It sometimes appears that those who would benefit most from independent advice at retirement receive least help. A prime example is when people with relatively modest pension pots reach retirement. Decisions taken at this time may have a significant effect on their standard of living for decades to come, yet most are funnelled into a lifetime annuity without considering the alternatives.
The open-market option was introduced in 1978. Low take-up led to a rethink of the rules in 2002 when providers became obliged to tell clients they might get a better deal by taking their pension savings elsewhere. The number of retirees exercising the option has remained stubbornly low, prompting a third review that is currently ongoing.
The review must find solutions to the problem that those who need to make best use of their pension savings are among the least likely to use an independent or whole-of-market adviser.
Whatever factors are dissuading people from seeking professional advice – whether it is lack of awareness of the financial significance of making an irreversible lifetime commitment, access to advisers or cost of advice – they are serious impediments restricting access to better retirement income decisions.
The RDR, in proposing a simplified advice regime, must be careful not to result in no improvements or to make the situation worse.
The limited commission available and retirees’ reluctance to pay additional fees mean that their financial needs are dealt with as quickly as possible and funnelled towards a self-select, tied or multi-tied lifetime annuity or simply left with the existing provider. The RDR proposals could reinforce this weakness. They make the mistake of assuming it is better to receive some advice rather than none, missing the point that what many retirees need is good advice on the whole range of options available on what may be the biggest single investment they ever make.
There is much else at fault in the retirement income market that the Omo review should consider. One point is that pension providers have a vested interest in keeping the pension money in house through the sale of a retirement income product such as a lifetime annuity, contrasting sharply with the client’s requirement to secure a higher income or a more flexible product. There need to be far stricter rules to put a clear separation between the provision of a pension plan and provision of an income product at retirement.
It would also be useful if the Omo review could look at enforcing tight time limits on providers for the transfer of funds to alternative providers. At present, this can take months because there is no compulsion for providers to hand over the cash. A 14-day limit should be imposed with a mandatory requirement for funds to be transferred electronically rather than by cheques in the post.
Another key opportunity would be to focus on the standardisation of pension provider letters to actively encourage retirees to seek advice and consider the whole market. Many of those letters that do comply with current Omo rules are still worded to implicitly encourage clients to roll over into an annuity rather than shop around or seek independent advice.
Retirees need to be made aware that their pension money should be invested with just as much thought as if it were cash in hand. It should be made clear that buying a lifetime annuity is not compulsory at retirement and many would benefit by keeping their options open, especially in the early years.
The widely held belief that retirees have no other option than to annuitise remains a major disincentive to the development of a market for alternative retirement products. Fixed-term annuities have a huge role to play because they effectively enforce an Omo at the end of each term, making the holder shop around for a new deal that suits them best and giving advisers the ability to continue servicing clients deeper into retirement.
It is only by age 75, roughly halfway through the average retirement, that lifetime annuities become more attractive because the benefit from mortality pooling is so much stronger and people have a far better idea of their future income needs.
About 65 per cent of pension money – more than £4bn a year – is rolled over into providers’ own lifetime annuities with little thought about alternatives. Few people in the industry believe these people get the best deal.
Peter Quinton is business development director at Living Time