So, what impact will this have on the annuity market? Will it create openness in the sector, and will it improve the situation for people at retirement?
I have always said that anything that helps people get a better deal at retirement is to be welcomed, so on that basis I support the recent move by the ABI to publish information on annuity rates. However, I have argued consistently that it is not sufficient to just concentrate on the annuity rate as there are other issues and options to consider.
Before looking at the issues in more depth it will be helpful to look at what the ABI has actually done.
Earlier this year the ABI launched its Retirement Choices Code with the aim of helping those approaching retirement to better understand their options and to encourage them to shop around for the best annuity given their circumstances.
As part of this code the ABI published specimen annuity rates offered by all the ABI’s member companies, representing about 95 per cent of the annuity market. The rates are based on 12 example customer profiles.
The ABI has made it clear that this is not a price comparison tool, but is designed to show what is available in the market, and of the need to get expert advice. The illustrations will be updated regularly.
The ABI has said it will offer signposts to other sources of advice and information, including other comparison websites which do offer real-time rates such as the Money Advice Service (which was recently criticised for not showing rates from two of the top-paying enhanced annuity providers). The ABI will also direct people to where they can go if they want to contact a professional financial adviser.
The first observation is that it is very helpful to have a list of annuity rates from all the major pension providers. In the past we have only been able to guess at the difference between the best and worst annuity rates, now we know that this is typically 18 per cent.
For a single life annuity for a 65-year-old annuitant in good health investing £18,000, the best annuity is from Aviva (I have ignored Reliance Mutual) paying £1023, and the worst is Scottish Widows/Clerical Medical/ Halifax paying £839, a difference of 18 per cent. For enhanced annuities the difference between top and bottom is 23 per cent so it is more important to shop around for poor health annuities.
Clearly it is in the client’s interest to obtain the highest possible income, so why do people continue to get lower annuities than they could get by not exercising their open market option?
A number of reasons are given, including: client apathy, poor communications from insurance companies and practical difficulties in transferring to a higher paying annuity income.
At the customer level there may be the perception that it is not worth the extra work for only a small increase each year. For example, a policyholder of Abbey Life would receive £91 a year after tax less than if the annuity was purchased from the best-paying company Aviva. Money is money and an extra £91 could buy a meal in a posh restaurant.
Perhaps the key to understanding why the takeup of the open market option is less than it should be is to look at some of the behavioural aspects. I usually analyse the annuity market in terms of those with small funds, those with above average funds and those with large pension funds. In the context of the open market it might be better to segment the market in another way:
* Those who are not engaged with pensions and simply take the first offer they receive from their insurance company.
* Those who rely on their pension scheme or financial adviser to get them the best annuity.
* Those who are savvy enough to shop around for the best annuity rates on their own.
Clients in the second two categories should get the best rates in the market. Those relying on their scheme or adviser to shop around for them must assume that the market will be fully researched on their behalf. Clients who do their own shopping around must ensure that they get access to the best rates.
It is people who fall into the first category that the industry should be most concerned about and who need the most help, but how we can help people who do not want to help themselves?
The second observation is that the ABI appears to be doing little to encourage policyholders to consider options other than the conventional guaranteed annuity. The sceptic in me suspects there might be something fishy going here. Some of the serious annuity commentators and many of the actuaries who price annuities have argued that the returns on conventional annuities are so low that many investors may be lucky to get their money back, let alone receive any interest.
Not only are annuity rates at historically low levels but pensioners today have more complex retirement income needs.
Nowadays most pensions will be paid for a 20- to 30-year period as on average most will live to beyond their 85th birthday, so it is important to take a long-term view of retirement. It may be tempting to get the highest income at the outset but over time inflation will reduce the spending power of a level annuity. If inflation were to run at 3.5 per cent a year the income would be reduced by half after 20 years.
In conclusion, anything that helps to increase the uptake of the open market option must be welcomed and the ABI’s latest initiative will surely help pensioners to better understand the advantages of exercising the open market option.
Billy Burrows is head of business development at Annuity Line
Key points
* The ABI has just published a comprehensive data set of annuity rates from a wide range of annuity providers.
* For enhanced annuities the difference between top and bottom is 23 per cent
* The ABI appears to be doing little to encourage policyholders to consider options other than the conventional guaranteed annuity.
