investment Sense, the fees we charge will never be more than we would have received under the old, pre RDR, system

6. By paying a fee, which by the way, will come from your pension fund, you will not have to write a cheque, you can be sure of impartial advice. The fee will be the same no matter which Annuity provider is recommended, this is not currently the case, with some providers paying higher amounts of commission than others

7. If you go direct, or take the ‘Non-advised’ route, you have no ‘comeback’ if you make the wrong decision, meaning you have no entitlement to compensation. Down the ‘Advice’ route, if you feel that you have received poor advice, or that you have been miss-sold, you always have the option to complain

For all these reasons, Investment Sense has chosen to only offer the ‘Advised’ option from 2013 onwards; we passionately believe that advice and independence will lead to better results for our clients.

But why should I pay fees?

We know that some people will hate the word ‘fees’; it will conjure up images of large bills and cheques having to be written. We believe that some people, who would previously have taken ‘Advice’ when arranging their Annuity, might be put off by fees in the future, and consequently have a worse outcome.

So let’s try and dispel a few myths before they start:

1. As we’ve already said, whilst we can’t speak for other advisers, our fees will not be more than we would have received under the old system

2. You will not have to personally pay the fee, it will come out of your pension fund, which is exactly where commission comes from now, it just isn’t as obvious

3. In some instances, especially for larger cases, the fee charged could be significantly lower than the standard commission available to a ‘Non-advised’ broker

4. By paying a fee, which at Investment Sense will be no more than the commission under the old system, you will benefit from independent advice, which we have already said, is likely to lead, in our opinion to better results for clients

So what’s in a label?

The answer to the original question? Well that depends on which label we are talking about.

There’s a huge difference between the labels of ‘Advised’ and Non-Advised’; to us the ‘Advised’ route is the clear winner:

• Advice that an Annuity is indeed the right choice for you
• Advice on which options you should and shouldn’t include in your Annuity
• Advice on when is the right time to buy your Annuity
• Access to all Annuity providers
• Independent and unbiased advice helping you make the right choices

Remember too, we could have chosen to offer the ‘Non-advised’ route (which would have been easier for us!), but we didn’t feel that was right for our clients.

Yes, the ‘Advised’ route means a fee will be payable, but this, at Investment Sense, will be no more and possibly less, than the standard commission paid by the Annuity providers and comes from your pension fund, which after all is where commission came from before the new regime started.

Our final message, focus on getting the best ‘Advice’, the best retirement option for your circumstances, and the highest income possible.

Don’t be scared of fees, they may just get you a better outcome.

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk