Last month, the FCA published a policy statement outlining its views in relation to the purchase of annuities at retirement.
New rules require advisers to inform consumers how much they could gain from shopping around before a potential annuity purchase. Firms affected by the changes will need to ensure compliance from 1 March 2018.
It is a shame the rules have not gone a little further to include
those at the point of retirement being told they can move into drawdown. After all, the choices made at retirement are usually the most important financial decisions someone will make and, as we know, once an annuity has been bought it cannot be reversed.
Annuity rates remain at a 40-year low. Nevertheless, retirees are encouraged to use the Money Advice Service annuity comparison tool, which compares eight providers. Before the pension freedoms there would have been dozens of comparisons.
A recent survey from State Street and The People’s Pension caught my eye. It looked at people living on defined contribution pension income from the first day of the pension freedoms and found the following:
- A fifth cashed in their entire savings, paid off debts and invested the balance in bank accounts. Most spent this money on family health reasons, a child’s wedding, ailing parents or property renovations
- One person invested in peer-to-peer lending, another in Indian equities and another in gold coins
- A fifth took the 25 per cent tax-free cash and a few bought annuities. Two years on, they regretted this decision. The cash sum was used for the likes of holidays, property renovations or second property purchases.
But once the excitement of having a large cash sum at retirement has passed and people move onto their later life, expenditure drops. This is when products such as deferred annuities are needed to pay out in the event the pension freedoms money runs out. Indeed, as the lifetime annuity market falls away, now is the time for the product developers to think more about deferred annuities. They are now one of the most effective products to protect income for life.
Advisers have the chance to help form policy in this area by providing input to the FCA’s retirement outcomes review.
That said, you would not think they know this. As a side note, just 28 responses were provided to the regulator’s original consultation; the only adviser being Hargreaves Lansdown.
With around 120 FCA papers issued last year, consultation responses have dramatically declined. Who has the time to respond?
But there are many ways to engage with us. Last night I sat up and did a detailed online survey where it checked my spelling, calculated my numbers and thanked me all the way. I received a £10 Amazon voucher this morning thanking me again for my time. This is how surveys and consultations should work these days if you are after a response. They should be online, with guidance along the way and plenty of free text boxes.
Kim North is managing director at Technology & Technical