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.

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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

   

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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.

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