FTAdviser.com

Advertising

Is planning for retirement a bit like a popularity contest, where placing your pension is a matter of who dares wins?

Understanding which path will work harder for your money and where to take your pension pot in order to live comfortably, still remains to be something of a conundrum. Or is it?

For those who have a money purchase pension scheme, the answer is simple, in that the cash saved can buy an annuity.

This unlocks the money that is saved, where the return is dependent on age, sex and medical history – and of course the current annuity rate.

However, in the past decade, the rates have virtually halved, leaving retirees confused and this type of pension route as unpopular and perhaps out of touch.

However, Philip Brown, head of retirement and care product development for London-based Partnership, believes that this has never been the case.

He said: "It is a fairly simple concept and consumers do need those guarantees. For that reason, they need to know how they are going to get paid and who is going to pay them.

"Annuities will never really fall out of vogue and I do not believe that they have ever been unpopular, but I think there are certain parts of the industry that like to portray annuities as unfavoured."

He explained the remedy for this and added: "We need to distinguish between those customers that have huge funds, that don’t want to buy annuities and everybody else.

"Also there are two reasons why people have not taken out annuities. For people with small funds, they struggle to get advice, so if you have an average annuity pot, it’s difficult to go and get full financial advice, and that is very difficult for people.

"The other barrier is not knowing that the Open Market Option exists, and how best to research annuity products. The FSA comparative tables aids this, but has some limitations, as they was never designed to deal with post code annuities and enhanced annuities.

"From a regulatory standpoint, the OMO is a critical part of retirement planning. People should be using this and my view is that it should be the default option for every pension. You should be told to take your money to the open market."

Mr Brown pointed out that annuities are a long-term investment with an intrinsic link back into the investment market.

He added that it is worth retirees considering different product annuity types, as there is always a place to underpin investments with guarantees.

He said: "There is a positive future for annuities and there will always be a place for absolute guarantees.

"It is worth considering other products, for example, third way products, as they have a place within pensions. But whether they have a place for every single consumer is another question."

Mr Brown stressed that before pension choices are made, rules need to be set.

He said: "We should be told that a pension – at the stage of buying it – is that it is a two-stage transaction. What you are buying today is a product that you are buying into for the future. But you need to make a completely different set of decisions in the future than you will today.

"It is a packaged product and it needs to be explicitly clear that stage one is different to stage two."

He added: "This also includes the Treasury and FSA both understanding and addressing the consequence of OMO, in a world where regulation is not rules-based any more, it is principles-based.

"This is one aspect where there needs to be rules. When approaching retirement, I believe it is right to take your money out to open market, and hope the Personal Accounts Delivery Authority will have some influence in the default way to getting retirement income in 2012."

Mr Brown considered the way annuities should have been handled and said: "OMO has existed since the Finance Act 1978, so that means we have had 31 years to do something about this. However, as an industry we have whole-heartedly failed. Whether through choice or industry apathy, we have made a mess of this."

For Nigel Barlow, head of technical services not Surrey-based Just Retirement, not only believed the sector needed to address the sheer amount of retirees, but also the differing needs and outlooks of consumers in retirement.

He said: "This is a huge market, and there is more than 1m people who are retired, with numbers set to increase. It is like a tidal wave of people coming into retirement.

"Considering this, it can be quite dangerous to view them all as one type of person, they are all from different backgrounds, where some will retire at 50 and others will wait until they are 75.

"But annuities have a big part to play in retirement. They provide people with a guaranteed income, for life, however long that might be.

"Life expectancy is increasing, and that level of uncertainty is very difficult to insure against with anything other than annuity."

Mr Barlow pointed out that with the growing number of people in retirement; he believed the proportion of people taking unsecured pensions, income drawdown and third way-type products will increase.

But to fully achieve this he believes that something has to be done about consumer education.

He added: "In absolute numbers, is that all markets will increase, including annuities.

But it is a difficult task, in making the options as simple and as straight forward as possible. Some advisers will help crystallise their attitude towards the way they deal with this."

Taking on a different tack, Craig Fazzini-Jones, director and head of Worthing-based MGM Advantage Designs for Retirement, thought the market as a whole has to develop further, in order for annuities to survive.

He said: "One thing that will not go away is that people are living longer. There is a market for a product that balances the fact there is an element of risk in going outside of conventional annuity, and potential to grow in income.

"There are two key factors that influence annuity rates, which are the underlying investments to provide income, and the assumed life expectancy of people.

"To address this, there needs to be further developments in the market, where products need to maximise customer’s income.

"Also, in considering new products, it is about looking into this target market, where the vast majority of people have a pension fund which is quite small, about £30,000. So for these people, they typically would not be about to take a risk."

Mr Fazzini-Jones believes that OMO is one way of curtailing a potential stunt in annuity popularity growth.

He explained: "Consumers have choices in the OMO. But it is down to the simple fact is that many have tended to go with the option that is given to them.

"With annuities, they do offer a guaranteed income which still rests on the investment returns of which the customer chooses. With the take up of the OMO, the consumer has the option to go out and get the best possible annuity rate.

"The vast majority of people are choosing a conventional or enhanced annuity. At the same time, while there has been pressure on annuity rates, typically in today's market, you can get a single life level at 7 per cent as a guaranteed rate, in the current conditions is pretty attractive."

So annuities certainly seem to be taking pride of place in the pensions world, but whether its popularity – or lack of it – takes on a different form, still remains to be seen.

What does strike a chord is that the OMO is one area that needs to be pinpointed in order for annuities to continue to thrive, and together with the advancement of new products, this heads up annuities as another added ingredient in the never-ending pensions melee.

Girlie Garduce is senior features writer of Financial Adviser