Online tool that finds best annuity quotes under fire from pensions industry for hefty commission charges

A ground-breaking gadget which automatically trawls insurers for the best annuity deals has been slammed by pensions commentators for the hefty commission it charges if users go on to take products.

The 'free to use' online tool, launched last week by Hargreaves Lansdown to help retirees wring the most out of their pension contributions, has now come under fire after it was found that products sold through the site trigger typical commissions of 3 per cent that are taken from the retirees pot, rising to 3.5 per cent in some cases.

Despite sales made through the tool involving no financial advice, the charge is higher than some advisers would charge for a one-to-one service, and Hargreaves has admitted that the charge is only slightly below what it charges people to buy an annuity through one of its own financial advisers.

Online help, but at a cost: The tool asks you to enter information such as smoking and drinking habits, before it scans each major pension provider for a personalised quote

It said that an enhanced annuity - where returns are higher because of an individual's health - sold through the comparison tool would carry a commission of £1,500, while a customer would pay £1,750 to buy through one of its advisers.

The advised sale would also include 'suitability advice, market search and administration execution' for that fee.

The cost of sales on standard annuities follow a similar pattern.

The online assesses personal information such as medical conditions and lifestyle habits to see whether a person could qualify for a more lucrative enhanced annuity, but respected pensions expert Ros Altmann said this is no replacement for speaking directly to a qualified adviser.

She said: 'I'm not trying to say that what Hargreaves Lansdown is doing is not going to improve outcomes for many customers, but what people really need is individual advice and this does not give it to them, so they are paying a lot of money and still not getting what they need.

'Post-RDR, many people may understandably be put off by the up-front fees quoted them by specialist advisers, so if you have a £30,000 pot if could be that they charge you £1,000 up front.

'But this online service could charge up to £1,050 for the same size of pot but would provide no individual advice.'

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The cost of advice has been thrown into sharp focus in recent years and prompted the Retail Distribution Review (RDR) reforms which came into force in January. The changes mean financial advisers have to disclose fees up front and are banned from taking commission without consent.

But commission can still be charged on 'non-advised' sales, although the Financial Conduct Authority (formerly the FSA) has said it would be investigating this industry post-RDR.

The Hargreaves online tool compares prices for both standard and enhanced annuities from providers including Just Retirement, Partnership, LV, Aviva and MGM.

Hargreaves said the commission charged for products sold through its online resource for a standard annuity is around 1.7 per cent, while for an enhanced annuity it is 3 per cent, though the maximum is 3.5 per cent (or £3,500 from a £100,000 pot).

 

The financial services giant said the resource fills a gap in the market which has seen hundreds of thousands of pensioners lose out on extra retirement income by not shopping around for the best deal.

Hargreaves' head of advice Danny Cox said the tool could be useful for those with pension pots of less than £50,000, who financial advisers are now less likely to take on as customers since RDR was brought in.

The company said there was nothing to stop users searching for the best rates with the tool before approaching providers directly themselves to dodge the commission.

However, the tool provides guaranteed annuity offers, Hargreaves said, whereas other quotes may only be indicative, with the final offer made once an application has been submitted generally lower.

Tom McPhail, head of pensions advice at the firm, said: 'They are free to do that - I think that's a message that's got a bit lost. It is indeed free-to-use and we only get paid if we are offering the most competitive rate and people choose to use our service.

The choice is yours: Tom McPhail said people are free to use the search engine and go elsewhere to buy an annuity.

'Over half the annuity market is not currently using the Open Market Option. If any of these people use our annuity service, then it means they are getting a higher retirement income; our interests are aligned with the investor and we only make money where we can increase their income.

'48 per cent of our clients get an enhanced annuity...across the non-advised market as a whole, just 4 per cent get any kind of enhanced annuity.'

Why the controversy?

The tool was welcomed when it was launched last week and is a useful addition to the arsenal for those looking for the best retirement income.

The concerns around it come from the relatively high charge for an online service, when compared to what savers would be charged for financial advice.

Billy Burrows, of the Better Retirement Group, which powers This is Money's annuity comparison service, reckons his firm's advisers would charge around 2.5 per cent for one-to-one advice to someone with £100,000 pension pot, while Alan Higham of retirement income specialists Annuity Direct says typical fees for a specialist adviser would be around 3 per cent.

Mr Burrows said: 'How can they (Hargreaves) justify taking up to £3,500 for a very limited service?

'Everyone needs advice when they retire because there are so many different options.'

Ros Altmann said that buying an annuity is not just about getting the best deal but getting the right deal, so for example a married man ends up buying a single-life policy instead of a joint life policy.

This was echoed by Alan Higham, who said: 'People don't buy washing machines in this way (online), they go down to the store to push the buttons and check it's not a tumble dryer.

'Selling services exposes customers to a lot of dangers this way, for example there may be small print in their existing pension which they have overlooked that would entitle them to better income.

'Charging 3.5 per cent commission just for having a website is quite a lot of money. It's profiteering at the expense of mistakes customers make.'