Given that 80 per cent of annuity funds are under £30,000, it would be safe to assume, despite 20 years of campaigning for the open market option, that these consumers are not shopping around for the best annuity rate at retirement.
We have spoken to advisers who have seen the difference between the best and worst rates reaching as high as 30 per cent. This is significant for any person approaching retirement but is particularly important for those with limited retirement funds. It is also a once-in-a-lifetime purchase, so there is no second chance if you get it wrong.
The first reason people might not shop around is down to inertia and there is a compelling need for Government and industry to campaign to encourage people at retirement to seek out the best rates – particularly those with small funds.
Second, it is currently not economical for an adviser to provide full advice for people with small funds. For a typical adviser, the true cost of advising on a £30,000 fund is estimated to be £750. Given typical commission rates of 1.5 per cent, this would result in a loss of £300.
It is understandable why an adviser would not want to focus on this business as the cost of this process would damage their business.
It is clear that customers and advisers would benefit from a simpler, more efficient process. The current system means it takes the same amount of time to write a £10,000 annuity case as a £200,000 one.
This is because it is typically a manual, paper-based procedure with significant time delays in receiving ceding scheme information, all of which adds to adviser costs. This process also denies the policyholder access to much needed income in retirement as it delays receipt of that income, in some cases by many months. This is a significant issue that must not be overlooked.
So why is it worth an adviser’s time to focus on this area? The answer is simple – 80 per cent of annuity funds are worth less than £30,000. This makes it a significant segment of the whole retirement market and, on current figures, we estimate this sector could be worth £2bn-£3bn next year.
According to Watson Wyatt, the retirement market is forecast to more than double in the next couple of years to £5bn. What other market in this or any environment exhibits such growth?
This presents a remarkable opportunity for any adviser as the many people approaching retirement start to anticipate and plan for living longer lives.
Using an automated solution that strips cost out of this process can make it worth an adviser’s time to develop this important and much neglected area of the market.
For IFAs, there are two clear benefits. First, they can be satisfied they can at long last provide cost-effective advice to those with smaller funds. Such people can really benefit from an increased rate of income in retirement, as opposed to being defaulted into a low-cost option from their ceding provider.
In other words, if the estimated 300,000 customers who retired in 2008 with pension funds of less than £30,000 had shopped around for a better rate, they would now have lifetime incomes £305m higher.
Second, advisers can now benefit from remuneration not previously available to them. Partnership has calculated that the lost commission on funds where people in retirement did not use the open market option is estimated to be in excess of £61m last year alone.
If advisers can start to bring advice to this section of the market we believe it will leave a lasting legacy that will put an end to annuity apartheid – great annuities and appropriate guidance will no longer be limited to those wealthy people lucky enough to have large funds.