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Guide to Annuities
Your IndustryFeb 21 2013

Commission and adviser charging on annuities

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The Retail Distribution Review will accelerate the trend away from advised sales, believes Alan Higham, chairman of Annuity Direct, because advisers have to agree a fee and firms selling annuities without advice can continue to take commissions.

“The problem is that most clients do not understand or do not believe the explanation given around how commission and advice fees work on annuities.”

Dean Mirfin, group director at Key Retirement Solutions, believes it is growing consumer confidence to make decisions on their own has led to the strong growth seen by direct-to-consumer annuity desks, but he stresses that advice remains very important to ensuring clients maximise their retirement income even at the basic level of offering the option of impaired annuities.

He says: “The market is growing rapidly with a a wide range of innovation and advisers have a major role to play. The more specialist products are not yet covered by direct to consumer desks.”

Most consumer don’t realise how commission and adviser charging works when they buy an annuity: that a standard commission charge is built into the rate they receive.

The commission can be between 1 per cent and 4 per cent of the purchase price of the annuity depending on the size of the seller and their profit margin, possible exclusive arrangements the seller has with the annuity writer, and the type of annuity being sold.

“You cannot avoid the commission,” insists Mr Higham. “Even if you go directly to the insurer they will still charge it to cover their costs of dealing with you directly and also to encourage consumers to use brokers.”

He gives the example of a client in poor health who qualifies for an enhanced annuity on a fund of £100,000.

This might generate a commission of £3,000 for the seller. An adviser might choose to charge only £1,500 to advise and implement the annuity thus getting the client a rate 1.5 per cent higher.

“The adviser would have to get the client to agree to pay a fee of £1,500. It can come out of their £100,000 pension fund, so it is just like a smaller commission.

“Someone who doesn’t give advice can take the commission and doesn’t have to agree a fee. They can present their service as being ‘free’ to the client and receive £3,000. The client receives 1.5 per cent less and has not had the benefit of advice.”

Stephen Lowe says post-RDR clients can choose to deduct the adviser charge from the pension fund after the full pension commencement lump sum has been deducted.

“Say your client has a £100,000 fund, and you’ve agreed a £1,000 adviser charge. The client can take £25,000 PCLS, leaving £75,000 in the fund, from which the £1,000 adviser charge is deducted,leaving £74,000 to secure the annuity.”