Pensions minister Steve Webb recently ruffled a few feathers when he raised the possibility of people switching annuity provider to get a better deal.
Some parts of the pensions industry responded to Webb’s proposals by questioning how workable the idea is and many pointed out that people can already get a better deal if they have health problems through enhanced annuities.
Awareness of enhanced annuity rates is increasing amongst consumers but not everyone who qualifies buys an enhanced annuity.
“It is not just awareness but access to them. If you say you can get one it doesn’t make it easier to get one,” says head of annuities at The Phoenix Group Alan Bradbury.
The difference in income that people are missing out is significant. Figures from LV= based on a 65-year old with a £100,000 pension fund show that a standard annuity rate of £6,045.56 a year increases to £6,383 for people with high blood pressure/high cholesterol; £6,961.55 for smokers and £6,999.46 for people with heart conditions.
Friends Life managing director David Still says the enhanced annuity market has grown over the last five years, so that over £1bn of enhanced annuities are written each quarter.
“The product is now mainstream and in 2012 we reached an important tipping point where more than 50 per cent of all annuities written on the open market were written on an enhanced or underwritten basis,” he says.
Industry estimates for how many people in the UK qualify for enhanced rates vary between 60 and 70 per cent. But awareness of shopping around and potentially qualifying for enhanced rates has been concentrated among people who take financial advice.
Legal & General head of annuity product and marketing Tim Gosden says: “Roughly half of all annuity contracts sold are where consumers are shopping around and in many cases seeking advice. So where they are purchasing their annuity from a different, external, provider they are arranging enhanced annuities. But where consumers are not doing this and are purchasing their annuity directly from their pension provider, in many cases without looking elsewhere, the figure for enhanced annuities is roughly 6 per cent.”
Head of The Annuity Bureau at JLT Employee Benefits James Auty feels the main reasons why people miss out on enhanced annuity rates are a lack of awareness, failure by employers to provide effective ‘at retirement’ advice to their employees and, in some cases, a deliberate attempt to hide known medical conditions.
MGM Advantage released some research last October, looking at how truthful people were about their health and lifestyle when buying an annuity. Pensions technical director Andrew Tully says: “The results showed one in 20 – 5 per cent – of retired people who purchased an annuity said they either deliberately under-estimated smoking and drinking, did not declare one or more medical conditions or said bluntly they were not at all honest with their provider.”
Partnership head of product development Mark Stopard believes that because disclosure of poor health in the protection market penalises people through higher costs, it can be difficult to understand how annuities work in the opposite way.
“Or people think it’s unfair that those who don’t look after themselves benefit from better rates. You need to explain enhanced annuities and get people to understand when they will get a better deal,” he says.
One problem is a reluctance to discuss health issues. “British pensioners are missing out on millions of pounds in retirement because they don’t tell their adviser about their health problems when buying an annuity,” says Auty.
LV= head of annuities and equity release Vanessa Owen points out that people’s reluctance to tell GPs the truth about their drinking and smoking habits makes it difficult to verify the medical information that would enable them to qualify to enhanced rates.
“There is an important role for advisers in how to have a conversation about it; how to get their customers to open up. There may be some reticence around that conversation on the part of advisers but is critical that they do so to get the best possible rate for their customers.” she says.
Increaseyourpension.co.uk director Craig Palfrey believes nobody should be allowed to buy an annuity without completing a basic health questionnaire.
“As financial advisers, we have access to a questionnaire that can be sent to all the enhanced providers once a client has filled this in,” he says. “We believe that all direct providers and execution-only platforms should be made to issue this to people and run a quote for any medical issue someone may have.”
Aviva head of retirement solutions, products and services Roger Marsden says Aviva does not give annuity quotes without medical information, making it difficult for advised and non-advised customers to avoid conversations about their health.
Getting more people to take financial advice seems the obvious way to ensure people get the best deal. Stopard believes initiatives such as the Pensions Income Choice Association’s Pick-A directory can be useful in pointing people in the right direction.
But Zurich Financial Services head of retail propositions Peter Hamilton sees cost as an obstacle to advice since the RDR, as some people cannot or do not want to pay fees. “We encourage our customers to take financial advice. We know that many customers recognise the importance of taking advice. But we also know that the cost of advice means that this route is unavailable to some and that others, a minority, are willing to research and make their own choices,” he says.
Gosden says that since the ABI Retirement Choices Code of Conduct came into operation in March, the number of internal enhanced annuity contracts sold is increasing by about 20 per cent each quarter.
The code requires companies that sell pensions to update and improve the communications they send to their pension customers in the run up to retirement.
But Stopard has concerns. He says: “Almost a year on I’m not convinced the code is working. For some providers it is and for some it isn’t. More enforcement is needed and more incentive to providers who are adopting the code to increase their game.”
But getting back to Webb’s idea of evolving the annuity market, both Marsden and Still say a move to individual underwriting could address the dual problems of poor value for consumers and ensure that everyone recieves an enhance rate if they quality for one.
“This will benefit a large majority of consumers because it helps annuity writers to predict life expectancy with greater precision. It provides greater certainty of pricing and enables companies to offer better deals to consumers,” says Still.