I sometimes find it hard to understand why everybody of retirement age does not know about the open market option because I have been talking about this in the national media for over 25 years. Then I realise I have lived in an ‘annuity bubble’ and have been communicating with a self-selecting group of people who take their retirement income options seriously.
The bubble was hugely inflated from 2010 onwards when a lot of hot air was blown in as a result of new media marketing and an increase in non-advised brokers.
The bubble had to burst at some time but it took the then chancellor George Osbourne and his infamous 2014 budget speech ‘no one will have to buy an annuity’ to deflate the bloated bubble and boy did the hot air come rushing out. The annuity market is a shadow of its former self with sales falling by over 50 per cent compared to pre-pension freedoms volumes.
But just because the bubble has burst and pension drawdown is quickly becoming the option of choice rather than annuities for those converting pension pots into income, it does not mean that those people who buy an annuity now should not shop around.
Open market option annuities are back on the agenda following a FCA’s retirement income market study which recommended an “annuity comparator”.
What is an ‘annuity comparator’ you might ask? According the FCA’s press release it ‘will be required to deliver information in a personalised form in a format set out by the FCA. This prompt will have to show the difference between the provider’s own quote and the highest quote available to the consumer from all other providers on the open market. There will also be a prompt to help the customers access the best quote – this will be a link contained in the information prompt’.
Not only will firms have to compare rates they will also have to give details about joint life options and guarantee periods. Although there is no mention of it, presumably details about escalation options should be discussed as well, especially as in the Brexit and Trump era it seems inflationary pressures are set to return.
The FCA has carried out behavioural testing and found that when shown the annual increase in income that a consumer could gain from purchasing an annuity on the open market, there was a 27 percentage point increase in the number of participants who went on to compare products from different providers.
The FCA has proposed that the new rules will come into force in September 2017. Surely this is a good thing?
Of course it is a good thing if people are encouraged to shop around for the best annuity because who would not want free money? The table below compares the best buys from the top annuity providers and the difference between the providers that actually publish their rates is significant, but if we were able to get the rates from those company who do not publish rates we would see that the difference between best and worst could be as much as 40 per cent.