The ideal solution would be for all people in this position to get the independent help they need to make this important decision. Buying an annuity is like entering a one-way street. There is no going back. Once made, people have to live with their decision. That is why it is important to get the right annuity and the highest possible income.
But not everyone will get the advice they need. It is simply not economical for advisers to work with people who have small pension pots. The cost of advice could be between £300 and £600 but the commission is usually only 1 per cent of the pot.
We need to find alternative models to help people get the advice they need. Part of this may lie in the proposals for primary advice made in last July’s retail distribution review discussion paper. This area now falls under the heading of sales in the recent interim report. There are other ways forward as well.
As part of the Treasury’s drive to increase the number of open market options being exercised, it decreed that the Pensions Advisory Service should design an online system to give people the help they need to buy the right type of annuity. TPAS is an independent, non-profit organisation offering help and guidance on pension matters and it asked the industry for input when developing its online retirement planner, which has just been launched.
The first thing that strikes you when you go through the online planner is that buying an annuity is far from simple. To its credit, TPAS has taken a thorough approach. You are asked questions about guaranteed annuity rates, market value reductions, transfer penalties, merging plans and tax-free cash. You are struck by how much has to be considered.
The planner also tries to cover the alternatives to annuities including products such as income withdrawal and short-term annuities. However, given the growth in areas such as living benefits or third-way annuities, it is obvious that this section will need to be revised as more providers come to market.
The planner also takes the individual through the important decision of finding the right shape of annuity, considering spouse’s pensions, increases in payment and guarantees. It also flags up the possibility of impaired life and enhanced annuities.
All in all, it’s good stuff. There are perhaps just two areas in need of improvement. First is the language. It feels like it has been written by a pension expert and would benefit from being a little more ordinary in approach. For example, no one refers to their spouse so why not use husband or wife?
The second area is that it leaves the person hanging somewhat. After picking the right shape of annuity, it pushes them into the arms of the FSA comparative tables. The missing bit seems to be help with the documentation and the big question of how do you actually move money from one place to another?
People obviously need help and advice when making the big annuity decision but advisers cannot afford to give it. Online retirement planners can play a part in helping to solve this but others have a role as well. Providers need to work together to find a faster and simpler way of combining pension pots and moving the money to the chosen annuity provider. This should help streamline the process and allow advisers to devote their energy to helping clients make the right decision, rather than following a paper trail put it into place.
There are opportunities galore for providers and advisers specialising in this field and I am sure that together we can improve the service and decision-making process for thousands of people.
Rachel Vahey is head of pension development at Aegon