If you have not yet sent a response to the FSA's consultation on Disclosure: Trading an endowment policy and buying a pension annuity, don't worry – you still have a few days to pen some well-chosen words. The consultation period ends on October 31.
Like most people, you may find the title of the review rather heavy and less than enticing. However, I would encourage you to participate.
Why? It deals with an increasingly important subject, the open market option – the right for people to shop around for their annuity. This is not just important for pensioners, it is increasingly important for the business that you as an IFA will be required to advise on.
The key facts are two-thirds of the working population are over 45 and are either starting to think about their pensions, close to drawing them or having to buy an annuity.
This market is therefore increasingly relevant and growing. Every year in the UK, £7bn is spent on annuity purchase. This is hardly a surprise as the over-45s have nearly 80 per cent of all financial wealth in the UK (Henley Centre for Forecasting).
Equally important, despite the recent performance in the markets, pensioners are becoming increasingly vocal about the poor returns they are getting on their annuities.
However, there is minimal awareness of the right to shop around for an annuity with a better rate, even though it has been estimated that in the population reaching age 65, up to 40 per cent could qualify for an enhanced annuity on the basis of health or lifestyle. This can improve their income by up to 14 per cent and even as much as 30 per cent.
Mori research (commissioned by Britannic Retirement Solutions) shows that 77 per cent of those who had heard of “annuity” did not recognise the term “open market option”.
This must explain why only 25 per cent of people reaching retirement use the Omo and only 3 per cent of the funds which are converted to annuities on retirement are on terms that are enhanced for lifestyle or health reasons.
So why is this consultation important to you?
First, it is about reputation and a changing marketplace. The growing retirement market and concerns about pensioner living standards means that more people approaching retirement will be seeking expert advice about how best to enhance their investment during this “third age”.
Second, it is about the credibility of best advice to the retirement market. If pensioners fail to shop around for the best annuity as a key part of their retirement planning, they will rightfully feel misled or poorly advised.
However, of over-riding importance, it is about ensuring that the level of warning and advice about Omo means that consumers choose financial advice from experts before selecting their annuity.
The consultation seeks, among other things, to find out “what level of information policyholders need to know and which it would be reasonable to require to be given to them?”
The FSA suggests an explanation of the Omo, including:
That there is not necessarily one “best” company or product for all individuals in all circumstances.
That by shopping around, policyholders may get a better deal and the importance of this to their standard of living in retirement; and finally.
A brief explanation of how to make use of this option, including the desirability of taking “independent” financial advice.
Remember that – “independent” financial advice!
I feel that for the credibility of advice and advisers in the increasingly complex and sophisticated financial retirement market, it is in the best interest of those engaged at this level to make the following comments:
All annuity providers use standard wording to provide consistency. That wording must not only make consumers aware of the Omo – it must also shock them out of complacency by providing a very real wealth warning.
The consumer must be made to sit up and listen. If they are not shocked into action, it may result in a loss of income which could downgrade the quality of their retired lives.
Support the recommendation that consumers should take advice. However, consumers must be told that specialist advice is available not just from “independent” advisers but also tied advisers.
It is not the source of advice which is the key issue. Instead it is an awareness of the impact of the Omo and the fact that they should seek best advice to help them improve their annuity which is.
Good luck with your responses to the consultation.
Jim Boyd is a director at Consolidated Communications