More value is lost from the pension system at the point of retirement than at any other stage of the retirement saving journey.
For years, investors have been buying poor value and inappropriate annuities. This is because they have not enjoyed the benefit of having an intermediary help them to shop around the market and find competitive terms for them.
Every year more than half of annuitants, hundreds of thousands of people with billions of pounds of retirement savings, have been missing out on this market competition. What’s more, because many of them don’t readily understand the retirement process they may have been buying an inappropriate retirement income.
For example missing out on an enhanced annuity, or not realising that alternatives such as drawdown exist. Financial advisers and retirement brokers offer a solution to this problem but all too often investors miss out on the services these businesses offer.
The Pensions Income Choice Association was created to address this problem. For the past few years we have worked with the Stakeholder group chaired by the DWP and comprising a range of industry, government and consumer bodies to improve the retirement shopping around process. As a result of this work, the ABI launched its retirement Code of Conduct earlier this year.
This is a notable step forward, however still more than half of annuity purchasers are buying their retirement income without first shopping around the marketplace.
The ABI code helps investors to get the right shape of annuity where they buy from their existing insurer but it does nothing to help them seek out the best rate in the market. For that a broker is needed, someone who can help them search the market and use that market competition to secure a good deal.
There is an additional problem though in that many pension pots are very small, half are worth less than £20,000 at the point of annuitisation, whilst nearly 30 per cent are worth less than £10,000. For these smaller pension pots in particular, it can be a problem for investors to find an intermediary who can help them.
This is where the Pica directory comes in. The directory is free for intermediaries to register with, it is free for consumers to use, it carries no advertising or click through costs. It is a not-for-profit initiative to bring together industry solutions with consumer demand.
If all investors were already enjoying the benefit of independent advice there would be no need for this directory. Unfortunately in spite of the ABI code, the market is still not working.
What’s more, the cost of providing a compliant advisory service is such that today it is unrealistic to expect that all investors can receive independent advice at the point of retirement.
The directory has been carefully designed to accommodate both advised and non-advised solutions. Crucially, the directory can be used as a tool to drive up standards in the non-advised intermediary market.
All intermediaries registering on the site must certify that they comply with minimum standards regarding both the shape of retirement income they sell to their customers and the competitiveness of the rates they offer. In time we hope that the directory can be used to further raise these minimum standards.
We have no idea how successful this directory will be. We hope that intermediaries will recognise that this is an opportunity to obtain free leads matched to their business profiles. We hope that consumers will find it useful in finding intermediaries who can help them. Until it launches, none of the participants in the DWP OMO stakeholder group is endorsing the site or pointing their customers towards it. This is understandable; they want to see it working properly first.
However we have worked hard to accommodate their feedback on the directory’s development and we hope that once it launches they will be willing to signpost their customers towards it. In particular we are looking for the ABI’s members to include a reference to the directory in their wake-up packs which they send to their retiring customers.
We believe we have designed and built a directory which can meet the demands of all parties involved and that it will help to make the retirement market work better. We look forward to finding out if we’re right.
Tom McPhail is head of research at Hargreaves Lansdown