PIA inquiry into draw-down pensions may reveal mis-selling

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The Independent Online
Financial regulators yesterday completed the first stage of an inquiry into the sale of hundreds of millions of pounds of investment products which may have been mis-sold.

The Personal Investment Authority said it had collected responses from almost all providers of the income draw-down plans, which offer pension savers the chance to draw money from their fund without buying an annuity.

Industry sources expect the inquiry to reveal strong evidence that financial advisers had a massive incentive to sell income draw-down products, which depend for their result on the stock market, rather than an annuity, the safer alternative.

Data from individual life offices disclosed to the regulator shows that advisers could receive up to pounds 5,600 in commission for persuading an investor to put pounds 100,000 in a draw-down product. If the investor had bought an annuity, the commission on pounds 100,000 would have been less than pounds 200.

Joe Palmer, the PIA's chairman, said earlier this year that commission on draw-down products "may give rise to biased advice which we will be investigating further in 1998. The commission on pension income draw-down is considerably higher than that available on annuities."

Data disclosed to the regulator shows that advice on buying an income draw-down policy from a Norwich Union representative costs pounds 10,360 - most of which will come from the investor's savings. Advice on buying an annuity through the same channel is just pounds 259.

Life insurers who provide income draw-down products have become increasingly frustrated that little has been done to protect consumers from over-zealous selling by commission-hungry sales people. The product is thought to be the most complicated investment product ever introduced. With its popularity boosted by rock-bottom annuity rates of less than 7 per cent, more than pounds 800m a year has flowed into the product.

John Moret, who lobbied for the products to be introduced as head of marketing at Winterthur Life, said: "I've become increasingly disappointed at what's happening in draw-down since it was introduced." He added that attempts to persuade regulators to ensure that the advisers selling it were specially qualified had been rebuffed.