The announcement by the FSA that it is to take an in-depth look at open market option annuities has prompted much press comment and a good deal of speculation about the possible outcomes.
My position has always been that it is very important that those with money purchase pension plans do take advice and arrange the best annuity, taking their individual circumstances into account but at the same time I am concerned that, important as it is, the focus on getting the highest annuity rate has deflected attention away from other important issues.
Getting the best annuity rate is just the start and not a particularly difficult thing to do using today’s modern technology. The difficult thing is making decisions about the timing, type and shape of the annuity.
The key to understanding the state of the annuity market is to look at the market segmentation in terms of the policyholders, pension providers and distributors. When it comes to client segmentation, it pays to consider the following: there are three types of clients. Those with small funds, those with above average pension pots and those with large funds. A more sophisticated analysis suggests that those with larger pots do take advice, those with average pension pots should have access to an adviser or annuity broking service have but those with small pots are less likely to have access to the best rates and are the group most at risk in terms of not exercising the open market option.
A quick look at the current best buy tables shows the difference between the best annuity rate and a middle market rate, assuming that rates from Prudential are indicative of an average rate. There are obviously companies offering much better rates but it is difficult to get these rates other than on an individual client basis.
It is also important to note that some companies have special arrangements. For example Zurich quote rates from L&G and Standard Life offer better rates for existing policyholders.
However, there is more to achieving better outcomes for annuitants than simply shopping for the best rate. Getting the highest annuity rate is just the tip of the iceberg as there are many important issues hidden beneath the surface that can affect the amount of income that pensioners will get from their annuities. If the industry is serious about helping customers get better outcomes it is time to put the spotlight on the factors other than price that people should take into account before purchasing an annuity.
A good starting point is look at the three key questions annuity investors should consider. These are: when is the best time to buy an annuity, what type of annuity and which options?
The first question may seem simple but is often quite difficult. There are two sides to the when question; when is it right from a personal perspective and when is the best time taking into account the state of the annuity market. Just look at what happens when this question is ignored as it was in the run-up to the introduction of gender-neutral annuity rates last year.