Annuities have dominated the headlines over the past few months, with the debate fuelled by veteran Labour MP Frank Field’s call for an Office of Fair Trading investigation into the non-advised annuity market.
Then last week it emerged that Which? is entering the at-retirement market with both advised and non-advised propositions.
I have no problem with a new advised at-retirement service but I have huge concerns about the non-advised annuity market and whether it is providing the best outcomes for retirees.
Firstly, a non-advised annuity broker is simply tasked with finding the best annuity rate, either via a telephone service or online. But as all advisers know, this puts the cart before the horse. The most important question at retirement has to be: is an annuity actually the right option for the retiree? Indeed, would deferral be better?
As an industry, this is another message we need to communicate more clearly: shopping around for the best annuity is not enough; all retirement income options need to be considered.
By definition, a non-advised annuity broker cannot advise retirees on other options. The decision is already made to buy an annuity. Also, while deferral is often a very effective strategy, is a non-advised broker ever going to suggest that as an option?
Finally, our advisers have dealt with many clients who have already spoken to a non-advised broker and would have received a far worse result if we had not stepped in. We have seen non-advised brokers arranging an annuity when the existing scheme has guaranteed rates; who have missed the possibility of an enhanced annuity; and who charge excessive levels of commission or offered commission kick-backs to mask inferior rates and service.
I passionately believe the advised market serves retirees far better. After all, will a non-advised service:
Discuss and recommend the benefits of deferral?
Recommend more appropriate retirement income options?
Investigate the existing pension scheme to discover whether guaranteed annuity rates apply?
Get annuity quotes from the ceding scheme?
Advise a retiree on the benefits of moving to a cash fund?
Give the retiree access to a highly qualified, experienced and knowledgeable adviser?
Of course, if an annuity is ultimately the best option, the rate and level of income are hugely important.
But so is getting the correct shape, which is where advice is so important.
Lastly there is the thorny issue of cost. Non-advised brokers get paid by commission, advisers by fees. In our experience, an adviser can generally advise a retiree, doing all the things we mentioned above and more, for a lower fee than the often, in my opinion, excessive commission paid to a non-advised broker.
As an industry, we need to champion the benefits of advice at retirement while emphasising it need not be more expensive. In fact, with some non-advised brokers charging up to 3.5 per cent commission, advice might be much cheaper.
The message that retirees need to consider all the options is slowly getting through, but we should not rest until all retirees realise the benefits of advice.
Phillip Bray is marketing manager at Investment Sense