I’ve just read an article that could best be described as smug. It’s written by a lawyer in the financial regulation team of Foot Anstey – Alan Hughes. I don’t know Alan but I know his firm and have a high regard for it. But I think the article needs to be challenged.
The article deals with the minutiae of an FCA judgement against Standard Life and in particular breaches Standard committed of its duty to treat customers fairly and failings in its internal controls. Specifically this related to the selling of Standard Life annuities to the exclusion of the open market and with little or no regard to the enhancements in rate that customers might have got had the Standard Life salespeople cared a little.
Beyond these two breaches of FCA principles, the article draws a conclusion
Finally, it is worth bearing in mind this fine related to non-advised sales of annuities to customers approaching retirement and who may have been eligible for an enhanced annuity. If there was ever a situation which clearly demonstrated the value of advice it must be this.
This is what I want to challenge
Over the past three months I have become interested in annuities and have written several blogs about how we can get value from them. In this I have been helped by my conversations with annuity brokers, in particular Retirement Line but also Hub.
I have found that both these organisations offer an extremely professional service. Retirement Line in particular is regarded by its customer as exceptional and is rated #1 out of 96 financial services firms rated by Trust Pilot
I have found that though the annuity broking service is unadvised , it benefits customers by not just offering enhanced annuities , but guiding customers to their best enhancement. The “our in this slide refers to Retirement Line.
I learned that when a customer is asked how much beer they drink, not all beers have the same impact on longevity – or annuity rates
and I learned that missing certain conditions can have a huge impact on your retirement income.
I did not learn these things from regulated advisers, but from Retirement Line and Hub.
I also found out that there is a massive problem in Britain about annuity awareness
and I found that most regulated advisers are neither recommending annuities , nor do they have the competencies that give Retirement Line and Hub #1 and #2 place in the annuity broking market (respectively).
What little the public knows about annuities is coming from annuity brokers who offer great service and show massive integrity in their dealings with me and those who they speak to – who like me are finding ourselves awestruck by their competence.
And I am amazed by the hostility of financial advisers not just to annuities, but to me promoting annuity solutions in the Times and through this blog.
Why don’t financial advisers like annuities?
I was an IFA and I know why I didn’t like annuities- I felt deeply out of my depth arranging them. Indeed, when I started selling insurance with Hambro Life I was required to pass all annuity requirements to a specialist broker because I didn’t have the capacity to do a decent job for the customer.
Back in the day when everyone had to buy an annuity from their 226 or personal pension many people had guaranteed annuity rates, enhanced annuities were a twinkle in the underwriter’s eye and the open market was in practice restricted to those annuity providers with the best expense accounts.
For this reason, the behaviour of Standard Life (and the Prudential) is part of an ignoble tradition and most IFAs think that annuity brokers are no better than the cowboys at the insurance companies.
So IFAs feel out of their depth selling annuities, are worried that annuity salesmen are cowboys and thirdly they feel they hold the keys to unlocking retirement income through drawdown.
I hate to say it, but IFAs have got annuities all wrong
IFAs can use annuities as part of their retirement income portfolios without having to be experts in execution
There are some great annuity brokers in the UK but they don’t tend to be IFAs.
Annuities are brilliant as part of a retirement solution – as I talked about in a recent blog.
Will we ever have to buy an annuity again?
There’s been a lot of talk about the decline in annuity sales. I’m hoping that what we are seeing is an end to the poor practices we’ve seen in the past from the likes of Standard Life and the Prudential.
In my experience, the annuity broking market in the UK is one of the most competent I have come accross and firms like Retirement Line and Hub are setting standards other aspire to. This is reflected in customer Trust Pilot ratings.
Infact annuity sales are holding up remarkably well. If you exclude from new drawdown numbers the drawdown cases where all that is taken is tax-free cash (zero income) you can see that the numbers of people buying annuities is not appreciably less than the number of people “in” drawdown
But only a tiny part of the annuity sales are through IFAs while the vast majority of proper drawdown sales are through IFAS.
Foot Ansty are telling IFAs to take control of the annuity space but they are wrong.
IFAs are neither competent to broke annuities , nor do they have the capacity to. They can however see where an annuity is appropriate and should be referring annuity business to firms like Retirement Line and Hub who know what they’re doing.
George Osborne was wrong but he was nearly right. Here’s what he should have said
Hambro Life (SJP) never were IFAs they are one company product salesmen paid by commissions with some of the poorest value for money products. The same was true if Equitable life who proudly announced that they did not pay commission, they paid “volume related salaries”
A more holistic service is required to be a whole of market IFA and annuities are one of the possibilities. However, with IRRs less that 0.9% for the bridging annuities described yesterday in this blog the hurdle that alternatives need to reach is a very low one.
On illustrations I have looked at it is 28 years (at age 70) before a money back situation is achieved with a significant mortality risk of loss for the individual. The situation is even more problematic where an inflation link is added.
This is not to say that the annuity is a bad choice but in treating clients fairly it is not usually the first choice unless there are poor health conditions that would enhance the outcome over the constraints annuities have due to current bond yields.
John, the hurdle right now is a low one and for many – perhaps most – an investment driven solution will beat an annuity. But to measure the risk, we need the risk-free rate- don’t you agree?
My point is that at current rates, determined by bond markets, you could pile the cash on the piano and take the cash each year with a high probability of having cash left when you die. In 1988 the IRR on an annuity was over 12% so would have hit the peak of the 15 year rolling average return on a model portfolio. Rather like the recent German bond issue at a guaranteed loss I think you mean known risk as opposed to risk free
We are in very odd, politically motivated, interest markets where “normal” market equations throw up anomalies Even more important now to have bespoke solutions tailored to the individual with thinking that goes beyond the habit of equites bonds cash, equity funds
You missed a few things. The most important decision for a retiree is if to annuitize now or to defer that and use drawdown for a period. This is a personal recommendation and regulated financial advice of very high importance! (A lawyer could not say anything else than take independent advice!)
This is the most IMPORTANT decision a retiree is going to make in his life. It will have huge repercussions if they get it wrong, and they would need to use equity release a lot early to supplement their retirement income.
Also one of the questions you need to ask those annuity brokers is how many of the pension annuities they sell are index-linked and how many have a widow pension annuity of 50% – 66% built in. Just after that, we need to reach conclusions about how good a firm is at meeting clients REAL needs!
Financial advisors would first and foremost assess the need for retirement income the future retiree/s have with the help of detailed spreadsheets. In quite a few of these assessments we tell clients not to retire, as they cannot meet their retirement needs with how much they have already saved. I have postponed quite a few retirements in my career, one for 6 years.
We also asses the risk tolerance (including investment experience) of these people and their risk capacity based on the retirement income they would need. In the same time, a good practice would be to get underwritten annuity quotes for comparison between the two options. Here lifestyle issues (postcode, last profession, smoking habits, drinking etc) and health issues (diabetes, cholesterol etc) make a difference.
Do not underestimate the power of drawdown with a later purchase of a pension annuity at 75 years+ etc. Most of the time, it will offer a higher retirement income, and allow for a purchase of a pension annuity at a later date, when health issues appear or even when one of the two died. People who took investment risk at 66% equity just before retirement could lower than down to 50% equity allocation and still benefit enormously by starting withdrawals at 3% to 3.5% sustainable withdrawal rate, depending on age and risk profile. In many cases it offers 35% or even more retirement income than the same pension annuity (index-linked, 50% spouse pension).
In the same time, I agree drawdown is not for everyone and probably 20% – 25% of retirees would be better suited by pension annuities. They tend to be single (no dependent partner or wife) and could get enhanced pension annuities due to lifestyle and health issues (mortality drag is higher for enhanced annuities). This recommendation is also for risk adverse or very cautious people and people who have little risk capacity (some not even own the house they live in).
Some IFAs, Henry, spend a great deal of time advising around annuities, so don’t tar us all with the same brush!
Some IFAs Mark!
I’ll give you that, Henry! I was at a conference earlier in the year and I asked ‘colleagues’ around the table as to how many annuities they had arranged in recent times. With one exception, the answer was ‘none’, much to my dismay. “Why would I do that and reduce my revenue stream” was the gist of several arguments.
Interestingly, these comments came from younger IFAs (under, say, 40 – there are a few around, but not many) who have grown up with ultra-low interest rates and QE-fuelled equity markets. My hunch is that they will have a busy time soon explaining the risk trade-off between secure lifetime income and unsustainable “safe” withdrawal rates.
We shall see.