The front page of Money Marketing last week led with the story ”L&G warns FSA over possible fixed-term annuity misselling”.
The General doesn’t like them but Snoopy does may be an over simplification of the excellent online comments but it shows that views on fixed term are polarised. The first point to make is that these policies are not annuities but a form of pension drawdown. This is not just a technical difference it has really important implications for the way these policies are sold.
In one corner are those who argue that fixed-term income is not a good product for consumers because the customer may be taking more risk that is good for them and in the other corner are those who believe that fixed term provides customers with much needed and important flexibility.
A sub plot to this interesting debate is the realisation that the industry and customers are between a rock and hard place. The pension industry is in desperate need for product innovation and better solutions for their customers but is regularly accused of selling high charge and risky products.
Customers are in a difficult place because annuity rates are at the lowest levels ever and they find it difficult to make complex decisions about which options are best for their circumstances.
So how can product innovation be harnessed to provide customers with solutions that meet their needs?
The starting point is to understand what the customer needs actually are. I have written elsewhere about the 5 risks facing people at retirement. These risks are; longevity, inflation, interest rates, equities and health. The best outcome for a customer is that his income requirements are met in the future no matter happens to his personal circumstances or to financial markets.
Put simply, if someone invests in a level annuity and high inflation returns and interest rates rise, the customer will be stuck with an income that is falling in real terms. If someone invests in a fixed term annuity and interest rates rises and or their personal circumstances change in the future they will have a second bite at the cherry as they can invest in another annuity when the policy matures.
I argue that in a world where we don’t know what the future will hold it makes sense for investors to consider a portfolio of annuities or drawdown policies. I can also point to some complex financial modelling that proves the same point.
Returning to the central point of whether fixed term will be the next misselling scandal, the answer depends on the quality of advice. True the policies do transfer a lot of risk to the individual but they also provide flexibility. Providing advisers understands the risks and are able to communicate these to the customer in a way they understand there will not be any missselling.
However if these policies are sold by highlighting the potential advantages but without fully explaining the risks, there will be potential for misselling. In such situations the regulator may point out that fixed term is a drawdown sale and will look for a higher standard of advice than for an annuity sale.
As someone commenting on the Money Marketing website said “the bottom line is that the choice is neither black nor white. L&G is wrong to try to paint it so”.
Billy Burrows is director of Better Retirement Group