View more on these topics

Why Steve Webb’s switchable annuities look doomed to failure

Alan-Higham-MM-Peach.png

Pensions minister Steve Webb is right to want to shake up the at retirement market to stop 250,000 people making irreversible poor decisions on their retirement income.

His comparison with mortgages is a valid one, after all an annuity is a reverse mortgage.

The big difference is that whilst there is supply and demand for lifetime annuities, there isn’t any supply for 25 year fixed rate mortgages in the UK. Lenders including Halifax and Nationwide used to offer 25 year loans but they were roundly rejected by borrowers aghast at the idea of one lender for life.

A 25 year fixed mortgage either has to have exit charges or offer poorer rates than on offer on shorter term mortgages.

There is no law I know of that stops an insurer offering an annuity with a transfer option. So, why doesn’t anyone offer a guaranteed lifetime rate but give you a get out if you can find a better deal elsewhere?

The answer is that the insurer, like the mortgage firm, would either have to offer poorer rates or have exit charges. Insurers will have to go for the latter because no-one will buy a transfer option at a 25 per cent reduction.

There are 2 ways to calculate a transfer:

1. Fund received – pension paid – charges + returns

2. Pension being paid x factor to value remaining lifetime

In practice, insurers will look at both options to ensure they make money.

Regulators will need to intervene to stop abuse on transfer terms. It will be messy & complex.

I doubt any firm will offer these annuities willingly so Webb will have to legislate. It will be fraught with risk of unintended consequences.

50 per cent of people make bad decisions at retirement, largely because they don’t want to have to make a decision at all. Forcing them to buy a product that requires regular review points and more decisions isn’t likely to prove popular with the masses.

We do need to reform two areas and they are ones the Treasury is responsible for. Webb could do a huge service to encourage the Treasury and the FCA to look at:

1. The bias that allows annuities to be sold like apples on a buyer beware basis but layers huge regulation on other retirement income sales.

2. The lack of regulation around “non-advised” sales which encourages most of the bad practice we see.

The annuity is fine as it is. It is just being bought by the right people at the wrong time and at the wrong price with the wrong features.

Webb’s well intended idea could kill the guaranteed lifetime annuity or it could reform the market. There is no question that the market needs changing, but if it were me, I would start with the simple-to-fix distribution issues noted above first.

It would give the consumer the reassurance they need to make the right decision and the industry would get the wake-up call it needs to force it to meet standards that should have been there in the first place.

Alan Higham is non-exec chair at Annuity Direct

Recommended

Letter to the editor: Brokers should take a look at Noddle

Dear Sir, I read with some amusement the article by Devraj Ray in your 12 December issue as I am sure most brokers have had clients quote their Experian score and feel assured they could borrow what they needed. Instead, brokers might prefer to refer their clients to www.noddle.co.uk.  It is run by Call Credit, […]

FCA-Building-Blue-Sky-700x450.jpg
1

FCA appoints new wealth management head

The FCA has appointed Robert Taylor as head of wealth management and private banking in its supervision division. Outgoing head of wealth management and private banking Bob Ferguson is to join the FCA’s policy, risk and research division as a technical head of department.  Taylor was chief executive at Kleinwort Benson, the London-based private client banking […]

Legal-and-General-LG-500x320.jpg

Stephen Smith takes control of L&G Mortgage Club

Stephen Smith has assumed control of Legal & General Mortgage Club in an internal restructure that will see current managing director Ben Thompson take on a new role looking after the group’s banking relationships. Smith was previously director of housing and external affairs within L&G Network. Thompson, who joined the mortgage club in 2007, will […]

Old-lady-pension-pensioner-elderly-aged-700.jpg
1

LEBC calls for long-term care advice VAT exemption

Adviser firm LEBC has launched a petition calling for advice on care fees planning to be exempt from VAT. The Government’s Social Care bill, published last year, sets out plans to cap long-term care costs at £72,000 and increase the means-test threshold from £23,250 to £118,000 from April 2016. The bill also proposes creating a […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. But if the annuity is being bought at the wrong time, at the wrong price and with the wrong features, it’s not really fine is it?

    I agree with the distribution fixes, but that needs to go hand in hand with a review of what’s actually being sold to who, and when.

  2. To make an annuity transferrable you have to strip out mortality gain. What you’re left with then, is in effect drawdown.

    I seem to recall Keith Popplewell years ago saying that plain vanilla, low cost / low risk/volatility (ie the underlying investments) drawdown might be a way forward.

  3. headbelowthe parapet 6th January 2014 at 4:05 pm

    Perhaps the problem lies in the investment vehicles used by annuity providers rather than in the product itself – the bottom line is that providers need to manage investment/interest rate risk, longevity risk and they have to make a profit (otherwise why on earth would they do it?)
    This is a problem for actuaries to address and solve, not advisers.
    But, if an individual wishes to take on the investment/interest rate risk and longevity risk themselves they could always use drawdown…

  4. Get rid of the iniquitous 55% tax charge on invested drawdown funds. Hey presto, a personal, transferrable, income in retirement vehicle. No further legislation required.

  5. I agree with a lot of what is said here. Yes, the annuity is ‘fine’ as a product, but it’s the distribution that is key to the problems. All research suggests that as many as 60% of people could qualify for an Enhanced Annuity at the point of retirement and yet we are not seeing this translate into EA sales, so I would challenge the statement here that they (annuities) are being bought by the “right” people. Quite clearly something is going badly wrong when a large majority of people who could qualify for an EA are being “sold” (or “choose”) a conventional version instead. Who’s to blame for this? Providers? Advisers? Consumers? Government? Non-advised websites? Probably all of the above, to a certain degree.

    More flexibility in annuities (as per Webb’s suggestion) is a welcome debating point, but HMRC rules already allow for this (few providers offer this flexibility for the reasons stated in this article), then there are Temporary Annuities (not a popular product either) and of course Fixed Term Annuities which, although not strictly an “annuity” (written under Drawdown rules), do at least provide a ‘reset button’ for those who want to get out of the contract at a later date.

    I agree that the last thing we need is legislation on this point that could open up a whole can of unintended consequences. Education is key, as is further product innovation and an ‘offer more options’ mentality amongst those working in the retirement marketplace

  6. We all know (Even Steve Webb) that the problem, in the vast majority of cases, in the non advised market. If for no other reason because the annuitant has no recourse if he or she finds out later that they mad the wrong decision. Lets do some joined up thinking here. Martin Wheatley stated that the FCA research shows that 50% of the population does not understand what 50% actually means. What chance will they have surrounding annuities as to what is what is right for themselves without professional advice to ensure that the correct decision is made? The logical conclusion is to stop anyone from entering into an annuity without professional advice. The FCA can do this at the stroke of a pen, they do not need legislation. Call it RDR 2 or the AMR (Annuity Market Reform). They may well be taking a choice away from the population however that has never stopped them from doing so in the past. They should simply instruct providers, from a date in the future – say 6th April this year to refuse any kind of annuity application which has not come from an advised source. In one fell swoop they can quickly, safely, efficiently and very cheaply put an end to this huge problem they see. No need for enquiries, consultations, independent commissions etc etc. Annuitants will get slightly lower incomes due to the advice charge being levied or will have to pay for the advice directly but at least they are very liekly to get suitable annuities and on the odd occasion thatthey dont, at least they can have some redress if it can be shown they received poor or bad advice. I would sugesst that the drop in income doing it this way would be nowhere near the drop required to have “transferrable annuity”. Just a thought or 2.

  7. Marty, mandating advice on annuities is a good idea in theory, but I’m not sure it’ll work in practive. Consider the poor old pensioner with a £5,000 annuity pot. I’m not sure that forcing him to give up 5%-10% of his pension to pay for advice is going to be very popular. Even with higher premium sizes, some more spohisticated investors will resent being forced to purchase advice.

    In my view, the answer is forcing Non Advised distributors to be more clear about how much they are charging / receiving, and what they are providing for this amount. Arguably, the commission they receive is clearly documented in the quote, but even I struggle to see what support / guidance / assitstance punters can expect to receive from these brokers (including the number of provides on their panel).

    Its then up to Advisers to convice customers that’s its worth paying a bit extra to make sure they get the best product for them.

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com