It's not all about price
One of my many observations about how the annuity market has changed over the last 20 years is that more and more individuals are investing in annuities without getting advice.
There are many reasons. The increase in no-advice annuity supermarkets, mistrust of the financial services industry and the mistaken belief that investing in annuity is simple because it is all about getting the best rate.
In part, I understand where people are coming from because they are being told to shop around and the only way most people know how to shop is by price. It is like people are shopping for annuities the same way as they do for consumer goods. I am not making this up as I speak to customers every day and it is increasingly difficult to discuss anything other the best price.
There is nothing wrong with this in principle because I fully support the campaign to shop around for the best annuity rate but there is more to buying an annuity than price. In fact, getting the best rate is just the tip of the iceberg as there many important issues below the surface which can sink retirement plans if ignored.
That is why I was so pleased to have a client meeting with a qualified pension manager who was asking for advice about his own pensions. I explained that for most people there are three key questions when is the best time to buy an annuity, what type of annuity and which options.
The when question is one of the most important and one of the most difficult and there are two sides to the question.
When it is the best time is a personal point of view. For example, does the individual need the income and will they be paying tax on income they don’t need at present. The second part is about the state of the financial markets and although I do not profess to second guess markets, it is possible to make sensible assumptions about the future trend for annuity and equity prices.
The second question is about choice of annuity or even drawdown and the point being there are alternatives such as fixed term and investment-linked. Just because most people invest in a guaranteed annuity does not mean that investors should not be told about other options.
The third question is the easiest because most people can work out the annuity choices.
So, back to my pension manager because after the meeting, he said the discussion was very useful as it raised issues that were very helpful for him.
If advice was helpful to a pension professional, how much helpful and necessary is it for those who are not pension experts. As one friend said to me: “Everyone needs an hour with an adviser.” That might be harder after the RDR but no less important.
’It is like people are shopping for annuities the same way as they do for consumer goods’