Pensions experts have clashed over the suitability of one-year fixed-term annuities, with independent consultant Ros Altmann claiming savers who buy the product on a non-advised basis are guaranteed to make a loss.
LV= and Just Retirement have recently launched one-year fixed-term annuities targeting people who want to defer retirement in order to take advantage of the reforms announced during the Budget, which will allow anyone aged 55 or over to take their entire pension pot as cash from April next year.
Speaking during an MMWired debate on the Budget reforms last week, Altmann said customers who bought these products on a commission basis through a non-advised broker would lose out.
She said: “I really don’t understand what a one-year fixed-term annuity delivers for the customer.
“I can see it gets providers out of the technology problem they seem to have but it offers customers a product which they shouldn’t need under the new rules.
“If they buy it on a non-advised basis and pay commission, they are guaranteed to experience a loss on their capital.
“The problem is providers are currently unable to pay tax-free cash to customers but leave the rest of their money in the pension until next April.
“Because providers are unable to do that, a new product has been developed that is effectively a cash drawdown account, which you shouldn’t actually need.
“If it was sold with no commission that would be fine, but if it was sold non-advised the original paperwork I saw suggested a 2 per cent commission was taken out. The interest rate on your cash is 0.17 per cent so you are guaranteed a loss.
“I am really disappointed and I hope something better will happen for customers.”
However, Annuity Line head of business development Billy Burrows argued that one-year fixed-term annuities could be the right solution for some clients.
He said: “[They] can work. The preferred route would be to take the tax-free cash and defer but at the moment providers simply can’t offer that.”
Partnership chief executive Steve Groves said one-year fixed-term annuities are “expensive” and urged providers to release members’ tax-free cash. Instead, Partnership recently launched a flexible 12-month annuity, allowing clients to exit after a year if they want to enter drawdown or take the pot as cash.
He said: “I do not particularly like the one-year fixed-term annuity but I wouldn’t be critical of Just Retirement or LV= for launching it because it addresses a customer need to access their tax-free cash while not committing the rest of their fund. However, I have a huge amount of sympathy with Ros’s point because there is the flexibility under the Budget to take their tax-free cash and wait 18 months to make a decision.
“Just Retirement and LV= have solved a problem for customers but actually the FTA as a solution is quite an expensive one. It would be much better to see strong action from providers to allow people to take their tax-free cash, leave their fund invested and not incur these expenses.”
LV= managing director of retirement solutions John Perks says: “Our one-year fixed-term annuity is designed as a temporary solution for those retirees who want to access their tax-free cash and income now but defer making a long-term decision about their pension income until the new rules come into effect next year.
“Understandably, many retirees would like to do this. However, many pension schemes do not permit members to take their tax-free cash and leave their fund uncrystallised.
“Our product meets a very real customer need as it offers flexibility to those retirees who don’t want to limit their future options.”
Just Retirement group external affairs and customer insight director Steve Lowe says: “Just Retirement’s fixed-term annuity is only made available to people who have received advice from a regulated adviser. We do not pay commission.”
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Expert view: Billy Burrows
The annuity market has been castigated for not being competitive and lacking innovation but is now being hauled over the coals for launching innovative products.
The launch of one-year fixed-term income products has polarised opinion. I am not the biggest fan of fixed-term products but do see the advantages for some investors. In my opinion, the new policies should be welcomed because they fill a gap in the market and are good value for the right client.
There is an obvious gap in the market for a policy that enables people to take their tax-free cash and keep their options open until April 2015.
One of the criticisms seems to be that clients could achieve this by another means: either by transferring to drawdown or by staying with the current provider.
Most providers will not facilitate the taking of tax-free cash and no income at the moment without transferring to drawdown.
Another criticism is the cost. For once the mud cannot stick on this one because a close look at the numbers suggests there is little profit to be made by the providers. The question of whether adviser firms or broking firms are charging too much depends on individual circumstances.
The industry has done the right thing by launching one-year fixed-term policies because not only do they give clients what they want – tax-free cash and the flexibility to benefit from any changes – but they are also fairly priced.
Billy Burrows is director of The Retirement Academy