I have recently found myself musing, and then airing my musings, on the state of the annuity market - and more importantly whether the ‘default’ retirement income tool is still fit for purpose.
Without getting into too much detail, I discussed how illuminating it is to look at the pricing differences between corporate bonds and annuities, particularly where both are issued by the same company.
Many anonymous commentators - most likely those who are enhancing or building their own annuity ‘propositions’- were concerned that I was comparing apples with pears. Well of course I am. But there are obvious underlying similarities which can reasonably be expected to materialise in pricing, whether one is considered an investment and the other an insurance contract.
Thankfully others saw beyond my illustration and understood the point I was making: that lifetime annuities - enhanced or otherwise - often offer a paltry return for investors and it is time people were made aware of this. Are people really willing to pay so much to secure an inflexible income for life?
Even the ABI gets how bad it is. The industry body recently launched the aptly named ‘annuity window’ tool which is aimed at highlighting the different annuity rates available between its member companies (think money supermarket for insurers).
Laudable as this attempt is in highlighting the need for people to shop around and exercise their open market option, it’s all a bit one-dimensional and of course starts with the assumption that an annuity is the right option. It seems unlikely to shame those at the bottom of the league table enough to increase their rates.
It might just be time for the regulator and even the government to step in and take some action around annuity pricing - and the various distribution margins kicking around the market. It will be interesting to see the results of the Financial Conduct Authority’s review into the sector.
But while we all hold our breath (I suggest you don’t), advisers seem confident there are a number of things they can do to help clients.
It sounds almost too obvious to say it but I will anyway: individuals need the right sort of professional financial guidance before they decide to put it all on black. In other words, advisers need to consider alternatives to annuities.
Regardless of the technicalities, if a corporate bond issued by a life company offers materially better terms than an annuity offered by that same company, the industry needs to work harder to cut through the noise and create better client outcomes. If this should result in changes to the prevailing rules then that is what must be done.
The money people have worked hard to save and invest over the years should, when they need it the most, work just as hard for them in return and this will require a challenge to the ‘house always wins’ mantra currently being exercised over the annuity market.
Advisers are central to overcoming this challenge and to accelerating the shift away from generic one-size-fits all products to the creation of bespoke solutions to serve individual customers. I have no doubt the annuity will remain an important part of the mix but with over 400,000 people a year hurtling towards a process that is suboptimal at best I just don’t believe it’s right for everyone.
In short, while the annuity may remain fit for purpose it simply isn’t fit for everyone’s purpose and those peddling them, particularly to the unknowing, should accept and acknowledge that.
David Ferguson is chief executive of Nucleus
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