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Understanding the new annuity rules

27 February 2018

The new rules around annuity purchase should make shopping around easier. Dave Miller, executive general Manager (Commercial), IRESS, explains how the company has made the process as simple as possible for advisory firms via IRESS The Exchange.

New rules requiring the best open market rates to be provided alongside provider annuity quotes seem straightforward, on the face of it.

There is a certain amount of devil in the detail, however, with advisers among those needing to understand the implications of the legislation.

The changes are set out in policy statement PS17/12, which took effect on 1 March and means that when guaranteed annuity quotes are provided to customers, a comparison with the best rate in the market must also be given.

The overhaul emerged from the Retirement Outcomes Review published by the FCA last summer, which underlined the low instance of people shopping around on the open market when it comes to buying an annuity. The FCA’s research found that presenting information in a particular format was most likely to have an impact on shopping around, so new guaranteed annuity illustrations must now include one of three templates set out by the regulator.

These templates either show that the annuity quote is the best available, that a better deal could be secured by shopping around, or that a comparison could not be made because the client hadn’t consented to the use of their data for that purpose.

Where relevant, the information given to clients considering annuity purchase now includes a clear graph showing the comparison between a provider’s own rate and the best rate in the market.

Clients must also be given details such as whether the annuity is joint or single; whether the income is linked to inflation or another specified rate; the income is paid in advance or in arrears of the start date; notification that an enhanced annuity may further increase income; and details of how to shop around.

Implementing the new processes

IRESS offers an annuity service with real-time connections to all the open market annuity providers, support ingthe market in sourcing the best rates in a way that meets their needs.

We have developed a flexible range of solutions to suit different customers, whether they’re providers, outsourcers or advice firms.

Some will want annuity rates in real time and some want to operate a more manual approach, and we can support both of these. Whatever the requirements, we have sought to make it as easy as possible for advisers and providers to present the new information with the guaranteed quotes they generate for clients.

Our solutions range from a data-only service – where firms simply obtain whole of market annuity rates on the basis prescribed by the legislation – to a more comprehensive solution where we conduct a whole of market annuity comparison and produce the full documents.

Adviser firms will automatically be provided with the documents alongside the ones that they currently access. This means they don’t have to do anything further other than present their client with an additional page alongside the illustration that they currently give them. However, if they want to create their own process they can discard the provider’s document and produce a tailored version.

Here’s an example of the process that advisers might follow:

1. You log on and produce an annuity comparison.

2. From the list of results, you choose the best rate.

3. You answer some new PS17/12 specific questions and request the illustration.

4. The illustration is returned as it was previously, as well as the new PS17/12 template document (using the new information), either as part of the same document or as a new additional document

Adviser firms will need to ensure that if a whole of market comparison is required, they have secured confirmation from the client that they consent to their personal data being used for it to be generated.

There will doubtless be some advisers who don’t engage significantly with annuities in the post-freedoms environment. Yet they remain a core component of the retirement income suite and some 80,000 people still buy annuities every year. Research on the requirements of people approaching or at retirement invariably find that a guaranteed income remains at or near the top of the wish list.

The new rules, and the solutions available to help firms comply with them, offer advisers an opportunity to provide a valuable service to those customers while also further enhancing client relationships.

Professional Paraplanner