OpinionApr 22 2014

Industry should be wary of axing annuities golden goose

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
comment-speech

Talk to people in the retirement market and they will say the annuity sector has effectively ground to a halt.

Those near retirement are using the opportunity to consider their options with a consequent strain falling on some providers and annuity specialist intermediaries.

So should this concern investment advisers? They are likely to be benefiting significantly from much higher demand for advice – and that is surely the case, no matter what system of retirement guidance is devised.

Actually, it is very much in the interests of any holistic adviser that the annuity option remain a credible and viable one. Increasing numbers may choose to stay invested for longer; they may phase retirement; or they may choose a sort of ‘cocktail’, including drawdown, a scheme pension and some type of annuity.

However, in order for advisers and clients to have maximum flexibility, we need a viable annuity market. Certainly for older retirees, the best advice may be to annuitise.

The final reason, perhaps, for a need to reinvent annuities is because they will still be needed in the non-advised market

And as those who stay invested get older, they are also much more likely to qualify for, and desire, an enhanced annuity.

This also requires a healthy market. That is why advisers should be concerned about the current business squeeze, which could see some specialists knocked out of the market or perhaps having to merge, which also reduces choice.

While big insurers are often seen as villains of the piece, they may still have an important role to play.

The final reason, perhaps, for a need to reinvent annuities is because they will still be needed in the non-advised market.

We have watched the execution-only segment grow, certainly according to the latest Apfa research. But there are also some warning signs about liberalisation. The Pensions Advisory Service says it has been contacted by consumers warning about fraudsters who have been cold-calling, posing as government pension reviewers talking about the Budget changes and trying to elicit financial information.

There is also the fact that many people may embark on what you might call mini drawdown. Provider minimums may be down to £25,000, but a lot of investment advisers may not see either a business or a compliance rationale to bring down their minimums.

That could leave a lot of people who could easily have arranged their own annuity or may have been helped to do so by a financial adviser, now embarking on managing their own post-retirement portfolio – £20m of government money and even a provider levy probably won’t provide adequate ‘guidance’ to help manage an ongoing portfolio.

It is likely that, eventually, this group will want something surer than the stockmarket. The wrong people using mini-drawdown may rate as badly as people taking a poor lifetime annuity offer.

Don’t get me wrong – the reform is brilliant news for investment advisers. Many people will rightly stay invested longer, taking advantage of the greater flexibility on offer.

But it is also in everyone’s interests to have decent annuities on offer for when being fully invested, or even partially invested, stop being the optimal solutions. If the current annuity market has effectively been broken up, it is in everyone’s interests for it to be reinvented.

John Lappin blogs on industry issues at www.themoneydebate.co.uk