A war of words has broken out between pensions experts and life companies over annuity products launched in the wake of the Budget announcement, following a call from industry expert Ros Altmann for “defective” one-year products to be banned.
Two providers, Just Retirement and LV, which have both recently launched 1-year annuities ahead of a planned pension liberalisation next year, have hit back at criticism of the products and claims of a commission grab and poor returns.
The one-year products launched by the firms offer retirees to take their tax-free cash and a level income for one year, after which they should have the opportunity to cash out their pension under new rules under consultation.
Providers claim clients who may consider the one-year option include those who cannot stay in their current pension scheme, or those who need to take an income now but want the security of knowing what their remaining fund value will be worth in a year
However, Ms Altmann said one-year annuities are not in customers’ best interest as they pay a “very poor rate” of around 0.5 per cent interest for the year. She also claimed they are often sold on a ‘non-advised’ basis, with those selling the products receiving around 2 per cent commission.
She called on the Financial Conduct Authority to be “vigilant and intervene early”, branding the new products as “defective”.
She said: “Someone with a pension fund of £100,000 would take £25,000 tax-free cash and then £75,000 goes into the one-year annuity. This is actually an income drawdown fund that earns only around 0.5 per cent interest for the year - a very poor rate.”
Steve Lowe, director at enhanced annuity provider Just Retirement, disputed the claims and said his firm only sells the product through advisers and does not pay commission.
He added that the product gives a valuable option to some savers, particularly those “who choose to take their tax-free cash from their existing provider, who then do not have any option but to move their funds into another pension contract”.
Vanessa Owen, LV=’s head of annuities and equity release, said: “We launched our one-year fixed term annuity in the wake of the budget announcement to give advisers and their clients breathing space whilst the new regime comes into place.
“This product is designed to help retirees access their tax-free cash and income now and defer making a long-term decision about their pension income until the new rules come into effect next year. In this way clients don’t limit their future options.
“We would always encourage people to seek independent financial advice in order to ensure they get the most out of their pension fund.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, said that while he is not “widely enthusiastic” about these products, they are “not toxic” and there is “no need for regulatory intervention”.
He said he agrees with Ms Altmann that they do not offer a “fantastic return” but added one-year annuities allow customers “to tread water for a year”.
Mr McPhail said: “It’s irrelevant that they can be sold without advice and people have a number of options - they can take the tax-free cash although some providers’ systems cannot allow this, go into drawdown etc.
“A one-year annuity will provide one year’s income. It’s not glamourous but it allows people to tread water.”
Ms Altmann said that under new rules extending the timeframe in which a crystallised fund must be converted into an income, customers can now take their tax free cash and leave the rest of their fund alone.
She claimed some providers’ systems cannot pay out tax-free cash unless the customer moves the rest of their money into another product and that these one-year annuities therefore merely “help pension companies overcome their own technological shortcomings while offering no benefit to the customer”.
She added: “Surely it is time for customers’ interests to be properly safeguarded. The regulator has a duty to act quickly to prevent significant detriment from new products that fail to deliver value.”
Mr Lowe said: “Just Retirement will only allows people to go into a one-year annuity if they have been advised. We do not pay any commission.
“The decision about whether this is the right type of product is the decision for the financial adviser when considering other options in the market.
“There are some customers who choose to take their tax-free cash from their existing provider, who then do not have any option but to move their funds into another pension contract. That’s why the one year fixed term annuity has been launched - to give people an option.”
