Do you need an IFA to purchase an annuity?

dunstonh

Dunstonh -  Ive mainly just been using Moneyhelper as a guide for Annuity rates.  When you mention 'Commission' , who is that payable too ? 

If you use a non-advised process, then whoever sells you the annuity will collect a commission for doing so.  The annuity rate is reduced to reflect the commission taken.   i.e. £100k fund with no deduction multiplied by the annuity rate reduced to cover the commission paid.

IFAs cannot be paid commission.  They are paid a fee. So, there is no reduction in the annuity rate to factor in commission as fees have to be paid explicitly.     So, a fee would lower the fund value (unless paid directly externally - which you wouldn't normally do).    i.e. £100k fund with a £1500 fee would means £100k minus £1500 = £98,500 multiplied by the nil commission annuity rate.

I did an execution-only case recently where we agreed on a fixed fee.  I am able to use commission or fee on that basis, and I found that the fee method (fund value minus fee x nil commission annuity rate) gave a higher outcome than taking the same amount as commission (fund not reduced, but annuity rate was).   Not a great deal in it as it was the same amount of remuneration with both methods but a useful exercise.     

However, just as some IFAs can be greedy and others good value, some of the online DIY annuity sites can be greedy or good value too.   An annuity taking £5000 commission vs an IFA taking £1500 fee should see the IFA come in better.

Also, if I contact an IFA, will they provide me with some Annuity rates , with their Fee if I go ahead, or will they tend to charge some sort of fee regardless to cover their time spent.  

Some will, some will not.    You are probably better off finding out what their fee is first and then compare that to the online sites commission.    If the IFA fee is lower than the online site commission, then you would expect the IFA to come in with the better outcome.  You wouldn't be wasting yours or their time then.

Secret2ndAccount

When I bought my annuity with 100k, the broker received £800 commission. So effectively, I bought it with £99,200.  The second quote would have paid the broker £3400 commission. So effectively buying the annuity with £96,600. The broker offered to reduce his commission to £800 and pay the extra back into the annuity, but the monthly income still worked out to be a tick less, so we went with the first one. Quite a surprising difference across two very similar annuities, but the numbers are all there, clear to see in the quotes.

Bostonerimus1

Annuities can be complicated, once you have signed the contract you can't go back and they will be one of the largest purchases you ever make. So for some people advice from an IFA when buying one might be very useful. If a broker turns out to be less expensive than using an IFA then a more knowledgeable consumer might get a better overall deal after the fees/commissions and annuity rate are considered.

Of course the least expensive approach would eliminate all the middle-people and the annuity buyer would buy directly from the insurance company, but I can imagine lots of scope for mis-selling. FYI in the US it is possible to buy an annuity directly from an insurance company and the fees are rolled into the actuarial calculations and the rate offered. I have a quote for a flat lifetime annuity with a 10 year guarantee for a payout rate of 9.8% which amazes me.

QrizB

Bostonerimus1 said:

I have a quote for a flat lifetime annuity with a 10 year guarantee for a payout rate of 9.8% which amazes me.

When reading this we need to remember that life expectancies in the US are lower than in the UK by 2-3 years, which makes annuity rates higher over there.

dunstonh

Of course the least expensive approach would eliminate all the middle-people and the annuity buyer would buy directly from the insurance company, but I can imagine lots of scope for mis-selling.

That isn't the least expensive.  Indeed, for the handful that do it, it is often the most expensive.

Annuity providers hold manufacturing permissions with the FCA.   If they want to do distribution, then they need to hold distribution permission and have all the regulatory requirements for that.    So, that often means an in-house team doing it which has to be profitable in its own right.   So, that usually means a commission rate higher than the intermediaries (advised fee or non-advised commission)

FYI in the US it is possible to buy an annuity directly from an insurance company and the fees are rolled into the actuarial calculations and the rate offered.

That is what happens in the UK with non-advised annuities.     i.e. the cost of distribution results in a lower annuity rate.

zagfles

Secret2ndAccount said:

When I bought my annuity with 100k, the broker received £800 commission. So effectively, I bought it with £99,200.  The second quote would have paid the broker £3400 commission. So effectively buying the annuity with £96,600. The broker offered to reduce his commission to £800 and pay the extra back into the annuity, but the monthly income still worked out to be a tick less, so we went with the first one. Quite a surprising difference across two very similar annuities, but the numbers are all there, clear to see in the quotes.

Just goes to show you can negotiate with brokers to get their commission substantially reduced, probably far below what an IFA would charge you. £800 commission on a £100k annuity is a good result. 

Lowtrawler

Secret2ndAccount said:

When I bought my annuity with 100k, the broker received £800 commission. So effectively, I bought it with £99,200.  The second quote would have paid the broker £3400 commission. So effectively buying the annuity with £96,600. The broker offered to reduce his commission to £800 and pay the extra back into the annuity, but the monthly income still worked out to be a tick less, so we went with the first one. Quite a surprising difference across two very similar annuities, but the numbers are all there, clear to see in the quotes.

What quotation service did you use that revealed the commissions, or did you have to approach the brokers direct?

Secret2ndAccount

If you use the Hargreaves Lansdown search, you can ask for quotes for any results in the table. No interaction with a human is required. I believe any quote is required to show the commission payments.
Remember, it's the amount of the income payment that matters in the end.

Bostonerimus1

QrizB said:

Bostonerimus1 said:

I have a quote for a flat lifetime annuity with a 10 year guarantee for a payout rate of 9.8% which amazes me.

When reading this we need to remember that life expectancies in the US are lower than in the UK by 2-3 years, which makes annuity rates higher over there.

Good point, the payout rate will be due to a number of factors including life expectancy, administrative costs, joint or single life, age when annuity starts, guarantee period etc etc. This is the complexity of the annuity.

Bostonerimus1

dunstonh said:

Of course the least expensive approach would eliminate all the middle-people and the annuity buyer would buy directly from the insurance company, but I can imagine lots of scope for mis-selling.

That isn't the least expensive.  Indeed, for the handful that do it, it is often the most expensive.

Annuity providers hold manufacturing permissions with the FCA.   If they want to do distribution, then they need to hold distribution permission and have all the regulatory requirements for that.    So, that often means an in-house team doing it which has to be profitable in its own right.   So, that usually means a commission rate higher than the intermediaries (advised fee or non-advised commission)

FYI in the US it is possible to buy an annuity directly from an insurance company and the fees are rolled into the actuarial calculations and the rate offered.

That is what happens in the UK with non-advised annuities.     i.e. the cost of distribution results in a lower annuity rate.

Adding intermediaries to reduce costs seems strange and smalls of an arcane system of vested interests, but that's just me being cynical. It may well satisfy regulatory requirements and provide some safe guards, but the costs are borne by the customer. Annuities are complicated and, as with other insurance products, they offer an excellent way to charge fees and I have no way to understand if the fees are value for money...and I think that would go for most customers. So you just have to compare payout rates making sure that all the parameters are the same. It would be interesting to compare the payout rates for identical annuities in various countries adjusting for life expectancy. By the way my 9.8% quote is about 2% above the US market rate as it includes a loyalty bonus.