I buy an annuity with a pot of £ 55,000 – why is my broker getting a commission?

I have three private pension policies with a provider which amount to around £ 55,000.

Recently I contacted the pension provider to let them know that I would like to buy a fixed term (four year) annuity from them, but I was informed that they do not offer a term annuity fixed and that I should therefore transfer my pension to another pension institution and obtain quotes from pension institutions that offer fixed-term pensions.

Through a comparison site, I was provided with the names of three pension providers who offered fixed term annuities.

Shortly after using the site I was contacted by a broker and among the three pension providers I found the best quote for a fixed term annuity.

Around the same time, I also called this supplier directly to request a similar quote, in case I could get a better one by going directly through them rather than the broker.

However, the provider informed me that in order to get a quote for a term annuity directly through them, I had to make an appointment first (I think a phone appointment was suggested) , during which their financial / retirement advisor review my options with me and give me advice.

At the time, I failed to ask the price for this – the mere mention of a financial / retirement advisor set me off alarm bells, due to the perceived cost involved – because at the time, I thought this route might turn out to be more expensive than dealing directly through the broker.

Shortly thereafter, I asked the broker to proceed with my request to transfer my pension from my current provider to the provider I had contacted and to purchase a fixed term annuity (four years) with equal monthly payments ( with a tax rate of 25 percent). flat rate free at the start).

The necessary documents were then sent to me by the broker in the mail, and after reading them I noticed a section (Adviser Charge / Commission) where it was stated that it was not a sale. recommended and that the commission rate was 2.1%. .

I was stunned. This was equivalent to £ 1,155.

What I would like to know is if this is normal / fair / average in terms of commission charged under such circumstances, or should I seek quotes from other organizations in case they charge less commission?

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Steve Webb responds: Your experiences show the importance of reading the “fine print” before purchasing a financial product and also raises an interesting question about why you pay “commissions” when you haven’t received financial advice.

Consider first the process of saving into a pension and using it to buy regular income – an “annuity”.

The first essential point is that even if you have saved with only one company – Company A – you do not have to buy your annuity from Company A.

You have the right to exercise what is called in the jargon your “free market option”.

It just means that you can take your pot and buy an annuity from someone else.

Likewise, if you decide to go for a draw instead, you don’t have to take the offer from Company A. You can – and should – shop around.

I have no doubt that savers continue to lose millions of pounds each year because they stick with the easy option – Company A – rather than see what else is on offer.

In your case, you were buying a rather specialized product – an annuity that did not last your entire life but just for a fixed term of four years.

Your supplier did not offer this product, so you researched and identified a company – Company B – that would offer this product.

You transferred your pension fund to Company B, but then were surprised to find that you would be charged a relatively large commission when you purchased your annuity.

The rules regarding the pension commission have changed in recent years and are now in a rather strange place.

In the past, you could turn to a financial advisor and they often offered you “free” advice.

The advisor could afford to do this because he was going to earn a commission from the pension company.

But the problem with this system was that they might be tempted to choose the company that offered them the best commission, rather than the best pension for you.

As a result, the commission for advisers was banned in 2012 and you now pay directly for financial advice.

This means that if you had consulted a financial advisor for regulated financial advice on your annuity purchase, there would have been no commission, although you would have had to pay the cost of the advice.

Even so, you might have gotten a better deal overall.

What happened in your case is that although you did use an annuity broker – kind of like a high end comparison site – they didn’t really give you any advice.

This means that there is always a “commission” attached to the annuity and that it goes to the annuity broker.

The good news is, you didn’t just sign on the dotted line.

Now that you know how the system works, you can ask the annuity broker to “refund” you a portion of the commission, or you can shop around and see if another annuity broker will offer better terms.

You can also compare this with the rate you would get if you used a financial advisor and paid for advice.

As you will see, it is far from straightforward. Indeed, to make sure I understood what was going on, I consulted with annuity expert Billy Burrows of Better Retirement.

While neither Billy nor I could give you any financial advice, upon hearing the summary of your experience, Billy noted that a four-year fixed annuity option may not be as simple as it sounds and that there may be alternatives that better meet your needs.

Again, this could mean that taking advice has given you better value than just using a broker and paying a commission.

In summary, the worst thing that can be done is probably to save in a pension with Company A and then buy an annuity (or debit product) from Company A without seeing what is on offer. other.

And in the case of annuities, you should also compare the offer you would get if you paid for advice and paid no commission with an unadvised purchase with commission.

And if you go for the latter option, you should shop around again to see if you can recoup some of the commission from your annuity broker.