Annuity dilemma

sgx2000

handful said:

I've never tried it but there are comparison sites available. https://annuity.uk.com/landing/?v=latest-annuity-rates-1&keyword=best%20uk%20annuity%20rates%202023&network=g&device=c&creative=642063777829&matchtype=e&gad=1

I have looked at this link before.
They seem to just be an annuity broker
i.e. you give them basic info.  Then they call you back and get all the details.  Then provide their quotes.
(I will give them a try)

The best online quote I could find was Hargraves Lansdown.  Their online annuity calculator allows you to input medical conditions etc,  Then gives quotes from the top 5 or 6 annuity providers.

Why don't they all do this online??? 
The medical condition increase is, after all, just an algorithm ....

Given the number of pension scams out there.  
I do find myself however, becoming increasingly paranoid about who I speak to....

sgx2000

g002ahe said:

I have just funded a £300k annuity with around 40% of my total SIPP fund. I did this to diversify risk.

• My Age:59
• Spouse Age:52 (50% of annuity to spouse after my death)
• No health issues
• 3% increase per annum (I could have gone for RPI instead at a slightly lower annuity, but chose fixed increase.)
• monthly in arrears

L&G gave me the best annuity quote at  £12,134.52 PA, coupled with a £2,575 cashback from the broker.

I could have added the £2,575 back into the annuity if I had wanted, which would have increased it by around £100PA.

Thanks for the reply....
I already have a local authority DB pension paying out (since 60)
I am 63 with a small company pension £78K
Through HL I could get 

£5,936.28 single life, 10 year guarantee, flat
or
£3,792.12 single life, 10 year guarantee,  RPI

The £5936 would decrease in real world value, down to the £3792 in about 6-7 years given an inflation of 7%
but I would have had £2144 per year more for that 7 years  (£15k)

Decisions  Decisions   Decisions ...........

The longer I go at this,  the more I realize there is no perfect answer...
Just a good guess....

dunstonh

Anyone have any idea who the £6226 quote would be from ????

You could ask your IFA.   After all, IFAs generally get the highest figures.

What is HL's commission rate being applied?  (it could be that a higher commission rate is reducing the annuity more than the commission rate used by Aviva.   Although Aviva is likely to be using the  IFA rate, which has no commission on it, rather the commission rate).

g002ahe

dunstonh said:

Anyone have any idea who the £6226 quote would be from ????

You could ask your IFA.   After all, IFAs generally get the highest figures.

What is HL's commission rate being applied?  (it could be that a higher commission rate is reducing the annuity more than the commission rate used by Aviva.   Although Aviva is likely to be using the  IFA rate, which has no commission on it, rather the commission rate).

Actually, in my experience, brokers and IFA's were equally good/bad.

I tried:

• comparison sites and L&G direct
• an IFA (acting transactionally ie no advice)
• a broker

What I found was that upon first quote, both the IFA and the broker beat the L&G direct & comparison sites.

I went back and forwards between the IFA and the broker, several times each one beat the other's best quote by a small margin, until i arrived at the best quote which was from the broker.

How this works is that the discount that each gives comes out of the commission that they would have earned. The max commission is limited to £10k I believe but this varies depending on annuity value, product and company. for example generally L&G pay less commission than "Just"

They can give the discount by a cashback payment and/or an increase in annuity.

Personally, I really despise the way that this product works, seems reminiscent of the bad old days of high commissions. I wish that the direct approach of cutting out the "pointless" middleman was the best approach. It should be, but it isn't!

I did not try a "commission free" IFA option, where the IFA charged a fee for advice. I did not want advice.

dunstonh

Actually, in my experience, brokers and IFA's were equally good/bad.
I tried:

• comparison sites and L&G direct
• an IFA (acting transactionally ie no advice)
• a broker

What I found was that upon first quote, both the IFA and the broker beat the L&G direct & comparison sites.

I went back and forwards between the IFA and the broker, several times each one beat the other's best quote by a small margin, until i arrived at the best quote which was from the broker.

It usually boils down to two main things
1 - size of the fee for the IFA vs the commission rate.  The lowest figure in monetary terms has a head start
2 - quality of completion of medical details.   IFAs tend to probe for more detail and information whereas non-advised accept what you give them.  In most cases, insufficient detail is supplied and with a bit of probing it can lead to a better rate.  (I did this recently with someone who got £8.5k p.a. from the medical details he supplied but I got it up to nearly £10k by forcing more information out of them)

An IFA working on a non-advised basis turns into a broker and can take commission instead of a fee.
A clean or fairly clean application (in terms of health) will see little difference as the fee/commission amount will be the biggest thing.

So, you didn't actually use an IFA.  You effectively used two brokers

I did not try a "commission free" IFA option, where the IFA charged a fee for advice. I did not want advice.

You may not have wanted it but it may have given you the best outcome.  
e.g. a fund of £200,000 with a 1.5% commission is £3,000.  That £3,000 is factored into the annuity rate.   On fee basis with an adviser with a fixed fee or capped fee of £2,000, you have a £1,000 difference giving the advised option a headstart.

Personally, I really despise the way that this product works, seems reminiscent of the bad old days of high commissions. I wish that the direct approach of cutting out the "pointless" middleman was the best approach. It should be, but it isn't!

When you go shopping, do you buy all your products at cost or does the retailer factor a margin into the price?

Cutting out the middleman wouldn't reduce the cost.     A manufacturer and a distributor are two different things.   Often buying from a manufacturer via their in-house distribution is more expensive (often a lot more expensive).

So, no, cutting out the pointless middleman is not the best approach as the pointless middleman is usually cheaper.

JohnWinder

‘When you go shopping, do you buy all your products at cost or does the retailer factor a margin into the price?’

No and yes, but I buy the products on the basis of cost, not at cost, if the products are comparable.

I wonder if the annuity providers are trying to avoid competing on the basis of price, because that would push the price of the product down. Rather than offering the same several annuities eg life, fixed term, inflation protected, and compete on price which would put the consumer in the box seat, they add complexity to each product to differentiate it, eg one via an agent deals with health issues differently than one without an agent. This helps to exclude the consumer from direct purchasing. There has to be some value for the provider if they’re preferred sales route is via an intermediary who by their compensation must be reducing the value for the consumer or the profit for the provider. They’ll choose the former surely. Wild speculation.

Malthusian

g002ahe said:

I have just funded a £300k annuity with around 40% of my total SIPP fund. I did this to diversify risk.

• My Age:59
• Spouse Age:52 (50% of annuity to spouse after my death)
• No health issues
• 3% increase per annum (I could have gone for RPI instead at a slightly lower annuity, but chose fixed increase.)
• monthly in arrears

L&G gave me the best annuity quote at  £12,134.52 PA, coupled with a £2,575 cashback from the broker.

A level annuity would have paid around £17,305pa by my rough calculations. You will be 82 by the time you break even (the point at which the increasing annuity catches up with the level annuity and makes up for all the income foregone up to that point). 
There isn't any protection against inflation because it will increase at 3%pa no matter what inflation is. (In fact high inflation is worse for a fixed-increase annuity than a level one, because it increases the value of income in your hands now rather than 23 years later.) 
I don't get it.

Malthusian

JohnWinder said:
I wonder if the annuity providers are trying to avoid competing on the basis of price, because that would push the price of the product down. Rather than offering the same several annuities eg life, fixed term, inflation protected, and compete on price which would put the consumer in the box seat, they add complexity to each product to differentiate it, eg one via an agent deals with health issues differently than one without an agent.

Virtually all annuity providers offer the same annuity options in terms of level vs inflation protection, single life vs joint, guarantee periods, etc etc. (Not all - from memory I think Hodge didn't offer RPI annuities.)
Lifetime annuities and fixed term annuities are completely different products. 
There's no complex differentiation in enhanced annuities, you either offer medical underwriting or you don't. All enhanced annuity providers accept the same common quotation form for you to enter your medical details. 

There has to be some value for the provider if they’re preferred sales route is via an intermediary who by their compensation must be reducing the value for the consumer or the profit for the provider. They’ll choose the former surely. Wild speculation.

Providers would much prefer intermediaries didn't exist, as they could keep that margin for themselves, plus more customers would buy uncompetitive annuities.
Unfortunately for providers, they do, and it's not feasible to refuse business from intermediaries (a la Direct Line) because they would get so little of it.
If someone buys an uncompetitive lifetime annuity direct and then complains they were missold and weren't informed of their options, there's a much higher risk of a substantial payout than if you sell someone an uncompetitive one-year car insurance policy.

dunstonh

This helps to exclude the consumer from direct purchasing. 

If you bought direct, they would still include a margin for the cost of distribution.  In regulatory terms, that means having an in-house sales team, a bunch of additional regulatory permissions and a compliance team and management team to support that.   Those costs are typically greater with manufacturers dipping their toes into distribution.   This can be seen with many providers offering more expensive products in their direct to consumer offering than whole of market distribution.

If there were not distribution channels that can run more efficiently and generate scale, the manufacturer-only distribution method would be even more expensive.

g002ahe

Malthusian said:

I don't get it.

At the end of the day different annuity options are like different insurance t&c. its a gamble whichever way you do it - life expectancy vs inflation vs tax vs etc etc

The "expected" inflation built in to an RPI linked annuity is around 4%. there is a risk either way by taking a RPI linked and taking a fixed increase. If inflation is only 2% on average over the term then you lose if you gambled on RPI being 4%, and vice versa if inflation is 6% over the period you win.

I did get lots of various quotes for different options, all seemed reasonable so I went with the one the set of options that I liked the look of the best.