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Direct response

Can providers’ direct annuity services benefit the consumer or are they designed to maximise profits by cutting out advice?

Intelligent Pensions technical director David Trenner:

In 2003, the FSA introduced a requirement that insurance companies quoting retirement options to their customers tell them about the open market option. The regulator even put sample rates on its own website to help people compare rates. Yet in the whole of 2004, just 31 per cent of policyholders used the Omo and a staggering 69 per cent stayed with the company that they had saved with.

While 50 per cent of these stayed with two of the leading annuity providers at that time, Prudential and Norwich Union, the other 50 per cent stayed with companies which paid out up to 20 per cent lower pensions. Since then, the take-up rate for the open market option has remained steadfastly at about one in three.

Inertia may be the reason why some people leave their funds with the original insurance company or it may be from some misplaced sense of loyalty. If they have been happy with the investment performance of the Inertia could be the reason why some people don’t move their funds or it may be because of some misplaced sense of loyaltycompany and they like the repres- entative who has called on them over the years, they will often assume that the same company will “look after them” in retirement. Unfortunately, the figures suggest otherwise.

The annuity market has expanded considerably since 2003, with the growth of the impaired life market and the introduction of smoker and lifestyle annuities and more recently postcode annuities. So policyholders ignoring the Omo could not only lose out on the best rate for the annuity they think they want, they could also lose out by not taking an annuity more suited to their personal circumstances than that offered by the holding insurer.

L&G has said of its new direct annuity offering: “The Annuity Solutions service is proving to be very popular and it is clear that there is a demand from customers who feel confident enough to buy a pension annuity themselves.”

But being confident enough to buy an annuity and understanding all the issues involved are two completely different things. Someone who does not know what other options are available may be happy buying a single life, non-increasing annuity, not least because it offers the highest initial income.

Many independent advisers who do not specialise in advising on annuity purchase struggle with the complexities, so what chance do untrained members of the public have? Could it be that the likes of L&G and Aegon are looking to increase profits by cutting out the cost of advice? If so, they will not be treating customers fairly.

L&G head of annuity product development Tim Gosden:

Like most other financial transactions, purchasing a pension annuity is about getting the most appropriate product, the right options and the best rate. Since there are so many aspects to consider and it is such an important irreversible decision, we continue to recommend that seeking independent financial advice is appropriate for the majority of consumers. However we have experienced increasing demand from consumers to buy their annuity direct from us.

For a variety of reasons, some consumers do not want to use the services of a financial adviser and instead they prefer to do their own research, which may include talking to friends and family who have been through the retirement process. There is also evidence that consumers are now more aware of the open market option and with a plethora of information about retirement options and choices With informa- tion and choices online, custo- mers are more confident about researching their options themselves available from various online sites, some customers are more confident about researching their options themselves.

Furthermore, some consumers have problems in obtaining financial advice. It is estimated that 80 per cent of pension funds are less than £30,000, with 50 per cent less than £10,000, and as a result, the economics of providing advice for these small funds is simply not viable for some advisers. Access to advice is also limited by the fact that retirement planning is not a core area of expertise for many advisers and they would not advertise themselves as specialists in this field.

So, for these consumers, the ability to buy their annuity direct from their chosen provider is a valuable alternative as otherwise their only option is to accept the annuity rate offered by their pension provider, which may not be in their best interests.

In the context of information and guidance, direct operations can also offer real assistance to consumers. Although advice is not available, experienced staff can provide valuable factual information about the provider’s products and will also proactively explore any health issues with customers to ensure the opportunity of an improved rate is not missed. Throughout the process, customers who seem unsure are recommended to seek financial advice.

In summary, direct annuity services are not about cutting out advice to maximise profits. They are about providing the opportunity for some consumers who do not want or cannot get advice to obtain an improved income in retirement.

These consumers are shopping around the market and actively trying to improve their pension, so this extra choice in the way to buy is in harmony with the industry’s aim of expanding Omo uptake.

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