The Financial Ombudsman Service has raised concerns over the use of alternatives to traditional annuities.
William Burrows Annuities director Billy Burrows says: “Some people are only acting on insurance company information. Other people go to IFAs and get limited advice and other people will go to a specialist who gives expert advice.”
The ombudsman recognises various alternatives, including phased withdrawal, temporary annuities, pension fund withdrawal (income drawdown) and unsecured income, but implies these alternatives often do not produce the results of traditional annuities because of risks involved.
Purplecircle Consulting managing director Mark Andrews says the new alternatives that are available are more flexible than the traditional annuities offered before last April’s pension changes but says, for many people, such alternatives are unnecessary.
He says: “The question is whether or not an individual needs the flexibility. It is like having a car with every little extra on it. Not everyone wants all the extras.”
But Burrows believes that in many cases alternatives are much more useful than traditional annuities.
He says: “Drawdown is really useful for particular circumstances, usually for those with more money. Those with less funds tend to do better with annuities.”
He also has hope for newer, “third-way” options. One of these options is guaranteed drawdown, which gives the opportunity of drawdown with less investment risk.
But he is sceptical about temporary annuities because most clients want to buy annuities for life.
In many cases, even if the customer is receiving expert advice from a specialist, it is difficult to guarantee success. Burrows says the mantra for cutting reducing complaints is “Education, education, education.”
Just Retirement marketing and product manager Nigel Barlow says: “Our concern is that people are not taking advice on the best choice. They just roll over with their existing pension provider when they could possibly get a better deal by shopping around. If a client stays with their provider they may not even notice the rollover. The whole area needs a lot more in terms of advice.”
Barlow says it can be difficult for advisers because the unpredictability of future events limits choice.
Burrows says: “This is one of the most complex areas of financial planning because of future issues that cannot be predicted, such as a customers’ health, interest rates, inflation and the stock market.”
Other areas also need to be explored, such as the age of the customer, risk level, spouse age and aspirations for family inheritance.
Andrews says finding an option can be relatively easy if the client has little money as generally they will have no option but to buy an annuity but when a client has a reasonable amount of money, it can become a much more detailed and expensive exercise.
The experience of the adviser is important. Barlow says there are some advisers who may have gone 10 years without looking at options and they could easily be confused.
He says: “If you are advising on annuities frequently, it is not that difficult. Having the right documents and following the correct process can make it relatively simple to advise.”
Burrows says an IFA has an overriding duty to give proper advice to clients and identify suitable products.
He says: “Once you have bought an annuity you cannot start again. You have to get it right first time.”