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L&G warns FSA over possible fixed-term annuity misselling

Legal & General has warned the FSA it has “deep concerns” about the potential for misselling of fixed-term annuity products.

The fixed-term annuity market has continued to grow this year as providers look to offer consumers alternatives to conventional annuities. LV=, MetLife, Just Retirement, Aviva and Primetime Retirement all offer fixed-term annuity products.

Speaking to Money Marketing, L&G group executive director for protection and annuities John Pollock says: “My view is that the fixed-term annuity is not a good product for consumers. They place quite a large bet on markets and longevity in a manner that is uncertain.

“They may get an uplift for a period, and I stress the word ’may’, but I do not think the fact they are betting the rest of their life against uncertain conditions is appropriate. I think conventional annuities represent the lowest-risk way of ensuring the majority of people do not end up in poverty in retirement. We have deep concerns about fixed-term products.”

Pollock says L&G has voiced its concerns to the FSA. He says: “We have heard Martin Wheatley talking about early intervention if they have concerns about particular products. We have certainly voiced our concerns and it would be up to the regulator to determine whether it is worthy of review.

“Unless consumers are very aware of those risks and are assessing them from an informed perspective, then the product is probably not appropriate for them.”

LV= head of annuities Matt Trott says: “I think L&G is missing the point. Fixed-term annuities are designed to provide customers with additional flexibilities that are just not offered by conventional products, without all of the costs and risks associated with drawdown.”

Aviva head of retirement Darren Dicks says: “Fixed-term annuities come with more risk than conventional annuities but we believe the product is potentially appropriate for customers that want to crystallise their pension and take their tax-free cash but do not want to make the final decision about annuitising.”

The FSA declined to comment.

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Comments

There are 27 comments at the moment, we would love to hear your opinion too.

  1. Nothing to do with the fact that L&G don’t offer this product I suppose and are losing market share to it !!!!

  2. This seems to be another L&G rant about loss of market share due to the fact they do not offer this product type. Shame on you L&G for encouraging the regulator to shine a spotlight on a perfectly acceptable mid way product… Compete or Capitulate!

  3. I am not a fan of fixed term annuities, but they have a DIFFERENT risk to “traditional” annuities. It isn’t LESS or MORE.

    An exam in statistics and probability should be mandatory for anyone working in this industry.

  4. David Trenner - Intelligent Pensions 10th May 2012 at 9:35 am

    There is a temptation to think that L&G are saying this because they do not have a product, but I would agree with what they are saying.

    A typical FTA pays lower income than a lifetime annuity, and so the purchaser is gambling on annuity rates increasing, either because of an increase in gilt yields or because he/she has become ill.

    The early products did not offer an option to convert to impaired life on diagnosis before the end of the term, but newer ones do – and charge for this.

    Our analysis suggests that sitting in a low risk fund in drawdown may be more appropriate, as the typical internal rate of return of an FTA is usually very low.

    For someone with a small pot (say £30k) drawdown may not be appropriate, but taking 10% less income for 5 years in the hope of getting ill does not seem attractive!

  5. I think a good point has been raised here. Fixed term annuities have benefits, but generally as an alternative to drawdown type contracts. as drawdown is only suitable for those clients with suitable fund sizes, capacity for loss, investment experience and clear attitudes to risk. In other words a small proportion of those retiring today.

    As an alternative to a conventional annuity, then the increased risks and uncertainty of future fund values and income should be a very well presented.

    We have spoken with a few clients who expressed an interest in fixed term annuities based on increased promotion of them. However, once we had explained both the advantages, disadvantages and risks many had a different view to the suitability.

  6. I think a fixed term annuity is not going to be the right choice for everyone but it does add another option to the retiree and can be a useful tool within a blended retirment scenario.

    Great debate everyone. Keep up the good work!

  7. harry houdini 10th May 2012 at 9:50 am

    A fixed terms annuity sound like one where you spend the final payment on a one way ticket to Switzerland to see the nice man from Dignitas.

    of course this is a great product to sell…..

    just depends who to…

  8. Surely this is a question of options. It is totally wrong for L&G or Advisers to tar everyone with the same brush. Wants and needs differ from client to client – and what suits one may not necessarily suit another. One thing is for sure, though – FixedTerm Annuities add another option for clients entering retirement, and where there is more choice for the client, that must be for the best.

  9. So a product which is utterly irrevoacable – can never be changed in any way despite changes in your life, health and personal circumstances (and which can run for 30+ years) is ‘low risk’? Nice try John, weak words from a 20th century life office.

    Instead of criticising innovators, why not try and create new solutions for a market which badly needs to change.

  10. Wow this is schoolroom stuff and smacks of running to the teacher. I agree shame on you L&G. So long term annuites are the perfect answer are they and are without risks I suppose?

    I’ve said this for a while but I can see a time in the near future when it will be have been misselling to have recommended drawdown or conventional annuties or fixed term annuities and then all that will be left is to turn the lights out. REALLY L&G the regulators don’t need anymore encouragment surely.

  11. My views on Fixed Term annuities are well known – I believe there is a place for them and do recommend them to clients, however I am concerned that other advisers do not understand or fully explain the risks.
    My views are influenced by experience as an expert witness looking at the sale of with-profits annuities and I haunted by the question asked by the barrister “So Mr Burrows, do all of your clients who bought with-profit annuities understand the risks?” I was able to refer to my own literature, analysis and comments which clearly pointed out the risk and so I could demonstrate that all risks, including the risk of the final bonuses being removed was explained. I believe that I do the same thing for Fixed Term.
    I fear that if clients see a drop an income from their fixed term policies at the end of the term they may have a claim unless advises can demonstrate they understood the risks.
    Moving on to a more positive message, I am thinking about the advantages of advice and two things spring to mind. One is that it is about better outcomes for clients and secondly advice should look at potential future incomes.
    A level annuity may be good advice today but in 10 years time if inflation has taken off it might look like a poor investment. In this scenario, if interest rates have increased to keep inflation under control an income policy with the potential to deliver a higher income will have been a good investment.
    The point is L&G is right to point out the risks but wrong to suggest that the “fixed-term annuity is not a good product for consumers”. The evidence suggests that there is a good case for them in the right circumstances.

  12. Katherine Oxenham 10th May 2012 at 10:52 am

    I think the important thing is that retirees have choice. I agree that fixed term annuities will not suit everyone but you need to give your clients all the options and allow them to actively dismiss those they do not feel comfortable with. Explained properly and reviewed regularly, fixed term annuities form an important part of a holistic approach to retirement income planning.

  13. The real problem is with the morality of annuities. Taking money out of an estate and handing some of it to strangers, or having your income boosted by dead people’s money. Grotesquely immoral! Let’s have an amnesty. Let all those who have been tricked into investing in personal pensions be offered their money back less tax.

  14. Fixed term Annuities. The next ‘must have’ investment. Who saw this one coming ?

  15. If anybody wants a more balanced assestment please look at my presentation on Fixed Term at
    http://www.williamburrows.com/library/Aviva-Fixed-Term-Income-Plans.pdf

  16. At last. I rarely agree with L&G but on this occasion I truly believe they have a very valid point. As ever the regulator is fast asleep and even when those in the industry blow a whistle they seem not to have put in their hearing aid.

    In August last year I analysed these options for a client and wrote: (Sorry if it’s a bit long, but it is accurate).

    Pension Fund of some £230,000. The male was 67 age attained and his wife 64, both in good health so impaired annuities were not an issue and both were non-smokers. The best quoted annuity rate worked out at about 6.08% after maximum tax free cash, therefore the gross annuity worked out at just under £10,500 per annum (fortunately the client has considerable other assets and doesn’t have to rely on this alone for an income). However, I was more than well aware that this a pretty paltry sum for what is a fairly reasonable fund, therefore bearing in mind that the client has a low risk tolerance we did look at draw down, but the hurdle rates didn’t make it worthwhile at all. So it was to Snoopy that we turned as we had heard what wonderful deals these would be and, in order to keep an open mind, a fortuitous sales call elicited a raft of quotations.

    Now I am the first to admit that I am certainly no actuary, but I think I am fairly competent with basic arithmetic and unless I have entirely misunderstood I have found, yet again that these deals were more the figment of an overactive sales imagination than closer analysis of the figure work would support. Bearing in mind that the annuity quote was based on a level annuity with 50% spouse’s pension, we then got the following figures from Snoopy, bearing in mind that what we wanted was the largest guaranteed maturity amount.

    We started off with a fund of £230,000, took our tax free cash and had £172,500 to buy a temporary 5 year income plan with 50% spouses cover with maximum GAD. This gave us a somewhat more acceptable £11,385 income per annum, but at the end of 5 years only £127,368 was going to be returned. The income over the five years is 8% better than the conventional annuity. However the guaranteed maturity amount is a 26% drop in the initial value, or in other words we are losing 5.88% compound per year, or put yet another way £11,385 a year x 5 years is £56,925. However if you look at the difference in the starting price and the guaranteed maturity amount, that’s a drop of £45,132. So they give you £56,925 over 5 years but take away £45,132 which means that you actually get £11,793 over 5 years which is £2,359 a year. What sort of deal is that?

    But we can now calculate further. Much of the perceived advantage for these plans is that the client can defer buying the lifetime annuity so that hopefully by the time he comes to buy it he will be 5 or 10 years older, or however long he decides to take the temporary annuity for and therefore should be better off as a result.
    Indeed, he could even have health issues which would entitle him perhaps to an impaired life annuity. But all these are suppositions and of course we live in the real world and therefore have to deal with what we know, not what may be.

    Therefore presumably the logical way to proceed is to re-quote on conventional annuities by making the client 5 years older in this case to see how the annuity rate would improve (I set aside the point that over recent years annuity rates have declined and not increased). Well I discovered that doing this small exercise the annuity rate return would increase from about 6.08% to 6.9% on the best quote, which is certainly an improvement but by no means breath-taking.

    In which case, taking the guaranteed maturity amount of £127,368, this would buy an annuity based on the same principles (level with 50% spouse) of £8,788 per annum. That’s a drop of 16% on the original conventional rate at outset. So we therefore have the following upshot. The maturity amount of the temporary annuity would need to be at least £152,116 for the client to remain in exactly the same position assuming the 6.9% annuity rate for 5 years older. But what’s the point being just in the same position? (Apart from the adviser charging the client for useless work). Obviously if the annuity rate is significantly greater (how likely is that?) then there might be some traction, but taking the figures as they are, and assuming an actuarial span of a further 19 years from inception, (ONS Statistics for a male age 67) if we took the standard annuity from outset that would equate to an aggregate return of some £199,424 over 19 years. If we looked at Snoopy’s figures we would get £11,385 x 5 years and £8,788 x 14 years which would produce in aggregate £179,957 or some 9.76% less than the conventional annuity (£19,467 less over 19 years).

    If I am somehow in error, or if my logic is warped, or if this is somehow entirely incorrect, without the slightest hint of irony I would certainly be most appreciative to be put right. Otherwise it would seem that we are to rely on clients either becoming extremely ill or annuity rates sky rocketing to make these plans worthwhile or risk serious complaints in the future.

    These figures were sent to the provider first for comment – none was forthcoming – not even an acknowledgement. That surely tells you something. Wake up FSA!

  17. David Trenner - Intelligent Pensions 10th May 2012 at 12:35 pm

    Harry, I don’t think you can put the onus on the FSA here. Your analysis has demonstrated the point I made above: the internal rate of return does not justify the risk that annuity rates will not go up enough. But if the providers’ salespeople do not understand this analysis (and if they do how can they sell the product?!) what chance someone at the FSA?

    We have to self-regulate because we will always know more than the regulators!

  18. For customers who don’t HAVE to annuitise, then Fixed Term may be no bad thing.

    Customers who are delaying in order to receive a short-term uplift and who are fortunate enough NOT to require an impaired-life annuity will be receiving a nasty shock if they annuitise in a Solvency II world (and, if they’re male, are subject to gender neutral longevity assumptions).

    A timely heads-up to the FSA to prevent a potential mis-selling disaster is no bad thing – even if the majority of the people who have bought a fixed-term annuity have done so apropriately.

  19. I think many of the comments made by David, Billy and Harry could almost be used as the basis of a training session on presenting a balanced picture of how to consider alternatives.

    I much prefer this sharing of ideas and experience to the usual bash the FSA, damm the RDR, slag the providers…even if justified, it is not helpful

  20. man on the moon 10th May 2012 at 2:35 pm

    A heated debate.

    I have looked at these STA plans as an option for Clients and as yet have not advised one to be taken

    They have a place alongside Lifetime annuities, Drawdown, Phased retirement, dripfeed drawdown, investment backed annuities etc.

    One concern that I have similar to Harry K is when considering the flexibility versus that of traditional annuities that the return for clients drawing income is not wonderful. This is again based on ageing a client 3 or 5 years or whatever from their age now. Then comparing annuity purchasing power if annuity rates stay the same and of course health remains the same as does their need to add in a financial dependant benefit.

    As I stated earlier they have a place but one concern that I do have is that if for example a 6 year term on a STA is taken at outset. The clients income falls at the next GAD review that the client may not understand or choose to understand that this is not the fault of the Advisor. This is even though the surplus income is added to the GMA and they continue to have flexibility.

  21. Billy Burrows 10th May 2012 at 2:45 pm

    James, I welcome your comments because I am just about to launch the retirement-academy which will do exactly that – providing in-depth and technical training for IFAs

  22. Low risk? With the VAST majority of lifetime annuities sold on a level basis payable for 20 – 30 years one word comes to mind………..inflation !

  23. Quick reply to Mr Katz: Assume it’s a male pension – you don’t tell us. If you opt for a 50% spouse you are already gambling with client money. She could predecease husband, in which case he’s stuck in a low yielding annuity for rest of his life when he could have had a single life and much higher income. Suppose he dies first. She only gets half his pension, so effectively half the capital has been lost, or let’s say the effect of half the capital, because in reality, it’s all been lost. The male had other income you say and does not rely on pension income. Then surely drawdown is the answer. If she predeceases husband he can buy an annuity with the fund or keep it in drawdown. If he goes first she can have all his money for drawdown or annuity purchase. Committing to an annuity when there are two people in good health, and when there is other income available, seems to me to be misselling! Don’t forget, with drawdown the income can go up! Once committed to a level annuity (no one opts for the escalators, they’re such a poor deal) that’s it, no chance of increase. Annuities are dreadful investments. Who opts for an annuity purchase with their free money?

  24. Julian Stevens 10th May 2012 at 5:59 pm

    There are many interesting and intelligent comments here, but the bottom line is that the choice is neither black nor white. L&G is wrong to try to paint it so.

    Are interest rates and, by association, gilt yields and thus annuity rates likely to be as desperately low in five years time as they are now? I’d be prepared to bet the buying power of my own pension fund that they won’t be.

    Then again, longevity is forever increasing, Brussels is intent on sticking in its unelected oar with Solvency II and the UK government doesn’t have the backbone to tell the Eurocrats to shove it.

    In five years time, things MIGHT be even worse than they are now. But maybe not.

    The few FTA products with a GMV that I’ve looked at are rubbish ~ the rates of return to get to the GMV’s are pitiful. 5 year buidling society bonds offer significantly better rates.

    So FTA products aren’t going to work unless the buyer is prepared to take some investment risk with the balance of his fund. The only product I know well that offers a wide choice of actively managed funds alongside the FTA is Canada Life’s Annuity Growth Account. MetLife seem to have some interesting products (active funds with lock-ins, I seem to recall), but their broker consultant’s too lazy to come round and explain to me just how they work and what the funds are like.

    But, when all is said and done, what’s REALLY needed and what the government remains wilfully oblivious (perhaps even opposed) to is for annuity rates to be removed altogether from the retirement income equation, hence my suggestion of a Retirement Income Bond.

    No, it wouldn’t be capable of delivering much more income than an annuity but it would have the incalculably valuable features of simplicity, keeping all the holder’s options open for the rest of his life and, if the insurance element can be provided cost-effectively, with no loss of security of income for life. It would also be much easier to explain and to be appreciated by consumers as offering a value for money application of their pension fund/s.

    Wouldn’t that be better than any of the current retirement income options?

  25. I am pleased that L&G have come forward with such a brave stance on the most innovative product in the retirement field for many years. I am pleased that they have expressed concerns over its potential risks and find it heart-warming to see those who have supplemented these concerns with their own.

    I feel that such an active forum does not just do favours for dealing with FTAs but with retirement products in general. As it stands too many retirees are left without any assistance with this most complex and consequential of financial decisions. No single advice solution is best for all. However as long as the individual is clear as to the service they are receiving, surely some help is better than none??

  26. I bet L&G dont offer fixed term annuties!

    Maybe I should advise the FSA that there could be the potential for mis-selling of annuities – no solution is infallible!

  27. I have sold this product.

    Although there is a market place for it, the customer needs a very specific set of circumstances for it to be suitable.

    If possible draw-down offers all the advantages with added flexibility and greater choice of provider and funds.

    If a persons pension savings are not enough to enter a full draw-down arrangement then they probably should not be thinking about a fixed term annuity anyway.

    Like I say, the client needs a very specific set of circumstances.

    The only way companies can sell enough of the product to make it profitable is for them to provide it to people whom it is not suitable for.

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