The first Sunday Telegraph of 2014 carried an extensive piece based on an interview with the Pensions Minister Mr Steve Webb’s highlighting his proposals for reform of the annuities market
Mr Webb made a number of suggestions for reform as follows:
1. Annuitants must be able to ‘shop around’ for a better annuity deal every few years much like consumers do for a mortgage
2. The market need to provide more transparency around charges
3. Pensioners with health conditions or those who have worked in risky industries need to be given help to get better annuity deals
4. We need a new system of ‘collective pensions’ in which millions of private pensioners would keep their savings invested in the same mega fund while they were working so that their money grows with their investments
5. More people will have ‘mixed pension arrangements’, with some annual income through an annuity and the rest through their savings invested.
What’s interesting about all these reforms (except #4 which forms part of Mr Webb’s Defined Ambition DC workplace scheme proposals), is that the market already caters for them. Take #1 ‘shopping around’. It is already possible to select a Fixed Term Annuity for say five years and then review your position after an agreed period and select another annuity, or go down a different route, into income drawdown for example. But Fixed Term Annuities aren’t particularly popular because they don’t offer the best annuity rates in the market. As Craig Palfrey of YourMoney.com points out annuities are an insurance product. As the risk of a customer cashing in the plan early rises, then the annuity rate which insurers will be prepared to offer falls. It is simple economics based on actuarial calculations.
No, most pensioners are better off buying an annuity from the open market having discussed the matter with an adviser. The real problem today is less than half of the 400,000 buying an annuity each year are using the Open Market Option. Probably even fewer are getting any financial advice at all. All people buying an annuity need to be persuaded to look at all their at-retirement options – enhanced annuity, fixed term annuity, or drawing income from a mixture of sources: income drawdown, annuity, other savings, even equity release in a minority of cases. They may even choose to phase their retirement – reducing working hours before finishing working completely. Financial planning is crucial at this time to get it right.
Having spoken to a few IFAs that answered our 2014 Pensions Predictions survey; it is clear that the real issue around annuity purchase is persuading more customers to invest in good financial advice which ensures they find the best retirement income solution for them (including the right annuity for the individual’s retirement needs).
One IFA I spoke to explained that one of the central issues today re annuities is that those retiring with workplace pension schemes may never have had independent financial advice before and are now scared of the upfront charges that may come with OMO annuity selection post-RDR.