Andrew Tully: Lessons from the defunct secondary annuities market

Andrew Tully White background 700

Another month and another set of data issued: this time from the FCA, telling us what people have been doing with their retirement savings since pension freedom was introduced.

It is easy to get a bit blasé with this recurring information, especially as the freedoms have not been the car crash some feared it would be. People are generally acting sensibly, so commentators find themselves content to ignore some of the stark messages underlying the headline data.

The FCA data, which covers the first quarter of 2016, shows 60 per cent of annuity purchasers simply bought from their holding provider. Most of you will be thinking that is nothing new. And it is not.

For many years, too few people have been shopping around for the best deal at retirement and since pension freedoms it has got worse. But just because it is something that has been happening for a while does not mean it is acceptable.

Annuity sales have fallen significantly over the last couple of years but around 80,000 people will still buy one this year. Sixty per cent of those – nearly 50,000 people – may get a poorer deal as they have not shopped around. That is a significant number of people getting less income every year for the remainder of their life.

Some commentators will say there are many good reasons for people staying with their holding provider. Good service, trust, brand or guaranteed annuity rates are the usual excuses rolled out. And occasionally some of these may be correct: many people can get a better deal by exercising a GAR than shopping around. However, most people will be getting a poorer retirement income than they would have done if they had looked elsewhere.

I do not believe it is a coincidence the FCA data shows only 38 per cent of annuity purchasers get advice and that correlates almost exactly to the numbers shopping around. People who take advice are likely to get decent outcomes: the right products chosen, the best shape of annuity and the best rate.

With this in mind, we need to get the 60 per cent that do not take advice and do not shop around to do so or make it simpler to compare and contrast options.

Hopefully the work underway driven by the Financial Advice Market Review will mean more people having access to advice in future. To help with the other aspect, we may be able to learn a lesson from the now defunct secondary annuity market.

That market had fundamental issues, so it was correct to kill it. But there were moves, supported by the Government, to create a “hub” where customers could find out who wanted to buy their annuity and what price they were willing to pay for it. In other words, a simple way for customers to shop around.

The Government also suggested any individual looking to assign their annuity would be required to confirm they had received a minimum number of quotes before the provider could consent to the assignment.

If steps like these were considered for the secondary annuity market to make sure people got good value, why is the Government not looking to put them in place for the primary annuity market, where up to 50,000 people a year are getting a raw deal?

Next year is likely to see the introduction of a much simpler wake-up pack, reducing the mass of information people get as they approach retirement. The FCA is also keen to include an annuity comparator to illustrate how much people may lose out on by not moving. Both of these initiatives may help to some degree.

However, if we really want to improve the lot of the 60 per cent not getting advice, the simplest way to do so is to make it compulsory to shop around; the position the Government was moving towards in the secondary annuity market.

Andrew Tully is pensions technical director at Retirement Advantage