Having seen UK interest rates fall five times in 2001 and those in America a staggering nine times, it came as no surprise to receive notifications from both Standard Life and Norwich Union (two of the biggest pension providers in the UK) that they were once again reducing their annuity rates.
Annuity rates have tumbled along with interest rates. Even with the use of open market options there are thousands of soon to retire clients who look at us all with an expression of “is that it?” when confronted with their potential annuity retirement income.
So what are the alternatives? It appears that successive governments have listened with interest to lobbyists' arguments over the removal of compulsory annuity purchase at 75. The result has been to allow more and more “innovative” schemes into the market without having to make an actual decision on the central issue.
We now have with-profits annuities, unit-linked annuities, rolling five-year annuities, income drawdown, phased retirement and phased income drawdown. Doubtless there are many more inventive schemes on the drawing boards of those pension providers crippled by the profit/cost ratios of stakeholder. These will be launched into a market eager to offer an alternative.
What do the vast majority of these schemes have in common? They need investment performance to succeed.
I read with interest in this very paper recently how one particular IFA was launching a new service whereby clients can have their pension plans treated as investments, with all the attendant reviews and market summary mailings. Surely they cannot be the only advi-sers to have realised this?
Perhaps stakeholder, with its unnatural obsession with charges, has altered too many IFAs' ways of thinking.
We all know that it is investment performance that is the single most important key to financial well-being in retirement. Charges play their part and I am sure none of us ignore these – but a world where charges are the primary consideration is a world gone mad.
Having not taxed ourselves too greatly in arriving at the conclusion that investment performance is key, we are left with another problem.
There appears to be a large question mark over the ability of IFAs to give any form of investment advice. The Sandler review appears to be primarily interested in our ability in this area. They ask if we are competent to advise clients on where to invest.
In particular, income drawdown is being hyped as the next potential review area. Horror stories of misselling appear on a regular basis in the money pages of the national press.
There does appear to be a common theme – the exclusive use of with-profits funds combined with a lack of understanding of the risks associated with the contract.
With the advent of drawdown-to-drawdown transfers, poor fund performance and high charges can be alleviated by a move to another provider. Investment analysis once again comes to the fore as the primary driver in such a decision.
Drawdown can only work successfully when there is a portfolio of investments built according to the individual client's risk profile. The fund needs short, medium and long-term investments, including cash, fixed interest and equities. Drawdown means equity exposure and the client needs to believe that equities will outperform other areas of investment over the selected period to annuity purchase.
We can only guess at the outcome of the Sandler review but there is the potential for an investment qualification being a requirement in order to conduct this business.
Just as we have seen the Chartered Insurance Institute's G60 examination become a requirement to gain the special permission to conduct occupational pension transfer business, it is more than possible there will be a similar requirement to conduct income drawdown business. The CII's G70 examination – investment portfolio management – is the most likely contender.
With the likelihood of increased regulation and the potential of a future review, drawdown is becoming an increasingly costly area for advisers. Once again, there is already press comment on the difference in commission levels between these contracts and conventional annuities.
Drawdown is a rapidly expanding area of business that we are all being asked to advise on. We need to be aware of the pitfalls.
Jeremy Ford is a consultant at Warwick Butchart Associates