Annuity fees higher and Insistent Client status if 'No Cash' option taken?

tokai69

Hello,
I would be interested in others thoughts on my experience with an annuity provider...

I rang one of my private pension companies and spoke to a chap explaining that I wanted to combine my two private pension pots and purchase an annuity. He told me that he could supply me with quotes for an annuity with no tax free cash, which is my preferred option, and also for an annuity with a 25% tax free cash.

If I decided to take the 25% cash option he could progress things for me on a non-advised basis and the cost would be around £500. However if I decided to go down the 'No tax free sum' route I would HAVE TO speak to a company adviser, something to do with it not being in my best interests to take the 'no cash' option.

A company adviser rang me back and told me that her fees would be £800 and then proceeded to try and get me to take out a 'purchased life annuity' with my 25% tax free cash. She presented various figures which ended up possibly giving me between £7 and £100 extra a year depending on certain tax conditions. I said that I did not want to do this and just wanted my full annuity with no tax free cash.

She said I would therefore be classed as an 'Insistent Client' because I was not accepting her 'better' option. She also stated that any future dealings with 'the company' regarding my annuity would be dealt with under an 'Insistent Client Basis' which would mean I have less recourse should there be any problems at a later date.

So:
Why would it cost me extra if I want to take the 'no cash' option (£800 advised rather than £500 non-advised)?
Why do I end up as an 'Insistent Client' when I am just exercising my rights to choose one available option over another?
Can 'the company' force me to take out a 'Purchased Life Annuity'?
Is this normal behaviour for an annuity provider?

Thanks

Aegis

tokai69 wrote: »

Why would it cost me extra if I want to take the 'no cash' option (£800 advised rather than £500 non-advised)?

Essentially the situation you want is more likely to result in a complaint being upheld later, so they're expending more money to ensure that you are given advice as to why your idea is not ideal. That way when you realise that you could have potentially had more net income, they can present evidence that they fully explained your position to you.

Why do I end up as an 'Insistent Client' when I am just exercising my rights to choose one available option over another?

Probably because you are exercising what they believe to be a sub-optimal option and they are trying to advise you how you could improve this situation.

Can 'the company' force me to take out a 'Purchased Life Annuity'?

No, they can't. However, they are potentially offering you a better solution than you are proposing yourself.

If you use the full pension pot to purchase an annuity, the full value of that income stream will be subject to income tax at your highest marginal rate. If you instead take the 25% tax-free pension commencement lump sum and buy a purchased life annuity on broadly the same terms (i.e. same rate and same features) then that will be paid out as part taxable income but the majority is return of capital, which is exempt from income tax.

Essentially could go from 100% taxable to about 80% taxable, which could generate a fair bit of extra net income over the term at no additional cost.

Is this normal behaviour for an annuity provider?

One would hope so, it sounds like they're actually doing something in your interest.


Incidentally, unless you have guaranteed annuity rates (which would render much of the above moot in any case) it is usually worth using the open market option for annuity purchases, which can be arranged through an independent financial adviser. The OMO allows you to find the best available annuity rate on the whole market, which is often quite significantly higher than the standard annuity offered by your pension provider. That same adviser can also explain the pros and cons of taking the PCLS and can then find a purchased life annuity or another form of investment for reinvesting your PCLS (if applicable).

Best place to start is https://www.unbiased.co.uk or a personal recommendation from someone who has already used an IFA.

tokai69

Thank you for your comments Aegis, i will definitely explore the open market option.

stinktankcynic

If you have a pot of £10000 and want an annuity, do you mean they charge you a fee for it on top of the rubbish rate they give you?

dunstonh

If I decided to take the 25% cash option he could progress things for me on a non-advised basis and the cost would be around £500. However if I decided to go down the 'No tax free sum' route I would HAVE TO speak to a company adviser, something to do with it not being in my best interests to take the 'no cash' option.

I can understand that. Not taking the 25% TFC is nearly always a bad idea on money purchase pensions (Some exceptions apply - such as GAR issues). The FOS does not allow execution only to be an excuse for doing something you know is likely to be bad.

A company adviser rang me back and told me that her fees would be £800 and then proceeded to try and get me to take out a 'purchased life annuity' with my 25% tax free cash. She presented various figures which ended up possibly giving me between £7 and £100 extra a year depending on certain tax conditions. I said that I did not want to do this and just wanted my full annuity with no tax free cash.

The advice seems good and generically correct and what you would expect.

She said I would therefore be classed as an 'Insistent Client' because I was not accepting her 'better' option. She also stated that any future dealings with 'the company' regarding my annuity would be dealt with under an 'Insistent Client Basis' which would mean I have less recourse should there be any problems at a later date.

Excellent to see the firm being compliant and doing the right thing.

Why would it cost me extra if I want to take the 'no cash' option (£800 advised rather than £500 non-advised)?

Non-advised carries virtually no consumer protection which means less liability for the firm. Non-advised doesnt need to involve an adviser. So, you have lower costs there as qualifications cost money.

Why do I end up as an 'Insistent Client' when I am just exercising my rights to choose one available option over another?

Because you are doing a transaction that is not best advice and ignoring the advice given.

Can 'the company' force me to take out a 'Purchased Life Annuity'?

No. They can put you down as an insistent client, issue sufficient warnings of the what you are doing wrong and cover their backsides to stop any future complaint you make causing them problems.

Is this normal behaviour for an annuity provider?

I am very impressed that an annuity provider has done the right thing. Many will not get involved at all and let you make mistakes. This one appears to have its own in house sales force (as an increasing number do) and they appear to be doing everything spot on correctly. Well done to them

However, an IFA via the open market option is likely to come in with better terms than an in-house panel from an insurer.

dunstonh

stinktankcynic wrote: »

If you have a pot of £10000 and want an annuity, do you mean they charge you a fee for it on top of the rubbish rate they give you?

Sort of but not exactly. The rate includes cost of distribution/retail and advice. The amount of that is disclosed and agreed with the individual. Historically, an automatic commission was built in to the annuity rate. Now the figure is agreed and that figure is built into the annuity rate.

mania112

Forgetting about the actual sums of money for a second just think about what you're doing.

You're giving up a quarter of your fund to the tax man. Rarely does one have the opportunity to free up some cash without giving a slice to 'king and country' - this is your chance.

Sure, you would be reducing your Annuity. But if you really don't need the 25% cash, it can be put to good use to improve your retirement income.

tokai69

Thank you for your comments mania112.

Sure, you would be reducing your Annuity. But if you really don't need the
25% cash, it can be put to good use to improve your retirement income.

Could you elaborate on this statement? What uses are you referring too?

jamesd

tokai69 wrote: »

I rang one of my private pension companies and spoke to a chap explaining that I wanted to combine my two private pension pots and purchase an annuity. He told me that he could supply me with quotes for an annuity with no tax free cash, which is my preferred option, and also for an annuity with a 25% tax free cash.

Your choice is unlikely to be the best one. Normally for someone who didn't want a lump sum the best option would be to take a 25% lump sum then:

1. Use the 75% remaining in the pension pot to buy a lifetime annuity
2. Use the 25% lump sum to buy a purchased life annuity outside the pension, which has tax advantages compared to doing it within the pension.

tokai69 wrote: »

If I decided to take the 25% cash option he could progress things for me on a non-advised basis and the cost would be around £500. However if I decided to go down the 'No tax free sum' route I would HAVE TO speak to a company adviser, something to do with it not being in my best interests to take the 'no cash' option.

That's entirely sensible, what you're contemplating is likely to be the wrong choice and it would not be prudent to continue on that basis without advice. Even on execution only an adviser is supposed to be checking that there is some sort of sense to a plan and declining to do it execution only if it doesn't make sense at initial consideration.

tokai69 wrote: »

A company adviser rang me back and told me that her fees would be £800 and then proceeded to try and get me to take out a 'purchased life annuity' with my 25% tax free cash. She presented various figures which ended up possibly giving me between £7 and £100 extra a year depending on certain tax conditions.

You have been given good advice that is almost always going to be the correct way to proceed.

tokai69 wrote: »

She said I would therefore be classed as an 'Insistent Client' because I was not accepting her 'better' option. She also stated that any future dealings with 'the company' regarding my annuity would be dealt with under an 'Insistent Client Basis' which would mean I have less recourse should there be any problems at a later date.

It's a little surprising that they are even willing to do the business, because your situation is a complaint waiting to happen.

So:

tokai69 wrote: »

Why would it cost me extra if I want to take the 'no cash' option (£800 advised rather than £500 non-advised)?

Because your choice does not make financial sense and they have significant regulatory and compensation risk as well as some regulator imposed need to work out whether your situation is one of the very tiny number where there might be some sensible reason for doing what you want.

tokai69 wrote: »

Why do I end up as an 'Insistent Client' when I am just exercising my rights to choose one available option over another?

Because you are acting in a manner that is clearly against the best interests of almost all customers in your position and it's necessary for the firm to protect themselves from the future risk that you will claim they mis-sold a product form them, or that their regulator will instruct them to pay redress to you anyway.

tokai69 wrote: »

Can 'the company' force me to take out a 'Purchased Life Annuity'?

No. But they can refuse to do business with you.

tokai69 wrote: »

Is this normal behaviour for an annuity provider?

It should be. They appear to be conducting them selves superbly, acting just as their regulator would want. they should be commended for the actions they have taken.

The big question here is why on earth you don't want the almost always better combination of lifetime annuity and purchased life annuity. Why are you insisting on making yourself less well off? Unless there really is some strange fact in your own situation that makes a purchased life annuity a bad idea you should drop your insistence on not using one - it really is the best approach in almost every case.

Do you have any health conditions that would affect your life expectancy? Being overweight, smoking or anything else? Those can result in higher annuity payments. The annuities offered by places where pension pots are invested often do not include these products.

Regardless of what the current people are saying, you should not just buy an annuity from the place where your pension pot is invested. Use the open market option, generally via an IFA, is likely to be the best route to use, that will result in higher payout. You should expect all reputable IFAs or annuity providers to recommend the lifetime annuity plus purchased life annuity combination. Any provider who doesn't should be avoided because they aren't doing a good job for their clients.

jamesd

Alternative uses for the 25% include the purchased life annuity or income drawdown, perhaps via investments within an ISA. The drawdown approach can significantly help with flexibility and at the moment is likely to pay out more than either type of annuity, though with some investment risk to go with it.

If you have a spouse you might also consider whether using all of the 75% for an annuity is the best course. Income drawdown within a pension offers 100% pension for a spouse at no extra cost or income loss for you as one of its benefits. This means that where a spouse is involved it can often be a good idea to use drawdown or some combination of drawdown and annuity purchase.

tokai69

I have just looked at the written illustration and the figures are actually worse than I thought:
When you compare the monthly payments WITHOUT tax free cash, my preferred option, with the combined total of the monthly payments WITH tax free cash taken out and the monthy income from the Purchased Life Annuity, I am £1.56 a month worse off and it will cost me an extra £300 for the unwanted advice.

How can this be in my best interests?

Even if I did get a bit more with the PLA how long would it take to recoup that £300? If you take the £7 a year extra that I mentioned in the original post as an example it would take me 42 years!