The Association of British Insurers’ statistics on annuity sales are concerning. If you look at the total sales for 2005, financial advisers wrote 5.6bn of annuity business but the split between where the business went is staggering.
Ninety-five per cent went into conventional or guaranteed annuities and only 5 per cent into asset-backed annuities. This intuitively feels wrong, especially when you look at the shape of business going through some of the specialist advisers.
The decline in annuity rates is well known but it is frustrating to see commentators who point out the obvious facts about low rates but never seem to offer an alternative.
In fact, there are some really good ones out there. For every criticism levied against annuities, there are alternative options.
With falling gilt yields, returns from conventional annuities have reached an all-time low, exacerbated by the increasing longevity of the UK population. The positive side of all of this – apart from us living longer – is that advisers and consumers are looking for alternatives to produce an income for life.
Some of the specialist IFA annuity desks are moving 30 per cent of their business to asset-backed annuities and for some the volume is significantly higher. These specialists are adding value by suggesting that the product mix should be significantly different from that recommended by the majority of UK advisers.
Non-specialist advisers need to be aware of this trend to ensure their clients are getting the right type of advice. Rate-driven advice does not resolve concerns around investment flexibility and income levels. There are products in the market that can cater for different needs but customers need to be made aware of these.
Evidence suggests that these options are too easily discounted. Advisers and providers have a huge part to play in educating the market on what is available.
In years gone by, customers bought a pension and at retirement it paid them an income. From September 2002, it became a statutory obligation that all providers must draw the open-market option to the attention of their customers. But what does this mean to most people? More often than not, it will be interpreted as getting the best rate on the market. We need to change this train of thought and raise awareness and understanding that the open-market option is not about getting the best rate but about giving the customer the right solution to meet their needs.
The irony of the client or adviser looking for the best rate is that a with-profits annuity will give about a 20 per cent rate above the best conventional rate in the market. You need to understand and have an appreciation of the client’s appetite for risk but, as these contracts are generally considered to be low to medium-risk products, there will be a considerable chunk of the market where a with-profits annuity may be just the right choice.
The importance of the advice process is integral to ensuring that the client gets the right product for their needs. A customer only gets one shot at this and they rely on professional advice to ensure that they are presented with all the options. If customers are only getting information on rates, how will they ever know what is the most suitable product?
With most other products, such as investments or mortgages, customers can switch out of products that are not to their liking. With an annuity, this is not an option. Once a decision is made, it is with them until they die.
The world has moved on from a few years ago. Annuity rates are low, people are living longer and the need for good advice has never been more prevalent. This is one decision that customers cannot afford to get wrong. If they do, they are stuck with it and there is nothing that the adviser or provider can do about it.
It is time for advisers to look at the alternatives and start providing customers with more choice that better meets their needs, rather than looking at who is offering the best rate.