How are fees paid for an Annuity?

Consumer3

I have a family member looking to buy an annuity.  We have had some annuity quotes from a Chartered Financial Planner and the fees (2%) are built in to the annuity on a yearly basis (approx £130k pot). I was expecting the advisor fees to be paid separately.
Having never done this before, is this a normal fee structure?

Thank you.

DullGreyGuy

Whose fees? The planners selling commission or the insurers operating costs?

dunstonh

I have a family member looking to buy an annuity.  We have had some annuity quotes from a Chartered Financial Planner and the fees (2%) are built in to the annuity on a yearly basis (approx £130k pot). I was expecting the advisor fees to be paid separately.

Annuity doesn't have ongoing fees.  Just a fee at the outset.  2% would be a fee deducted from the value before the annuity is bought.  It is not built into the annuity.  It is taken off the value right at the start (or after the 25% TFC taken).  The annuity is the nil commission annuity rate.

If it was a non-advised annuity, then it would not be fee based and the annuity rate would be reduced to pay the initial commission.     An IFA cannot take commission.  So, this would not apply th them.

Broadly speaking, 2% fee on a nil commission annuity rate vs 2% commission on a reduced annuity rate would give a similar outcome as the annuity provider is paying out 2% either way.    Think of it a bit like 4x5 compared to 5x4.

Consumer3

Thanks @dunstonh
I thought they were an IFA, I’ll have to check. I have asked them to explain the fee structure but haven’t heard back yet.

@DullGreyGuy they didn’t say it just says 2% IAC 

dunstonh

I thought they were an IFA, I’ll have to check. I have asked them to explain the fee structure but haven’t heard back yet.

CFPs can either be FAs or IFAs.   However, with annuities, there are only about 6 providers in the marketplace and it as long as they have access to all 6 then that is fine.

it just says 2% IAC 

IAC = Initial adviser charge.

Consumer3

Thanks @dunstonh for the explanation, they said they checked the whole of market and they did the enhanced medical questionnaire. 

I wasn’t sure if my family member should shop around or at least try the pension provider direct for a quote, but the planner said others should get the same rate results - I know these and the pension figures will fluctuate by the time it goes through.

sgx2000

Consumer3 said:

I have a family member looking to buy an annuity.  We have had some annuity quotes from a Chartered Financial Planner and the fees (2%) are built in to the annuity on a yearly basis (approx £130k pot). I was expecting the advisor fees to be paid separately.
Having never done this before, is this a normal fee structure?

Thank you.

Yearly basis?

dunstonh

I wasn’t sure if my family member should shop around or at least try the pension provider direct for a quote, but the planner said others should get the same rate results - I know these and the pension figures will fluctuate by the time it goes through.

In the majority of cases, an IFA will come out with the best outcome unless the initial fee is greedy or the value is low (less than around 30k-40k).  IFAs do the shopping around.

Most providers don't retail direct to consumer.   

There are some internet non-advised intermediaries, but they take commission, and often the commission is greater than the adviser fee and results in a lower annuity rate.
Plus, where there are medical conditions, the providers have frequently said that IFAs usually give better outcomes as the disclosure of medical information is usually more comprehensive.  IFAs will usually go digging for missing information, whereas internet/direct will usually stick with what they are told.

So, they have almost certainly done the right thing.

Consumer3

@sgx2000 yes that’s the bit I’ve asked the advisor to clarify.

FIREDreamer

The commission on my annuity, paid to Hargreaves Lansdown by the annuity company, was 0.79% of the annuity purchase price.

Didn’t think it was too bad.