Do non-advised demands go too far, or not far enough?

Critics call for annuity sales to fall under the RDR, while others say advice is prohibitively expensive.

Response to recommendations by the Financial Services Consumer Panel to increase transparency of non-advised annuity sales and to include an option for advice have ranged from critics saying they are too onerous to those saying they are not extensive enough.

Yesterday, the FSCP reported findings which showed non-advised annuity sales are often marketed as ‘free’ but in fact pay 5 to 6 per cent commission, well above the 1.5 to 3 per cent average. The report also criticised a lack of any requirement to consider the ‘whole of market’.

The panel recommended the FCA undertake a complete overhaul of non-advised sales and introduce a code of conduct that would demand, among other things, that annuity providers be forced to offer an advised service as well as their traditional non-advised route.

Andrew Tully, pensions technical director, MGM Advantage said there is still a significant lack of awareness of the potential benefits of shopping around among savers approaching retirement, and that the annuity market as a whole needs a thorough overhaul.

To read the full article, please click here.


Source: FT Adviser

Ways of combating inflation

Mark Carney is settling into his role as the new governor of the Bank of England. Moreover, he seems determined to distinguish himself from the old guard. So whereas the headline policy of keeping interest rates bumping along at 0.5% looks oh-so-familiar, his reasons for doing it are slightly different. Carney is targeting unemployment, and until that falls to 7%, interest rates will remain low. In contrast to previous policy, inflation is deemed ‘sticky’ and is being left to its own devices, but if it starts to rise ‘too high’ (whatever that means), action will be taken to bring it down.

Therefore, predictions are inflation will continue to exceed the old 2% target, and perhaps even nudge above 3%. Inflation still presents a danger, especially to pensioners who spend a larger proportion of their income on essential items that tend to increase in cost more quickly. Pensioner inflation is often cited to be much higher than CPI, often as high as 9%. In addition, its corrosive properties to a retirement income over 20 or 25 years are harsh.

The good news for the state pension is that it is guaranteed to increase. The Coalition Government famously introduced the triple lock - a guarantee to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%. However, that now looks to be in jeopardy. The triple lock is only written into legislation until the end of the current parliament, 2015. From there on state pension is only proposed to increase in line with average earnings, which over the long term, will give less protection against inflation.

Private pension incomes are at even more risk from inflation. Those in a defined benefit scheme will find at least part of their pension will increase each year, and some might even be lucky to find it’s inflation-linked. However, those buying annuities on the open market have options - to buy a level income, one that increases at a fixed rate (often 3%) or an inflation-linked income. The vast majority plump for the level income - partly because it is by far the higher starting income, and it can be difficult to see beyond that - certainly to a distant point in time 20 years’ hence.

Even if the retiree took a closer look and did some basic maths, index-linked annuities don’t look good value for money. A 65-year old with £100,000 today could buy a level annuity of £6,100 a year or an annuity that increases each year by 3% of £4,267 a year¹. (I’ve assumed no spouses’ pension, a five-year guarantee, and no medical or lifestyle conditions.)  That means the retiree would have to live to 88 before the accumulated fund from the increasing annuity outstripped that from the level annuity². 

However, if the person chose a RPI-linked annuity, their starting income would be only £3,666¹. If RPI was 5% a year, our retiree would be 85 before their accumulated fund from the RPI-linked annuity² beat the one from the level annuity, but if RPI were 3%, the retiree would be a staggering 97 before the break-even point.

Nothing disintegrates under the glare of inflation like a fixed income. Therefore, of course, keeping some investment exposure and the possibility of investment growth for retirement income is an effective way of combating it. This is one of the main reasons behind income drawdown’s historic success.

However, income drawdown is only a temporary solution for most. The absence of mortality cross-subsidy – present in annuities – means the underlying investment fund has to work harder in income drawdown than in annuities. This is particularly true for those over the age of 70. Investment-linked annuities as well as offering the key advantages of investment exposure, income flexibility, and a maximum income of 120%, also have the benefit of mortality cross subsidy and may be a better option for older clients wanting to fight inflation.

Obviously, there are risks with maintaining investment exposure, and the usual adage that investments can go down as well as up. As longevity continues to increase and the average lifespan grows, it’s clear one of the greatest risk for retirees is simply ignoring inflation altogether.

  

1.    Source: MGM Advantage analysis of Money Advice Service annuity rate tables 11.9.13 

2.    Source: MGM Advantage calculations

Enhanced annuities have come of age

Enhanced annuities (EA) have now come of age and become a mainstream product. Nowadays advisers need to justify why they are NOT recommending an enhanced annuity.

The EA market has exploded. According to the ABI, last year it reached over £4.5bn and accounted for 31% of all annuity sales¹. Despite the fact that up to seven out of ten retirees could qualify², the sad truth is enhanced annuities are still the reserve of those who get advice. Around half the value of annuities sold by independent advisers are on enhanced terms¹.

The booming non-advised channel also seems to be getting to grips with the enhanced market. Although only 5% of the value of annuities sold on non-advised terms were enhanced last year, this has increased to 18% for the second quarter of 2013¹. Thanks to better communications, both on the telephone and online.  Although there is some considerable ground to make up until it can match independent sales, this has to be good news for those who seek the non-advised route.

However, there are many thousands who fail to shop around and buy direct who are missing out on the increased income an enhanced annuity can secure. From April to July this year, 52% of people bought an annuity with the holding provider, but only a pitifully low 6% of those bought an enhanced annuity¹.

We need to rebalance this. We need to make more people aware of their choices and encourage them to shop around. Media coverage does its bit to heighten awareness of enhanced annuities. And the hope was the ABI code would encourage shopping around by getting providers to put the message clearly upfront. But the initial signs show there is no sharp increase in those buying from another provider – although it is early days.

Clearly, the key is getting help in making retirement decisions. And this is where another initiative might help. The Pension Income Choice Association (PICA) will shortly launch an adviser directory so consumers can find professional help through the retirement maze, be it on independent or non-advised terms. Hopefully if people get the help they need, they will be quizzed about their medical and lifestyle history and discover that an enhanced annuity might be appropriate.

The annuity market is changing fast. Writing annuities on individual terms is becoming the norm, and we must make sure people don’t miss out on higher incomes because of a lack of available help.

 
1.       Source: MGM Advantage analysis of ABI market statistics 2012 / 2013 
2.       Source: MGM Advantage Retirement Nation 2012

The Autumn Statement 2013 - state pension ages will rise in the future

The Government’s autumn statement took place today. Here are details of the changes affecting pensions:

1.       State pensions: State pension ages (SPA) will increase again, as widely trailed overnight. The increase to a SPA of 68 will take place in the mid-2030s with a further increase to 69 in the late-2040s. Someone born today is likely to have an SPA of at least 72. The increases to 68 and 69, plus previously announced changes to 66 and 67, will save the Government around £500m over the next 50 years.

2.       Income drawdown: The Government has been conducting a review of income drawdown tables to see if the allowable income is reasonable – as some providers have been asking for drawdown income tables not to be linked to annuity rates and/or allow a higher income. The Government Actuary’s Department (GAD) has found withdrawal rates are a reasonable match to annuity rates, so the government will not change the basis on which the GAD tables are formulated.

3.      Class 3A voluntary National Insurance – In October 2015 the government will introduce a new class of voluntary NICs to allow pensioners who reach State Pension Age before 6 April 2016 an opportunity to top up their Additional Pension records. This is to try and help those people who won’t qualify for the new single tier state pension which is due to be introduced in 2016.

4.       Individual Protection – As a result of reducing the pension lifetime allowance to £1.25m from 6 April 2014, the Government has confirmed it will introduce individual protection 2014 (IP14) through the 2014 Finance Bill. Individuals who claim IP14 will have a lifetime allowance of the value of their pension savings on 5 April 2014 subject to an overall maximum of £1.5 million.

Retirement income: what are the options?

For many clients, retirement is the first point at which they will come into contact with an adviser

Source: FT Adviser

Retirement planning makes up a large proportion of business for advisers and is an area where significant value can be added. With myriad options to choose from, selecting – and monitoring – a retirement plan is extremely useful for many clients.

From small pots to large, those approaching retirement face huge challenges. Annuity rates remain relatively low (although the ABI is continuing work to encourage shopping around, most recently with the implementation of its code of conduct on retirement for its members), while low Gad rates pose a challenge for those taking drawdown.

 Here is a list of the available options:

•  Annuities - level, escalating or inflation-linked

• Enhanced annuities

• Investment-linked annuities

• Income drawdown

• Other options - equity release

   

Follow this link to read this article

Can inertia secure better retirement incomes?

 Source: Money Marketing, by Mark Pearson

 

A key part of the automatic enrolment ideology is that employee inertia will result in their accrual of a pension fund. While this may help the government drive people into saving, the same inertia is presumably a factor in a third of all retirees taking the annuity offered by their current pension provider without shopping around.

The Government’s aim is for individuals to create an additional pension pot and bolster their state pension entitlement, which is only likely to reduce in the future due to the effect of our ageing population. A pension pot on its own will not suffice; at some stage it must be used to provide an income.

By 2018, the introduction of automatic enrolment is expected to create an influx of 11 million new pension savers. The knock on effect is projected to treble the size of the annuity market and it is essential the annuity market properly services these customers.

In its recent consultation, ‘Better workplace pensions: a consultation on charging’, the DWP demonstrated in its four client scenarios that the lifetime effect of reducing annual management charges from, say, 1.00 per cent to 0.75 per cent resulted in a increased fund value of between 3.2 and 8.4 per cent.

In light of this, it is surprising to discover how comparitively little attention is focused on the fact that, according to the NAPF and Pensions Institute, between £500m and £1bn in lifetime income is estimated to be lost each year as a result of savers being tied into annuity rates which are not market leading. This could represent up to 8 per cent of the annual annuity market.

To read the full article please follow this link.

Drawdown drawbacks

As drawdown clients get older they face increasing risk when it comes to maintaining their income levels, MGM Advantage has suggested.

The firm compared income available from a £100,000 pension using a drawdown product and an investment-linked annuity, and found that the annuity would pay the same level of income as the drawdown but with a lower level of risk (or a higher level of income with all else being equal).

The comparisons the firm considered compared clients aged 65, 70 or 75 through to age 85 and 90.

MGM Advantage Pensions Technical Director Andrew Tully explained that as age increased so did the risks of drawdown, but options outside of drawdown do exist.

Tully did stress that whilst investment-linked annuities could help, they would not be for everyone as some people like to retain access to their fund.

To read the full article, click here.

Source: Banking Times

The rise of the non-advised channel

Ten months after the introduction of the Retail Distribution Review (RDR), and we are beginning to get the hard facts behind how the annuity market has changed, and how people are buying annuities through different channels.

The percentage of money coming through the advised segment of the market has been slashed from 61% last year to 37% for the first six months of this year. Instead more and more people are going through the non-advised route; up to 52% from 32% last year.

The rise in non-advised is partly because there are more annuity desks to choose from. Household names have recently launched offerings, and a lot of time and effort has been invested in these services.

To read more, follow this link

Why Pica's new directory matters

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.

 

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 (Pension Income Choice Association) 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.

Please follow this link to read the full article. 

To find out more about PICA, click here

Source:  MoneyMarketing, Tom McPhail

The dangers of pension liberation

Source: Money Market

If you have money worries and a huge pension pot sitting in a bank account, releasing it is tempting; this is bad news

 

Seems an attractive option for people with cash worries; there are big charges

 

If you have money worries or unpaid debts it can be frustrating to have a lot of money tied up in your pension, but think twice before trying to unlock the cash.

You can’t touch your company or personal pension until age 55, but some rogue advisers have been promoting a way of getting at your money before then, called ‘pensions liberation’. This can seem an attractive option for people with severe money problems, but hefty charges and tax penalties could end up wiping out all of your pension pot.

Under pensions liberation, an unregulated adviser will typically take control of your entire pension, convert it into a bond, then lend half the money back to you as cash. You will have to pay both the loan and interest in full before you retire. The adviser may call it a ‘pension loan’, falsely claiming you are only ‘borrowing’ the money in your pot.

City regulator the Financial Conduct Authority has warned that any scheme offering to help you release cash from your pension before age 55 “is almost certainly a scam”.

It may sound attractive to people in financial hardship, but the huge charges and potential tax penalties can wipe out your entire fund, says Andrew Tully at retirement specialists MGM Advantage. “The companies behind these typically charge huge fees, between 20% and 50% of your pension fund’s value. Even worse, if HM Revenue & Customs find out you have taken out one of these unauthorised schemes, they could hit you with a tax penalty of up to 70% of your money.”

To read the full article, please follow this link.

It pays to take a risk in retirement

Source: The Sunday Times

With rates so poor, experts advise looking for alternatives at retirement.

Few people would think about fixing their mortgages for two decades, but most of us still lock our retirement income into a fix for 20-plus years — even though the rates available offer appalling value for money.

Pension experts say it is now time for a radical rethink of how we fund retirement.

Annuity rates have been creeping up, rising 6% over the past three months and 12% since the start of the year. They are now at their highest level since 2011.

However, the payouts remain extremely poor. Someone retiring at 65 with a £100,000 pension fund can secure an income of just £6,252 a year, according to Hargreaves Lansdown, with some annuity providers paying far less. This will not increase with inflation, nor will it pay a pension to any surviving spouse.

To read the full article, follow this link

Government asked to inflation link overseas pensions

Source: Every Investor

MGM Advantage has called on the government to review the policy denying thousands of people inflation-linked rises in their state pension when they choose to retire abroad.

Where a country does not have a reciprocal agreement with the UK, including some of the most popular retirement hotspots, UK pensions are frozen at the point of retirement. 

Australia, Canada, New Zealand and South Africa all currently fall outside the reciprocal arrangements with the UK but are popular with expats.

“Retiring abroad is an aspiration for many people, with our research showing three of the most popular foreign retirement destinations do not currently have reciprocal agreements in place,” said Andrew Tully, pensions technical director at MGM Advantage.

“We need to ensure a level playing field for anyone retiring abroad, irrespective of their chosen destination. People who have been caught out by finding their UK state pension frozen at the point of retirement understandably feel hard done by.

“For example, if you retired to Canada ten years ago, your UK state pension would now be worth 42% less than if you had retired across the border in the US. Many retirees have found this has hit them hard.”

 To read the full article, please follow this link

Annuity rates recover to two-year high in Q3

Pension payout rates have soared to a two-year high – bringing a welcome boost to millions of workers planning for retirement.

Figures yesterday revealed that people buying an annuity now will get 11 per cent more than this time last year.

Pensions have been squeezed by falling investments, a record low base rate of 0.5 per cent and the Bank of England’s money printing ­programme, which has pushed down the price of Government bonds and damaged annuity rates.

In November 1991 average rates were over 14 per cent. Today they are around 5.8 per cent.

The MGM Advantage Annuity Index showed rates increasing by six per cent in the third-quarter of the year, the largest quarterly increase since August 2009.

Follow this link to read the full article in Daily Express

Gender equality rules means women can get 12 per cent more retirement income from annuities than last year

By Adam Uren, The Mail Online

Women buying an annuity can get a retirement income 12 per cent higher now than before 'gender neutral' pricing was introduced just under a year ago.

Annuity rates have been on the rise since the turn of the year as a result of improved investment returns on the bonds and gilts that underpin them, but it is women who have benefited most thanks to EU rules introduced last December.

These gender equality rules meant insurance companies are not allowed to discriminate because of sex when offering to convert pensions into annuity incomes.

But once the EU rules were brought in this could no longer be taken into account, meaning women's rates rose and men's fell as the prices equalised.

To read the full article from Mail Online, please click here

Inflation could halve income in retirement

Source: Sara Davidson, Every Investor

Conventional annuities pay a higher starting income than inflation-linked annuities but over time inflation can erode 50% of your purchasing power.

MGM Advantage analysed various retirement income options to see which could potentially offer the best way to counter the effects of inflation eroding your retirement income.

By modelling four options: conventional annuity, inflation-linked annuity, an annuity increasing at 3% a year and an investment-linked annuity, the company has worked out the total income from each over a typical 22-year retirement.

Inflation-linked or escalation options, although protecting your purchasing power from the ravages of inflation, offer a much lower starting income than conventional annuities. The total income over time is also less than conventional annuities, typically between 5% and 24%.

Investment-linked annuities by contrast can potentially offer the best of both worlds, with a flexible income which can initially match or exceed a conventional annuity, and the ability to help protect your income from inflation through the returns from equities.

"Inflation remains a key issue for people considering retiring, who find themselves caught between a rock and a hard place with low annuity rates and inflation running above target. Nothing disintegrates under the glare of inflation like a fixed income,” said Andrew Tully, pensions technical director at MGM Advantage.

To read the full article from Every Investor, click here.

Larger pension withdrawals given green light

Over 55s can dip deeper into their pension pots following a recalculation by the Government.

Retired savers taking an income from pension pots still invested in the stock market will get a significant boost in October, it was announced today. The maximum withdrawals on so-called income drawdown policies will be lifted by hundreds of pounds.

Hundreds of thousands of retirees have chosen to go into drawdown at retirement rather than buy an annuity, which turns a pension pot into a fixed income for life.  Drawdown, which is available from age 55, keeps you invested in assets such as shares, bonds, and property while you take a steady income. This means your money has a chance to grow – but equally you could lose out if markets crash.

To read the full article from the Telegraph, follow this link.

Investment-linked annuities - a flexible approach

Andrew Tully explains how, by offering a flexible income similar to income drawdown, investment-linked annuities could be ideal for older clients.

Source: Investment Life & Pensions Moneyfacts

Income drawdown has had a tough couple of years, with sales falling and regular negative media coverage. But, helped by the Government’s decision to reverse income to the old 120% level, reasonably healthy investment markets and low annuity rates, the outlook is more positive. And that’s good as drawdown is a valuable tool for advisers and clients.

But while drawdown is suitable in some situations it does have weaknesses. A key one being the increasing risk capped drawdown customers face as they move through their 70s.

So it’s important people consider when and how they will leave drawdown. And that’s where investment-linked annuities can be very useful. They allow people to maintain the investment exposure and income flexibility they have been used to, while also taking declining health into account and reducing risk by benefiting from the cross subsidy available within an annuity. Investment-linked annuities offer people a flexible changeable income, in a similar way to drawdown. Maximum income for a healthy individual is broadly similar to drawdown.

But annuities can also take health and lifestyle into account, which means the many people whose health deteriorates during their time in drawdown can get a significantly higher income from an investment-linked annuity.

In addition, one of the key benefits of an annuity, mortality cross-subsidy, has an increasing importance as people grow older. On death any remaining fund - after death benefits are paid - is pooled for the benefit of other annuitants. This is the reason why annuities can pay out a guaranteed income even when someone lives beyond their expected lifespan.

With investment-linked annuities the benefits of the mortality cross-subsidy are built into the product as yearly bonuses, and this allows customers to reduce their dependency on investment returns. For example, if we assume an income drawdown customer would  need a 6% yearly investment return to maintain their income, an investment-linked annuity would only need a return of around 4% for someone who entered the contract at 70 and lived to 85. For someone entering at 75 and living to 90 the difference is even more stark, with only a 2.5% investment return required – as the cross-subsidy ‘makes up’ the difference (i).

Income drawdown can be hugely beneficial for some clients. But it is unlikely to be a suitable contract for the majority of older customers. An investment-linked annuity can offer much of the same flexibility as drawdown while also offering a higher maximum income to the many who are suffering from some impairment. And, crucially, the benefit of cross-subsidy can greatly reduce the investment risk for these older clients.

 (i) Calculations by MGM Advantage. Income taken 100% of GAD tables, same charges for both contracts. For professional advisers only.

The full article is available in the September edition of  Investment Life & Pensions Moneyfacts.