Annuity comparator makes it easier to shop around
From 1 March 2018 every firm issuing guaranteed annuity quotes must comply with new rules set out in the FCA’s policy statement PS17/12. In simple terms, firms will need to ask customers for their consent to use personal information in order to produce an annuity comparator.
The annuity comparator is simply a new type of annuity illustration which informs the customer if there is another company in the market offering a higher rate. For example, if company A offers an annuity paying 2,500 per annum but Company B offers £2,600 the customer must be told there is another £ 100 a year on offer from another company.
The idea is to make it easier for customers to shop around for the best annuity and avoid customers rolling over into sub-standard annuities offered by their pension provider. This is clearly a noble aim and everybody who signs up to getting better customer outcomes should agree this is a good news story because more people should end up get higher incomes when they purchase an annuity.
Most annuities are personalised
The important thing to remember about annuities is that almost every annuity is personalised in one way or another. For example, post codes, size and weight and drinking or smoking. These factors will typically add about 5% or 10% on top of a standard annuity. If people take prescription medication, or have a medical condition you should get more, perhaps 20% to 35%. Some firms advertise up to 40% but that is probably over egging it for most people.
Garbage in, garbage out!
Annuity quotes are like a computer; enter the right information and you get the right answer but ‘garbage in, garbage out’. So, with an annuity the amount of the income depends on the quality of information given at the outset.
This brings me to most important thing about the annuity comparator. The success or failure will depend on the right information being entered at the outset.
Some customers may not agree to having their personal information used so they will not benefit from the comparator. But where consent is given, will the right information be collected in order to get the highest annuity?
Use an adviser
Clients using a financial adviser or a non-advised broker should be asked for the correct information and get the highest annuity. In fact, some non-adviser brokers seem to know less about pension options and more about which medications and illness qualify for an enhanced annuity. This probably reflects the selling culture based on commission sales.
Customers approaching insurance companies directly should also be asked the right questions because the teams have many years’ experience in arranging enhanced annuities.
Watch out if you get a quote from your pension provider
But, customers requesting annuity quotes from their existing pension providers may not be asked for the right information. This is because they may not have the experience of dealing with annuities and their quotation process may not take the relevant medical details into consideration. In this case the annuity comparator may not show the best rate the customer could get.
It is worth noting that some providers operate a panel of annuity providers. Companies offering a limited panel may find the annuity comparator will show there is a better rate on the open market, so they may be forced to open the panel to all annuity providers.
In conclusion, the annuity comparator should be seen as a good step forward but there is clearly more work to be done especially where advisers or specialist brokers are not involved.
Finally, annuity rates are on the rise so if the annuity process takes a lot of time, a good adviser will monitor annuity rates and if necessary arrange for an even higher annuity. This doesn’t happen if customers go direct.