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.
The second question is very important especially as the value from annuities is at the lowest level ever and many people may not even get their money back from future income payments. Therefore, it has never been more important to look at the alternatives to conventional annuities such as investment-linked and fixed term annuities.
At this point many people remind me that the average pension pot is less than £30,000 and at this level advice is not affordable. I believe that this is wrong for two reasons. First, many of these people have other sources of pensions or savings so it is important to look at their overall position. Second, if we are to treat customers fairly they should have all of the relevant options explained to them.
The third question is not so difficult for most advisers because once a decision has been made about the timing and choice of a policy, selecting the appropriate options and which company is offering the best rate is not too difficult. However, this can be difficult for clients who are trying to arrange the annuity themselves without the benefit of advice. I have always been surprised over the question of single or joint life annuities. Many people have the impression that the joint life option is expensive but when I present them with examples they are often surprised by the relatively small reduction in income compared with the single life and often end up preferring two-thirds widows compared to 50 per cent.
There is clearly more to arranging annuities than simply getting the best rate and so the challenge to the industry is how we can enhance the shopping experience for our clients.
The key to getting better outcomes is to encourage clients to think about more than just getting the best rate and to consider the wider issues. An increase in annuity income of £40 a year after tax for a £10,000 pension pot, or £300 a year for a £ 50,000 pot, may seen trivial if future financial or personal circumstances change such that a different option would have produced a better outcome.
Billy Burrows is director of Better Retirement and Retirement Academy
Key points
There is much speculation about what conclusions the FSA might reach following its in-depth look at open market option annuities.
The key to understanding the state of the annuity market is look at the market segmentation in terms of the policyholders, pension providers and distributors.
Once a decision has been made about the timing and choice of policy, selecting the appropriate options and which company is offering the best rate is not that difficult.
