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Prudential, one of the UK’s biggest insurance companies, is under fire for including quotes for complex and risky pension products in packs sent to customers six weeks before they retire.
Prudential encloses quotes for its “Income Choice” with-profits annuities alongside conventional annuity quotes in retirement packs sent to customers who had built their pension pot with the Pru.
In leaflets included in the pack, Pru savers considering their income options are told that ordinary annuities “don’t offer as good value as they did in the past” with Income Choice offering income growth potential to reduce the impact of inflation.
Since the Income Choice product was launched in 2009, annuity rates for conventional annuities, which typically pay a level income, have dropped to historic lows.
While offering an alternative for those seeking better income than that offered by a conventional annuity, advisers say that with-profits annuities carry more risk.
“A with-profits annuity is a complex product with the potential for income to fall,” said Phillip Bray of Investment Sense, the independent financial adviser.
“As it involves significantly more risk than a standard annuity, the pros and cons should therefore be considered and I believe it isn’t suitable to be bought on a non-advised basis.”
In a with-profits annuity, future income levels are linked to a with-profits fund. Returns from the fund, in the form of bonuses, are subject to a “smoothing” process, where profits are held back in years of good investment returns for redistribution in years when markets are weaker.
Customers can choose their starting pension income with these investment-linked annuities, which also guarantee that income will not fall below a set level.
But customers must rely on declared bonuses matching an “anticipated bonus rate” (ABR), typically 0-5 per cent, which they have selected. If the declared bonus rate is lower than the ABR, income will fall. Customers choosing a higher starting income will need higher declared bonuses to keep their income rising.
“A higher starting income can look more appealing when a quote is compared against a conventional annuity,” said Billy Burrows, director with the Better Retirement Group.
“If customers are choosing Income Choice purely on the basis of the higher income, then there is a danger they may not know what they are signing up for because the income may be less in the future.”
The Pru said this week that it did not automatically include Income Choice quotes in all retirement packs, and added that it “works very hard” to ensure customers have access to the right information and to select the annuity that is right for them. Its marketing leaflets included information about the product risks.
“Financial advice is important for those who feel they need it with such a vital decision,” said the Pru.
“Equally important, though, is the clear information provided in our six-month and six-week packs and the telephone support that we provide for customers in the run-up to their retirement. We prioritise making this process as clear as possible for customers.”
The Pru said it ”definitely did not” place with-profits quotes more prominently than conventional annuity quotes in its packs, as claimed by some advisers this week. It said it wasn’t company practice to include the quotes to independent financial advisers when they had not been requested. Pru was asked to disclose figures for unadvised sales of its with-profits annuities, but did not supply this information.
Pru is considered to have one of the strongest with-profits funds, but its policy contrasts with competitors, including Aviva and LV=, which say they do not automatically include a with-profits quote in retirement packs.
There have also been calls for the regulator to reconsider the sales regime for investment-linked annuities.
Currently, buying direct from an insurer – or execution-only – means that the consumer has weaker protections than if they were to have bought through an adviser. For example, buyers do not have recourse to the Financial Ombudsman Service to complain about the sale if they later decide the product is unsuitable.
“Some insurance companies won’t sell investment-linked annuities direct to customers, but only through intermediaries, because the products are higher-risk,” says Alan Higham, chief executive of Annuity Direct, the chartered financial planners.
“I have raised this issue with the Financial Conduct Authority as I believe these policies can rarely be sold safely without advice. It is not enough to have a health warning in a 20-page information pack that a customer may or may not understand.”