Steve Hunt, managing director of Rockingham Independent Services, which provides specialist at-retirement advice through www.annuity-advisor.co.uk and drawdown-advisor. co.uk, says although the amount is difficult to quantify, he has seen an increase in the at-retirement business.
He says: “The growth in the last few years has been significant if you look at the Association of British Insurers’ statistics for the last five years, which exclude a lot of corporate business.”
Most of the growth is due to maturing personal pensions but Hunt says many defined-contribution schemes now control significant assets and he also sees final-salary schemes as contributing to the growth of the at-retirement sector.
“For some people, even in a final-salary scheme, it is better to take the cash and broker their own benefits, especially if they do not fit the final-salary model of being married with a couple of kids,” he says.
Hunt expects to see a shake-up of the annuity market, partly as a result of the growth in the atretirement market but also as a result of the changing way that people buy annuities.
He says: “The way that things are going, product providers are going to have to get in to the advised route. You have a very precarious position at the moment, both for advisers and providers. With less than 60 per cent of people exercising the open market option, this is dangerous territory.
“That will have to change, and that will change and those insurance companies that are doing quite well out of people not exercising the open market option will find that that, almost guaranteed, level of business will go.
“The only way that they can retain profitability from the people that are coming up to retirement is to get into the business themselves.”
However, to do that, there needs to be a shake-up of the Omo. Hunt advocates a much more explicit approach to the Omo than is currently the case, where a client has to make a specific choice of annuity provider at retirement rather then roll over into the default option which is take the offer from their pension provider.
He says: “The Omo has to be the default. When people are within three or four months of retirement, they have to be told that they have to go out and find an annuity and it has to be a positive election. It has to be them saying ‘I do not want to broker my benefits elsewhere, I want you to provide me with an annuity”It is possibly the biggest thing they will ever buy and 60 per cent of people do nothing about it.
“We are talking about large sums of money. When you can increase income for the rest of your life by 20 to 30 per cent, it is massive. But it does not matter, even if you are only increasing it by only 10 a year, who in their right mind would say no to an extra 10 a year for nothing?”
Hunt also points out that the argument put forward, mainly by big annuity providers, that people are incurring the cost of advice only to increase their annuity by a few pounds is false.
He says: “There is still commission being paid. The advice is there and being paid for but it is not being taken up. For example, Mr 100,000 fund that does not take the Omo and just takes the benefits being offered by the company, there is 1,500 commission being paid there, either to the guy who sold the pension in the first place or the insurance company is keeping it.”
This, he says, is asking for trouble if and when clients discover they could have gone elsewhere. “He finds out down the road that a: he should have used the open market option and didn’t and b: there was 1,500 available to get advice that he did not take up and the insurance company kept that as well.”
For those who do exercise their choice, Hunt says reluctance to sign up to a traditional annuity is growing.
He comments: “The thing that we find coming up all the time is people’s reluctance to give away their funds to an irrevocable contract for the rest of their lives.
“For annuities of old, it was not an issue, when you had people living for six, seven, eight years in retirement you were not talking about a long-term investment. But now you have got people living for 25 years in retirement and the thought of some people tying themselves into an irrevocable contract for 25 years is horrendous. That is a strong argument for the third-way route.”
Hunt says the traditional choice between an annuity or drawdown can be an unsatisfactory one. “Historically, there has always been this massive void between taking the annuity route, where you are tying up your money for 25 years. If you live an average life expectancy with a conventional annuity, you are looking at a maximum of 2.5 per cent, maybe 3 per cent, return on your money.
“People look at the returns on the fund that it has taken all their lives to build up and not only are they only going to get 2.5-3 per cent but they also cannot touch it or do anything else with it for the rest of their lives so it does not look too attractive.
“On the other hand, you have got drawdown. Most conventional drawdown is sold on the back of going into equities. Those who were sold on the back of equities are now suffering so there is this high-risk, highstrategy investment with drawdown on one hand and no risk but very poor return with no flexibility on the other.”
Third-way products have a role to play but so far they have not provided the “silver bullet” that some people expected them to.
He says: “They are still a long way from providing an alternative to an annuity. It is down to a lot of things. It is cost, it is lethargy, it is complexity. A lot of these third-way products are very complicated and people find it hard enough to understand an annuity sometimes.”
Hunt says this complexity and the increasing number of products available is posing problems for annuity selection and he believes annuities should be a specialist area of advice.
“It is a minefield. There is a such a plethora of products out there for IFAs that they cannot be a jack of all trades and retirement income is very much a specialist area,” he says.