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Will trees bear annuity fruit?

For some IFAs, the news that the Government is even considering the feasibility of decision trees on annuity purchase will show that no lessons have been learnt from stakeholder decision trees.

In addition, the suggestion that the Government is looking at allowing annuitants to transfer their pot after they have started to take an income throws up a number of issues surrounding the potential logistics and scope of moving providers.

Both trees and transferability are subjects under discussion at the Number 10 policy unit, the section responsible for generating policy. Downing Street has called in a number of IFAs, providers and key lobbyists to put forward their plans for annuity reform while throwing a few of their own into the mix.

The latest ideas on the drawing board throw up a host of issues. Even after months of agonising consultation, drafting and redrafting, it is still far from clear if anyone has bought a stakeholder off the decision trees or if the guidance has been of any use. Would annuity trees be any different?

The two key criticisms of stakeholder decision trees are that they are incomplete, exclude the impact of the minimum income guarantee and the pension credit, not to mention the fact that they sidestep the issue of contracting out.

After the initial reaction of IFAs to decision trees, the sequel is relatively predictable. On the ground, trees have generated the need for financial advice and are not likely to cost advisers a penny in lost business.

Wentworth Rose managing director Philip Rose says: “Once people see decision trees, they want advice on how to use them. If anything, they reinforce the need for financial advice. They might work for a minority of smaller cases but it comes down again to this question of complexity. The area of annuities is just as complex as pensions.”

A move to introduce decision trees on annuities would seem to be well in keeping with policy to date. The Government hopes that more and more lower earners will generate modest pension pots through their stakeholders. Under current legislation, these pensioners will need to buy an annuity of one kind or another in the future.

The other issue for the Government is that it feels this part of the at-retirement market is not being adequately serviced by IFAs, who find it commercially necessary to concentrate on the higher end of the market with complex arrangements which often require active management such as income drawdown.

One important issue concerning annuity transfers surrounds the potential impact it will have on the entire market, particularly how transfers could be executed and what effect certain types of transfers would have on the mortality cross-subsidy. Annuitants are only currently able to move products within the bounds of the same provider.

Annuity Bureau director Ronnie Lymburn says: “Moving an annuity would involve converting the income back into an amount of capital and converting it back into income. Transferring would obviously benefit the likes of Equitable Life withprofits annuity policyholders.”

A move to allow transfers would follow the Inland Revenue&#39s decision to allow the introduction of transfers of income drawdown policies in February.

It is not clear what the scope of transferability would be if it became policy, for example, whether with-profits annuitants could swap to a unit-linked policy, if a single life could cash in and rebuy as a joint life or if transfers would only be permitted for funds over a certain threshold.

Alternatively, could a policyholder with newly discovered impaired mortality shift to an enhanced rate? Allowing this kind of transfer is likely to undermine the mortality cross-subsidy, causing annuity rates to drop across the board should annuitants have the freedom to shop around after they have signed up.

Britannic Retirement Solutions corporate development director Bob Bullivant says: “Transferability would not work on guaranteed annuities. Also, on the issue of impaired lives, this selects against the life company. If there was someone who was on a normal life rate, had a heart attack and moved to a higher rate, he would take with him the mortality cross-subsidy.”

The ultimate effect of any impaired life exodus would heap more agony on depressed rates which is especially pertinent as yields on long-dated gilts are currently languishing at an all-time low of around 4.4 per cent. This led last week to a number of providers, including Standard Life, Norwich Union and Canada Life, cutting their rates, NU twice in one week.

The switching of the entire Boots pension fund from equities to bonds has led to fears that demand for gilts will soar and yields will further fall as others follow.

Actuary Buck Consultants legal and technical manager Kevin Le Grand says: “It is unlikely many other funds will follow. The Boots fund had a number of unique features.”

This reassurance would offer some comfort if it were not for ever-increasing longevity which will keep the pressure up on gilts.

The policy unit says it was not prepared to discuss any of the details of the meetings or when the conclusions of its feasibility questions are likely to make it to policy or even consultation. What is clear is that there appears to be genuine appetite for reform but it is anyone&#39s guess as to whether annuity decision trees will get off the drawing board.

Average returns started to fall again at the beginning of November, with the average unit trust having returned -22.4 per cent in the past year.

Merrill Lynch&#39s gold & general fund and Govett&#39s US bear fund continue stay at the top of the unit trust table, with the rest of trusts all coming from bond fund sectors.

A £1,000 lump sum invested in the Merrill fund a year ago would now be worth £1,334.

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