View more on these topics

Nic Cicutti: Savers won’t seek vital advice on cash for annuities

Cicutti-Nic-2014-MM-700.jpg

Every now and then, whenever I write about a financial dilemma faced by myself or a close family member, I receive lots of emails and online messages telling me all I am trying to do is obtain free advice over the internet.

In reality, this is almost never the case: by the time the article appears we have usually already decided what to do. In truth, sometimes I might also speak to a couple of friendly advisers for a few minutes, run a couple of ideas past them and decide accordingly.

Is that cheating? I suppose so, just a bit. Most people do not have the luxury of knowing many advisers and are unable to exercise the same opportunities that we do.

It works both ways, of course. On a number of occasions over the years, advisers seeking guidance on how to translate their thoughts into print have contacted me for help. Or a friend might ask if I can offer their son, daughter or another relative some advice on how to become a journalist.

I have always tried to help with either type of inquiry. Ten or 15 minutes do no harm and it always feels good to help out every now and then – as long as you do not think the person asking for assistance is taking the mickey.

There are some things, however, that even I would regard as beyond the pale in terms of asking for free advice from an adviser. For example, I have not bought an annuity yet. If I did – and advice was necessary – I would expect to pay for it.

Even more so when it comes to selling an annuity: of all the potential minefields for your average 60 or 70-something, that of getting rid of an annuity you have already bought must be one of the hardest decisions to make.

Yet that is one of the new “freedoms” which Chancellor George Osborne announced as part of his March Budget statement barely three weeks ago. In essence, after April 2016, up to five million pensioners who already have an annuity will now be able to sell it if they wish.

The Treasury is expecting the FCA to consult with interested parties to “introduce appropriate guidance and other consumer protection measures” regulating the sale of annuities.

It is expected their buyers will be institutional and not retail, although no word has emerged on whether these institutions might be allowed to package up tranches of these annuities as income-producing funds, or for them to become part of other income funds sold to the public.

For a retired person, the potential complications are staggering: what are your tax liabilities likely to be that year? For example, Guardian journalist Patrick Collinson has calculated the potential tax take for someone aged 70 who receives £75,000 on the sale of an annuity in 2016.

If their only other income is a state pension worth around £6,000 a year, for the 2016/17 tax year they will be taxed on total earnings of £81,000, meaning nearly £40,000 will be taxed at the 40 per cent higher rate tax. Some people, especially those with larger annuities worth more than £150,000, will end up in the 45 per cent tax band.

The Treasury’s announcement in March spoke of people selling annuities to “pay off debts in response to a change in circumstances, for example getting divorced or remarried.”

But what about annuitants’ spouses, some of whom may be unaware of what their husbands of wives are doing and suddenly discover that incomes they take for granted are no longer being paid?

Don’t get me wrong: this is not a diatribe against selling an annuity, merely a reflection on the fact that this, as with a number of other important financial decisions retirees are now expected to make, is one in which expert advice is vital.

The worry is such advice simply will not be sought by those who most need it. In recent weeks, as several stories in Money Marketing have indicated, it is becoming clear the guidance on offer to those wanting to know whether to take cash or buy an annuity will be limited in the extreme.

For existing annuitants, expecting them to pay 3 per cent, say, of their £75,000 pot for advice that may conclude they should not sell up at all is a triumph of hope over likely experience.

Pension Wise was always likely to be flawed by virtue of the fact that it does not offer advice. The Treasury and other agencies, including the FCA, must take responsibility for not being prepared to discuss alternatives, such as a small voucher-type system that could be used towards obtaining that advice.

But the industry too, including both advisers and companies like Aviva that have now done a body-swerve away from offering any kind of guidance at all to their soon-to-be and current potential annuitants, must also take some of the blame for not raising some of these options, including fund-matching to ensure even a portion of an adviser’s time was paid for.

The end result will be seen years down the line – and you know what it reminds me of? This is the home income plan scandal of the early 1990s all over again.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. Nic if people aren’t willing to pay 3%, with the protection this provides them for bad advice, then hard luck mate.

  2. It’s a tricky one. The fact is that most of us can provide qualified advice very quickly and inexpensively, but due to 1) regulatory overhead and 2) liability, the process is skewed and whilst I know that you understand this, there are forces which seek to blame the adviser for being too expensive when the reality is much different.

    So, until the above changes, and in particular the liability issue, we are where we are and shall remain there no doubt!

  3. Pension freedoms, cash for annuities – the cynic in me would believe that the Treasury would be delighted if Joe Public goes for DIY advice and ends up paying huge amounts of tax.

  4. Julian Stevens 9th April 2015 at 9:42 am

    If people do stupid/unsuitable/self-damaging things such as cashing in the (very probably) vitally important guaranteed income stream existing annuity, it won’t be with any help from me. All I can do is mind my own kitchen and look after the best interests of my clients to the best of my ability. What anyone else does won’t be my problem.

  5. “Be careful what you wish for” springs to my mind in the madness that is consumer protection !

    The FCA, its rule book, RDR and crippling costs, is its answer to rid the market of bad practice/mi-selling ! (its MMR jab, to rid the world of disease if you will)

    Will we all skip, dance, & bask in the Elysian fields ? following our regulators instruction and cost ?

    Naa ! im afraid not, we trudge through mud thicker than the fields of the Somme, paying our master (FCA) to whip us as we go !

    Consumer confidence and protection is very important, it cant be delivered whilst knee deep in mud but it can be crushed by those who go round, said sticky patch, now that is the problem !!

  6. Nic – You suggest that the industry should take some responsibility for not suggesting alternatives. Can you give an example of a time when the FCA listened to the industry, never mind the chancellor or treasury.

    As mentioned in the comments above most advisers are able to provide succinct advice at a low cost. What they can’t then do is jump through the required regulatory hoops for the same low cost. This is why it is so important to clarify whether or not someone is getting advice or guidance. Advice = Pay us and we’ll jump through hoops to make sure you achieve the right outcomes. Guidance = Jump through the hoops yourself and if you they trip you up, tough.

    Our current regulatory environment is such that we can initially jump through the hoops successfully only to find that someone, with hindsight, judges the jump to be a failure. After years of experiencing this environment advisers are becoming better at spotting the hoops that are most likely to cause problems, call it evolution or survival of the fittest. Thats why most advisers aren’t going anywhere near annuity resales. If ever a regulatory hoop had a big neon flashing light attached to it stating “Likely to be moved mid jump” this is it.

    Just my humble opinion of course.

  7. “For existing annuitants, expecting them to pay 3 per cent, say, of their £75,000 pot for advice that may conclude they should not sell up at all is a triumph of hope over likely experience”

    3% x £75,000 = £2,250 to be advised not to sell their annuity versus maybe £20,000+ lost through tax and in addition loss of guaranteed income for life if they do it without advice.

    Hmmm, which should I choose?

  8. Compliance Manager 9th April 2015 at 11:53 am

    Following the Chancellor’s announcement regarding the new ability for clients to sell their annuity income to a willing 3rd party, I’ve decided to become a product manufacturer and would like to offer you the opportunity to get “ground floor” access to my new product.

    The details are very “hush hush” at the moment but I intend to structure it as an unregulated collective investment scheme that allows investors to buy a portfolio of high-quality annuities at huge discounts and reap the benefits of long-term secure income.

    For your initial start-up investment capital of at least £100,000, you will receive an allocation of shares in the new venture. Given the discount at which I will buy the annuity income, this venture is guaranteed to make money so there is absolutely no reason for you not to engage at this very early point. Later investors WILL NOT get the same deal – so act NOW.

    Don’t worry if you don’t have the capital available – I’ve arranged favourable financing via a high-street bank at very attractive rates. (I will also make these loan arrangements available to end-user clients.)

    I am putting together marketing literature at the moment – again, the detail is confidential within the new operation but I am delighted to share with you the domain name I have registered:

    Second Hand Income Trading.com

    Watch this space for developments!

    ____________________________________________________________________________

    This is – hopefully obviously – a joke but it is designed to highlight a very real risk.

    I have, in the past, had experience of GTEPs – a “product” that offered clients the opportunity to borrow lots of cash at high street rates in order to buy a portfolio of 2nd hand endowments.

    How long will it be until some entrepreneurial type has this exact idea?

    I can already hear the sound of PCs humming as the Claims Management Companies draft their template complaint letters.

  9. I have had 3 enquires this week re final salary to cash. Certainly sir thats £500 for a review which might tell you not to do it and 3% if we do the transfer with the £500 offset. Not had a single taker. Happy enough to pay 3% if there is a move but not for advice not to do it. Human nature innit…

  10. A lot of perceived problems would disappear if we would all remember that the new freedoms, including flogging off your annuity, are actually voluntary not compulsory. This particular freedom is an option not an obligation.
    I would guess that as advisers our default position is to advise against it; there needs to be a compelling reason to advise a client to proceed to cash in his/her annuity. And if providers will not action without advice having been taken I think any potential problem recedes significantly.

  11. @Julian – “What anyone else does won’t be my problem”.

    Julian – I really, really do hope you’r right, sincerely. Just that the FSCS scares the life out of me……..

  12. Jabba The Hutt 9th April 2015 at 2:25 pm

    @ Nic,

    I think you are right on this occasion. A scandal beckons but who will be blamed? The policy makers who offer “freedom” with no sanction or the financial services community who are standing on a precipice!

  13. The main driver for the pension mis selling scandal was not advisers but the government sponsored TV ad campaign: “break free from the shackles of your employer’s pension scheme!” I can still see the arms with the chains breaking…

    How quickly they forget.

  14. Good point from Blair Cann – The freedoms are “voluntary not compulsory” …..

    For the vast majority, encashing an annuity will be the wrong thing to do and Simon W’s pricing for advising not to do something is about right at £500 to look at and possibly advise against and 3% if advised to proceed with the £500 offset.

    I do however think there needs to be a £clearing house” system established to separate advisers and providers where someone decline to take advice.

  15. Julian Stevens 9th April 2015 at 9:18 pm

    Chipping ~ Yes, the FSCS’s self appointment to make intermediaries pay for the negative consequences of just about anything and everything is a worry (about which APFA, as on so many issues, appears to be doing nothing, possibly because the relevant section of the FSMA is worded in such a way as to allow virtually infinite latitude of interpretation), though we may perhaps take a shred of hope from the fact that liquidating an annuity isn’t the same as putting money into a dodgy investment scheme. Then again, if just ONE intermediary facilitates such a move, the FSCS will probably seize upon that as an excuse for holding the entire community responsible for the losses incurred by everyone else who did so, regardless of any intermediary involvement. Then we’ll read the usual sanctimonious platitudes from Mark Neale telling us how sorry he feels for us, but……

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com