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Steve Webb: Why I’m poking the annuity market with a ‘big sharp stick’

Pensions minister Steve Webb has questioned the value for money offered by insurers and non-advised brokers as he continues his assault on the annuity market.

The Liberal Democrat MP caused a storm over the weekend when he suggested people should be able to switch annuity provider if they can get a better deal elsewhere.

The proposal has been criticised by the industry, with experts warning providers would need to cut rates by 25 per cent to accommodate the reform.

Speaking on BBC Radio 5 Live earlier today, Webb said: “When you take your pension pot and turn it into a retirement income, the way things work at the moment is that is a one off decision and it is irreversible.

“Many of these products are not good value at the moment. You have to live to 90 or even 100 to get your money back and we need to have lots more options for people rather than just making a one-off decision often with no advice and often not getting good value for money.

“Some of the people who have been critical of what I have said are people who make their living selling annuities. We have to be on the side of the consumer here.

“There is a lack of advice for people, particularly people with small amounts of money who are not going to pay hundreds of pounds for advice. This market needs a big shake-up and I am trying to poke it with a big sharp stick.”

Hargreaves Lansdown head of pensions research Tom McPhail said the Government should focus on increasing the number of people who shop around at-retirement and insisted annuities are, in general, a value for money product.

He said: “I think the minister is being fed misinformation. People have a right to shop around – we simply need to make it easier for people to do that.”

However, in response Webb said: “I simply don’t buy this argument that annuities are good value for money. Tom McPhail is an annuity broker and he is promoting annuity brokers. There are questions about whether people are getting value for money from those types of services.

“Education is vital and we need to strip away all the jargon. Buying an annuity is a huge financial decision and we need to avoid this cliff edge where you make a decision and then you’re stuck with it for the rest of your life.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. I am on Tom’s side here.

    I suggest that anybody who wants to criticise the annuity market or annuity brokers should actually spend a day on the phone speaking to potential annuity clients. I remember Steve Webb spending a day with HL. How many real clients did he speak to?

    I remember the good old days when most clients who exercised the open market option received advice – even if they didn’t realise they were getting advice – and they had the time and inclination to work through the options.

    Today if clients are asked if they want to consider the annuity alternatives which require taking some risk, the answer is normally ‘No’. Ask them if they want to pay for advice the answer is also normally ‘No’. Ask them if them if they will take a lower income at the outset but get a higher income in the future, the answer is also ‘No’.

    I don’t think this behaviour is necessarily rationale or sensible but that is the reality of the world at the sharp end.

    Something happened a few years ago which resulted in more clients aggressively shopping for the highest income at the expense of taking their time to do the job properly.

    I know where the blame lies but am too polite to say where.

    My plea is that people with influence should find a way of really understanding what is a very complex market before rushing off to make unjustified criticism or making unrealistic suggestion.

  2. Since Steve Webb made his original proposal, the level of vitriol here on Money Marketing online has been extraordinary and unedifying.

    ‘Idiot’, ‘stupid’, ‘totally out of touch’ and ‘completely misinformed’ are just some of the comments that have been made. Plus the usual hoary chestnut of ‘Steve Webb has no experience of selling pensions so what right has he got to lecture us’ If you follow that one through to it’s logical conclusion then Margaret Thatcher should never have been PM (no experience of running anything) Aneurin Bevan shouldn’t have created the NHS (no medical experience) and George Osborne shouldn’t be running the economy (no financial background)

    As an industry, we should be debating and coming up with serious alternative proposals rather than stooping to cheap jibes and personal abuse. If we don’t, then it becomes more likely that a ‘solution’will be imposed – and we’ll all end up as losers.

  3. In a bizarre way, such a poorly informed standpoint from Mr Webb has achieved something which nothing else has….to unite the opinion of advisers!

    The damning statements he makes will achieve nothing but yet more mistrust of those who can help, leading to more apathy and poor outcomes. Mr Webb is in an ideal position to work with all stakeholders (including those who can use policy to influence external factors which have recently dragged down annuity rates) in order to improve the overall consumer outcome. However this will be achieved through constructive discussion and not as a result of direct criticism.

    Billy is right when he says that retirement choice is about more than just the highest income at outset. The role of the professional, in any field, is to use detailed and specialist skills in order to assist the consumer to end up with the best outcome, where they would otherwise be unable to do so. With matters financial, this is the role of the adviser, in the same way that solicitors or dentists fulfill this requirement in their own field. Steve Webb needs to work with those advisers who do the job properly in order to better understand how to resolve issues.

  4. A pretty large proportion of industry practitioners would dearly like to poke Mr Webb with a big sharp stick with a view to getting him to address the annuity rates trap into which people are locked when they come to vest their pension funds. As for the costs of receiving advice, why don’t you, Mr Webb, take a look at the regulatory requirements for providing advice these days on just about anything? The creation of a Retirement Income Bond would sweep away much of all this at a stroke. Were the regulator/government to facilitate the creation of such a product, few if any people would opt for anything else.

  5. The comments made by Steve Webb reported in this article alone show a distinct lack of understanding about the “at retirement” market. He is talking as though annuities are the only option at present. A raft of options are already available for clients should they have the inclination to look for them.

    A key format of annuities is mortality tables remove an insurers ability to factor this in due to having the option of switching to another provider and you’ll suddenly find that annuities are priced based the average time between switches etc. The net result being clients get smaller retirement incomes.

    Yes the annuity provision process needs to be made more transparent and the OMO, along with getting qualified advice, promoted more heavily at retirement age but annuities themselves aren’t the problem.

    Steve Webb needs to sit down with the industry and come up with new options for the “at retirement” market which is changing all the time. I’m 32 and would be distraught if by the time i’m 60 – 65 my only real choices for a retirement income are still drawdown or an annuity.

  6. Everybody is focusing on the technical challenges. What about the practical reality? If we don’t feel that most 65 year olds can make decisions on annuities and need help, how much more so for those in their seventies whose health may have deteriorated? What IFA will have the courage to advise them to switch annuities knowing that it will be some time before the gain would outweigh the cost of the advice? Is the minister really proposing to put the opportunity for churning into the annuity market?
    This idea needs far more thinking through than it has got to date and the Minister was premature in coming out with it.

  7. Admit it Mr Webb you are doing this for one reason – votes. This will only benefit the middle and upper classes just like RDR.

    Your comments demonstrate a clear lack of knowledge about how annuities work.

    If you introduce the option to switch annuities all that will happen is that annuity rates will fall further.

    Maybe you should carry out in depth researce into why annuity rates have fallen and when you can show that it is nothing to do with government and EU policies (fiscal or legislative) and longevity we will accept you know what you are talking about.

  8. So Steve Webb things annuities are bad value for money, they are currently offering around 6% return! What does that make the return on Government Guits and a fraction of that. Is he suggesting that the Gov should pay a much higher return on its large borrowing and interest payments!
    I am amazed you can get 6% on an annuity looking at where the money is invested, gilts etc and the admin costs of paye tax and regulation.
    Like the idea of getting rid of AMD’s effectively raising the AMC for most this annuity idea would decrease the annuity by a large amount for all, can’t be good politically if his ideas ever happen.

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