- It is worth starting by pointing out that annuity purchase critical yields are not a regulatory requirement.
- The FCA regulations that cover illustration production have even gone to the effort of making it clear that the FCA does not require critical yields. In 2016, in the FCA Policy Statement PS16/12, Pension reforms – feedback on CP15/30 and final rules and guidance, it states at the bottom of page 21 “Critical Yield requirements were laid out in Regulatory Update 55 (RU55), issued by the Personal Investment Authority (PIA) in August 1998. However, the FSA did not adopt the rules or guidance laid down by the PIA. It was confirmed in Handbook Notice 108 (para 4.37) that there is no requirement to provide critical yield information to consumers”.
- The guidance in RU55 was written at a time when there was compulsory annuitisation of a drawdown account at age 75. As such, it had a genuine value to the client who was, effectively, deferring annuity purchase with a drawdown account. Since April 2015, it is no longer a requirement for a client to purchase an annuity. They can continue in drawdown for the rest of their life.
- There are other occasions when critical yields will not be relevant to an individual. For example, where decisions are being driven by the need for flexibility or other factors such as death benefits, comparing a drawdown pension income stream with a conventional annuity may not always be the major comparison to be made.
- As companies may use different assumptions, critical yields produced by different providers should not be used as a basis for making product comparisons – critical yields may be helpful in explaining the costs and risks to customers but their use should not extend beyond this point.