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Tom McPhail: Why Pica’s new directory matters

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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

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. From a company that charges 3% for an annuity with no advice?

  2. Not sure why the website didn’t allow my comments on this when posted yesterday. Just shows, even the best websites aren’t infallible.

    Firstly, PICA should receive recognition for the work they have done in driving more consumers to buy products from someone other than their current insurer.

    The idea that there should be a national directory of at retirement advisers to help people who struggle to find affordable reliable expert help is also welcome. The ABI promised in its Code of Conduct to sign post customers to a directory if a suitable one could be found.

    It is therefore very disappointing that PICA have designed a directory which isn’t regarded as suitable by OMO Working Group stakeholders who include TPAS, MAS, the Consumer Panel as well as NAPF & ABI. It is a missed opportunity.

    The directory is unsuitable in my opinion because it lacks clear objective standards for brokers/advisers to follow which would safeguard the consumer against the following problems.

    1. Being confused whether they were paying for advice with a recommended solution or simply making a buying decision based on limited data.

    2. Buying an annuity, especially an enhanced annuity, believing that you had looked at the best rates when in fact there were better rates readily available which had not been offered to you

    3. Buying an annuity from the open market and losing valuable benefits from the current policy which would be better such as guaranteed annuity rate; higher tax free cash or losing life cover when ill

    4. Dealing with a salesman when you thought you were dealing with a professional who was on your side

    5. Being honest and up front about how the consumer pays for the service, not trying to call it ‘free’ when commissions of up to 4% are taken

    6. Having different commission levels for different products which given the sales nature of many firms does distort how the products are distributed.

    7. Selling unsuitable products like single life annuities to married men but saying nothing because “I’m not allowed to provide advice”.

    Over 100 firms of specialist at retirement advisers are willing to sign up to a voluntary Code of Conduct for brokers and advisers which would protect the consumer. The Code will be administered by the Society Of Later Life Adviser and will be issued later this year for public consultation. A draft of the Code has been sent to the OMO Working Group for comment ahead of public consultation.

  3. Mr Higham

    Quick response to some of your points

    4. Dealing with a salesman when you thought you were dealing with a professional who was on your side

    5. Being honest and up front about how the consumer pays for the service, not trying to call it ‘free’ when commissions of up to 4% are taken

    7. Selling unsuitable products like single life annuities to married men but saying nothing because “I’m not allowed to provide advice”.

    How does your own service stands up to these challenges. You offer annuities on a non-advised basis, but time and time again appear to fail to mention this. In fact I can go to your website and buy an annuity without speaking to a single person, just tick a few boxes sign a disclaimer and off I go.

    You talk about standards, perhaps it time to look at your own double standards?

  4. Guy Durham

    No one could buy with a few clicks and not speaking to anyone.

    Everyone who initiated an annuity sale online had their choices checked against known data and was contacted if for example a married man wanted to buy a single life annuity.

    No one buys without being offered the chance to pay their advised or non advised charge from their fund or from bank account this enhancing the annuity rate.

    The peril Annuity Direct uses for non advised annuity sales are all qualified IFAs who also give a customer wishing to buy without advice the chance to receive advice. For the vast majority of annuity purchase clients advice does not cost more than the commission.

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