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Show them theway to go Omo

Despite recent coverage, the open market option is stilllittle understood and little used.

Even though not using the open market option is the only example I know of a genuine free lunch – the only prob-lem is that it tends to be the provider and not the clientwho lunches.

In 1998, according to ABI statistics, over £7bn was converted from money-purchase schemes into annuities. It is difficult to assess how much did not reach the open market as there are no real statistics. However, other surveys, including those carried out by Evergreen, suggest that only about 25-30 per cent of people reaching retirement make use of this facility.

This is disappointing – or if you view it from the client&#39s perspective, especially one who has been affected by not exercising this option, then it is a disgrace. For example, the client probably has a lower income for the rest of his or her life, the Exchequer receives less tax and the point at which a client could qualify for means-tested benefit is accelerated.

So what can you – the IFA – do about it?

First, if you are not already aware, you need to be aware that Evergreen has launched a major political campaign to draw the attention of MPs to the lack of use of the open market option, and its impact on their constituents and the Exchequer. A question has already been raised in the House of Commons and Treasury Economic Secretary Melanie Johnson has agreed to look at the issue.

If you feel as passionately as we do, you should write to Melanie Johnson at the Treasury, Treasury Chambers, Parliament Street, London, and your MP. We have found that MPs are keen to discuss an area that is non-political and does not require primary legislation to rectify. All that is needed is for the FSA to insist that a warning is given on retirement quotations to the effect that failure to consider the option could lead to a lower income for life.

You may be asking why you should get involved. Well in short, this is a £7bn market that should be the preserve of the IFA. After all, the IFA is in the best possible position to show that real value is added in a way that clients will most appre-ciate – more money for the rest of their life.

When you bear in mind the availability of enhanced annuities that increase income by up to 42 per cent over the worst rates, the case becomes compelling. Evergreen estimatesa considerable number ofpeople reaching retirement could qualify for an enhan-ced annuity on medical or lifestyle grounds.

With these types of figures, there can be no doubt that this market represents an opportunity to make a real difference to your clients&#39 futures and, if properly developed, can be highly satisfying for the IFA.

This market is set to grow rapidly. In 1999, there were around 20 million personal pension policies in force and this should increase dramatically with the introduction of stakeholder. Mintel recently forecast a 245 per cent rise in real terms in the value of new annuity premiums over the next four years. By 2004 the number of annuities purchased will be over 500,000.

But wait, I can hear you say – some funds are very small and commission is also small. This is true but if you can give a client a better income for life, surely he will pay a fee. Rather than being intangible, as is the case with a lot of investment advice, this benefit is a real one – a benefit that can make all the difference to a client&#39s retirement lifestyle.

Furthermore, if the provider operates a flexible commission system such as Evergreen&#39s fee-based commission, the fee is paid by reducing taxed pension income. Every pension carries tax-free cash options and you will be able to advise on the investment of this sum as well.

The other reservation that some IFAs have raised on becoming involved is that, once someone has retired, that is the end of advice.

I would argue that nothing is further from the truth. The retired population accounts for over £400bn of property assets and many retirees are struggling on their current incomes. Equity-release schemes last year accounted for £250m of sales – another massive potential market for the IFA. Further into retirement, long-term care advice may be needed.

The retirement market represents a massive opportunity for an IFA to make a real difference to a client. It is immensely satisfying and its development represents a major market for IFAs and real benefits to your clients.


Julian Gibbs

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