Pension firms' kickbacks from unadvised annuity sales

Pension savers are being pushed towards potentially unsuitable annuity offers by providers who take commission for referrals, but do little to check whether their clients get the best deal.

Many of the country's largest pension companies are in tie-ups that involve commission kickbacks when customers are passed to the annuity provider.

Such arrangements continue despite insurers restating their commitment to encourage more savers to shop around for the best annuity rate. "Shopping around" rates at some of the companies involved are far lower than the industry average.

When approaching retirement, pension savers are typically sent a quote from their savings company for an annuity, which turns the pension pot into an income. However, many pension companies don't offer annuities as they are not competitive or they are closed to new business.

But instead of simply encouraging retiring customers to seek financial advice for the most suitable option - which may include an alternative to annuities, such as drawdown - or to shop around, they also promote annuity quotes from organisations. These carry no guarantee of being the market's best, or the most suitable for the customer.

Zurich, one of the world's largest insurance groups, receives a 3.5 per cent commission payment from Legal & General each time a Zurich savings customer takes up a quote with L&G.

Prudential, another household name, is in a similar tie-up with Royal London. Equitable Life points its customers to Canada Life, although there is no commercial agreement with this deal.

In one case seen by FT Money, a Zurich customer with a £50,000 pension pot was told that a commission of £1,700 would be paid from L&G to Zurich, with the "pension annuity quoted takes into account the commission we (L&G) pay".

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It added: "We always promote the open market option to customers, and have done for many years. As we do not actively compete in the annuity market, and recognise that not all customers will make use of the open market option, we have contracted with Legal & General, one of the most competitive annuity providers."

L&G, which has similar tie-ups with other providers including Sun Life and Axa Wealth, pointed out that the commission was not deducted from the client's fund, and the whole fund was used to buy an annuity.

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"These customers are getting very competitive rates and are the same as we offer on the open market for non-advised sales," said Tim Gosden from L&G.

Royal London said the commission from Prudential was fed back into its customers' pension pots so they effectively got a boosted rate with the Pru. But neither company would disclose the level of commission or enhancement.

However, unlike L&G and Canada Life, Prudential, which takes a "prudent" approach to pricing, is not always competitive for standard annuities on the open market - meaning their customers are more at risk of getting a poorer deal on their retirement income.

On an average pot size of £30,000 for a 65-year-old, L&G this week offered a market-leading rate of £1,797 for a standard annuity, while Prudential offered £1,489, or 17 per cent less, according to Annuity Direct, an annuity adviser.

However, for a smaller pot of £10,000, L&G was less competitive and ranked third on the table with £542, while Prudential quoted £483, both 3 per cent and 13 per cent, respectively, behind the top rate of £557.

However, for a smaller pot of £10,000, L&G was less competitive and ranked third on the table with £542 while Prudential quoted £483.

The companies involved stressed that they keep tabs on the competitiveness of their annuity partners and strongly encourage their customers to shop around.

But Royal London told the FT this week that of the 900 policyholders retiring each month, about 70 per cent are opting for a Pru annuity, with just 30 per cent opting for another provider.

"Of course we do encourage people to shop around for a better deal," said Gareth Evans, spokesman for Royal London. "It's unfortunate that two-thirds, in our experience, aren't doing that."

Campaigners for reform of the annuity market said customers were at risk of getting a poor or inappropriate deal.

"Annuity rates can change from hour to hour. Who is there to check they are getting the best rate, or whether they might qualify for an enhanced annuity due to poor health, or, indeed even whether buying an annuity is the right thing to do?," said Ros Altmann, a independent pensions expert.

"Companies which don't offer their own annuities should simply encourage their customers get financial advice about the best option for them, and that might not be an annuity."

< > Advisers, who must now charge customers upfront fees, argued that commissions for non-advised sales were hard to justify. "I have never charged a client 3.5 per cent fee for advice on £50,000 fund," said Jeremy Phelps, a financial planner with Financial Solutions of Wales. "What are they getting for that commission?

The Association of British Insurers said that insurers must tell customers approaching retirement to shop around for the right annuity deal for their own circumstances.

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