Where our story begins
Enhanced annuities are now firmly mass market. In fact, some might say they’re overexposed as the number of providers offering enhanced annuities, and the number of clients who qualify for them, continues to rise. But it hasn’t always been that way.
Cast your mind back to 1995 and the arrival of a new entrant to the advice market, the Pension Annuity Friendly Society (PAFS). PAFS business model was built on using annuitants’ medical information to underwrite annuity quotes. This meant they could confidently offer higher retirement incomes to people with reduced life expectancies.
Also in 1995, Stalwart Assurance launched a ‘smoker’s annuity’ followed a year later by a ‘lifestyle annuity’, which promised enhanced rates for obese people.
And so the enhanced annuity was born.
The adviser opportunity emerges
Other providers soon began to sit up and take notice. We all know how the story ends; the enhanced market is now buoyant with providers and advisers offering enhanced annuities.
But it didn’t happen overnight.
Remember, this was almost two decades ago. For providers, launching an enhanced annuity would have meant significant investment, and for what return? The sustainability of enhanced annuities was not yet established and therefore offered no guarantees.
With a selection of specialist enhanced annuity providers dominating the market, it’s likely that the majority of enhanced annuity customers were using the open market option, which presented an opportunity for financial advisers.
Indeed, barriers to entry into the enhanced annuity market were arguably fewer for advisers than providers. Though without the technology we take for granted today, selling an enhanced annuity would undoubtedly have taken longer and demanded additional work. As a result, advisers received higher levels of commission for enhanced annuities than standard annuities.
A new chapter for enhanced annuities
Fast forward to today. It’s estimated that enhanced annuities account for as much as a quarter of the market. Few providers haven’t got in on the act. Technology has advanced to the point that it’s now possible for all advisers to request annuity quotes online through the portals from a range of providers - making the process quicker and easier.
At the same time, Origo Standards, who work behind the scenes to simplify and speed up the annuity quote process, have succeeded in standardising the annuity quote questions set for all annuity quotes, making online quote requests consistent with the Common Quote Request Form (CQRF).
With online quotes, advisers can easily give providers full information about their clients’ health and lifestyle in return for a personalised and often higher annuity quote. And having this full information also helps providers to give guaranteed, automatically underwritten quotes instantly through online portals.
All these things combined have resulted in a normalisation of enhanced annuities. They are no longer a niche product offered only by specialist providers on the open market; instead they’rea widely available option suitable for many clients.
The future of enhanced annuities
The boundaries between standard and enhanced annuities are beginning to blur. A new breed of ‘personalised annuity’is emerging that offers everyone an annuity tailored to their individual circumstances. The natural conclusion is that, in future, we will no longer make a distinction between ‘standard’ and ‘enhanced’ annuities.
That’s a good thing. But it raises challenges too, especially around adviser charging. According to Aviva’s quote data, advisers are still charging an average of over £200 more for enhanced annuities compared to standard annuities.
Based on the common sense assumption that an adviser’s charge should reflect the amount of work he or she does to earn it, a number of business models are challenging the validity of charging more for enhanced annuities. There are fewer and fewer differences in the process an adviser goes through to sell an enhanced annuity compared to a standard annuity. And so there’s less justification for a higher charge.
There’s a sliding scale of enhancements available, too, which is not usually reflected in an adviser’s fee. Meaning some clients get more ‘value’ than others for paying the higher charge.
To muddy the waters further, it’s possible for an individual who qualifies for an enhanced annuity with one provider to get a higher retirement income with a standard annuity from another provider. In which case, a higher adviser charge based on a label (and not represented in real value terms) feels arbitrary at best.
On the other hand, automatically underwritten instant online quotes are still fairly new to the industry. Advisers face a significant amount of work to get their processes and technology in place to provide clients with an efficient enhanced annuity service.
On this basis, you can understand why some advisers make a case for higher charges for enhanced annuities. Especially as in the majority of cases, clients will benefit from a higher retirement income. Assuming they’re lucky enough to enjoy a long retirement, even a small enhancement to their income is likely to more than justify paying a higher adviser charge.
You decide, Aviva helps
Adviser fees for enhanced annuities is a hot topic at the moment. There’s truth in both sides of the argument, so it’s up to advisers to find their own truth and charge accordingly.
One thing is certain though: advisers who want to make a success of their retirement business post-RDR need to make sure their charges represent good value. More importantly, they need to demonstrate their value to clients by clearly communicating the benefits of paying for expert advice at retirement. This is equally important for advised and non-advised sales.
Aviva are committed to helping advisers improve their processes and demonstrate their value.Their newpersonalised annuity websiteaims to help advisersconvert more personalised annuity quotes into sales.
