Last month saw a good deal of hand wringing amongst the industry bodies and the media about the poor state of advice associated with annuity purchasing.
23rd April 2013
This is becoming a more significant issue as more of us are retiring each year: 2012 saw a record number of baby boomers reaching the statutory retirement age of 65 - 726,069 in England and Wales alone (Source: ONS). At least 400,000 of these retirees will go on to buy annuities. Yet according to a recent report from the National Association of Pension Funds (NAPF) and Pensions Institute called ‘Treating DC scheme holders fairly in retirement?’ 1, most will not receive sound financial advice before they do so.
As a consequence, many will lose out in retirement to the tune of thousands of pounds a year. Collectively 2012’s retirees may lose as much as £1bn from their total future pensions income, simply because they are not being offered sound financial advice around annuity purchase and are not shopping around to buy an annuity.
The problem in essence is that most DC pension pots are relatively small, sub £50,000 in value. At this level advisers are not able to charge appropriately for their time to advise retirees. The other major problem is lack of education – many people still don’t even know they can shop around for the best deal. Finally, checks and balances throughout the at-retirement process are simply not in place to prevent consumer detriment, the NAPF report notes.
Now that compulsory Adviser Charging has arrived with RDR and Auto-Enrolment is being phased in over the next few years, the problem is set to compound itself. Up to eight million low to median earning new pension holders, all with relatively small pension pots and all who have not been actively involved in decision-making around their pension contributions, will be ‘confronted with complex choices that they do not have the skill, experience, or inclination to make.
Do they take a fixed or an inflation linked annuity? Do they buy an annuity now or wait and draw an income from the fund? How long should they wait? And how do they know if they can secure an enhanced annuity that delivers a fair rate in relation to their health conditions and lifestyle issues?’
What are the answers to this problem which is only going to get worse if not addressed? The report has many solid ideas. Key amongst them are:
- Clarifying what the Open Market Option (OMO) truly is and then making it a true default at-retirement
- Defining and benchmarking enhanced annuities
- Improving transparency around commission-based charging and clarifying whether an enhanced annuity includes full medical underwriting or ‘underwriting-light’ which can mean scheme members missing out on by as much as 20% of annuity income
- Automatic transfer from provider to adviser at-retirement with an obligation of the assigned adviser to act
- Setting up a national whole of market annuity brokerage service to combat lack of advice being offered to smaller pot holders
The Association of British Insurers (ABI) Code of Conduct on Retirement Choices 2, launched in March, introduces new safeguards to help annuity buyers gain a better understanding of their options at retirement. As part of the industry’s commitment to greater pension transparency, the ABI will publish specimen annuity rates across a range of different products offered by members as early as this summer. But the NAPF report says the ABI Code to protect consumers at-retirement does not go nearly far enough.
There is clearly a great deal of work to do to ensure more consumers that are entitled to better annuities gain access to them. Tighter regulation aside, increased automation and the introduction of better tools for charges disclosure and annuity product comparison will inevitably prove critical to the modernisation of the UK annuity market as it continues to gain in value and importance.
Dunstan Thomas has developed and is powering the Spire Financial annuity portal which was recently launched via the Nucleus platform initially. Dunstan Thomas has helped design an electronic process to fit the adviser and platform client user. The Spire service has been designed to save advisers time and provide the best possible annuity rate to their clients. Natanje Holt is managing director of Dunstan Thomas.
2 ABI Code of Conduct on Retirement Choices (pdf 1.7MB)