Unwelcome news for anyone looking to turn their pension pot into a secure retirement income. Rates are down due to low bond yields but also because there’s less competition in the market, following the #pensionfreedoms. https://t.co/NWAqReWjMi
— Josephine Cumbo (@JosephineCumbo) September 11, 2019
The upshot of Jo Cumbo’s conversation with Nathan Long of Hargreaves Lansdown is this table.
I am not sure of Hargreaves Lansdown’s agenda but I don’t suspect Hargreaves Lansdown (despite still being one of Britain’s largest annuity brokers) are quite the fan of annuities they once were).
The case for buying annuities well
This article sets out to explain how a few top annuity brokers maintain a standard of service that makes annuity purchase both easy and profitable. I will hesitate before saying pleasurable – though the trust pilot scores suggest that people do feel they get a good deal when purchasing well.
I have long thought that annuities offered value for money and continue to do so today. Even in the early years of this decade, when I blogged about people being trapped by stunted annuity rates, it was not the annuity providers that I was complaining about, but the impact of quantitive easing.
I first met Mike Orzag, WTW’s head of research, when he was conducting research into the UK annuity market in the late 1990s. He came to Eagle Star to look at our (not particularly competitive) annuity book. He concluded – as an independent expert – that annuities were amongst the best value financial products available to the UK consumer with low margins, effecient processes and marketing which did what it said on the packet.
The paper Mike , his brother Peter and Mamta Murthi produced in July 2000 can be read from this link. It found that for a typical 65-year old male, annuitization typically involved a reduction in yield of the order of 1 percent. There are very few financial products that can offer that efficiency.
When I was discussing annuity margins with Legal and General in 2013 as part of research for Channel 4, I found that the insurer’s margin was 6-7%. This compares with the typical margin for fund managers of 36% – as discovered by FCA in 2017.
Annuities are not a rip-off product and they never have been. I would contest that the problems with annuities come about from bad purchasing induced by poor salesmanship.
I use the word “salesmanship” deliberately (I did not say advisedly). Annuities are not an advised product, people like David Slater (Retirement Line) and Billy Burrows (Annuity Direct), the heroes of annuities – are business people who sell a broking service to the public in a straightforward way. They are the people to whom I would go to get the right annuity at the best rate for me.
With people like Billy about – why do things go wrong?
The problems have occurred when annuity broking is not sold – when instead, people are offered annuities without the care about enhancement and annuity type that the best annuity brokers typically display.
Yes brokers take commission but it is fully declared and customers can choose to walk away and execute with another broker of directly if they feel they can get a better deal. Clearly not all brokers are the same and Sam Brodbeck has written feelingly of poor customer experiences with one well known “name” – here is his Telegraph article
But high commissions are negotiable and most annuity brokers use what they call “decency levels” to cap commissions where they don’t represent value for money. Retirement Line are one such broker.
Retirement Line are rightly proud to have the highest trust pilot score of the 96 Financial Services companies that use their ratings (9.8/10).
It’s the way you sell ’em
Sadly, some of our largest insurers, most notably Prudential and Standard Life have not shown this care for the customer and have been caught by the FCA offering a shoddy service.
The FCA are on top of this and are doing a good job making sure that people know they have an annuity option as they get to retirement.
The four options people choose from at retirement
The FCA has produced a technical paper (CP19/27) that has the intent of reinforcing the importance of people shopping around to get the best rate on the market. I spoke to Retirement Line about this and – as ever – their response was focussed on the customer rather than their business needs. This from Retirement Line’s CEO – David Slater.
Retirement Line wholeheartedly agree with the annuity information prompts as outlined within FCAs PS19/1 and the proposed amendment within CP19/27.
The proposed amendment in CP19/27 will ensure any consumers who refuse to supply potentially sensitive health and lifestyle information will still benefit from seeing a ‘market leading quote’ – This should be the highest ‘like for like’ quote available on the open market.
Retirement Line also supports the FCAs concerns that too many consumers have failed to shop around for the best annuity rates and as a result, have potentially missed out in securing higher standard or enhanced annuity income for the remainder of their lives.
Although Retirement Line agree with the proposed amendment, they feel it is important that the FCA reviews the text supplied on the information prompts taking into account a consumer could refuse to answer health and lifestyle questions for multiple reasons some examples being:
- security concerns
- a lack of supporting explanation
- complexity and length of the health form leading to its abandonment
Whatever the reason for refusal, it does not necessarily mean that the consumer does not have any health or lifestyle factors which could result in an enhanced annuity quotation and higher annuity income. A consumer could receive an enhanced annuity rate through simply supplying their BMI, occupation and weekly alcohol intake.
As a result, Retirement Line have proposed that the FCA considers reinstating the ‘Did you know?’ text box on the relevant information prompts. The ‘Did you know’ text box clearly explained the benefits of supplying health and lifestyle to consumers.
This may sound arcane – but to me it demonstrates the care annuity brokers take to maximise engagement in what matters. It’s more than putting “annuity” into google – though that works too!
Annuities – well sold – are good buys
There is nothing sexy in annuities. The most exciting thing that’s happened to the annuity market this month is the arrival of Scottish Widows as a provider of standard (as well as enhanced) annuities.
The market has actually expanded rather than contracted this month (in contrast to the general trend identified in the article promoted at the top of this blog).
Annuity sales have slightly recovered since 2016 and while they are nowhere near at the pre 2015 levels, they are stable. Many people are buying fixed term annuities, waiting and seeing what is going to happen to rates (which everyone thinks can only go up).
I should add that there is absolutely no guarantee that annuity rates will go up. But if they remain depressed, then it will be because the deposit rate – the other source of risk free return, is also depressed.
Annuities remain a good value product, there are annuity brokers in the UK – Retirement Line being my favourite, that offer consumers a good deal in terms of service. Annuities themselves are well priced and (apart from oddities like Purchased Life and Deferred annuities), there is a competitive market for them.
Annuity salesmen like Burrows and Slater are honest and proud about what they do. They may sound a little cheesy (like Frank below) but there is nothing wrong with promoting what you do with old fashioned vim.
Clearly rates are low right now, but that should not stop people investigating their annuity options – if they want secure income that lasts as long as they do.
It’s the way you sell ’em
Sorry to bang on about this but annuities can, for some, be a disaster.
They are treated as income for means tested benefits and reduce the amount people get from them penny for pennt, pound for pound.
They’re appalling for peple under state pension age because the benefits levels are much lower than for older people’s benefits.
They can be really bad for older people.
If you have only a state pension and are thinking about what to do with your pension savings, then if you are advised to look at annuity, and the advisor doesn’t look at the benefits situation, then there may be a lot of trouble being stored up.
Pension Credit will top up incomes to a level that’s about the full rate of the New State Pension (which is more than most people get). That’s currently £726.74 a month for a single person and £1,109.12 a month for couples. If someones state pension is, for example, the level of the old state pension at £561.40 a month then a single person will get £165.34 a month in Pension Credit, giving them a total of £726.74 income.
Sell them an annuity of £150 a month (that’s a pot of about £38,500 on today’s best buy rates for a sigle 65 year old) and their income becomes £726.74 a month. They’ve lost their savings and gained nothing.
If a annuity salesman, or broker, or an IFA tells them that an income for life is good value then they’re very, very wrong. They’re probably (I hope) not lying; they’re just ignorant.
If instead, they took capital drawdown irregularly then, as long as their total capital in hand stayed at less than £10,000 there would be no effect on their Pension Credit and they’d also keep any income from that cash without it affecting their benefit.
How many people selling or advising on annuities do a check on benefits? Remember about half of people entitled to Pension Credit don’t claim it, largely because they don’t know about it or don’t think they’d qualify.
There are simple, quick, cheap apps around that do the calculations. or the sums can be built into other systems, so why doesn’t it happen?
I’m sure it’s not because it might reduce the sales of annuities, so what is the reason?
Gareth Morgan is entirely correct in what he says, and can demonstrate as to where ‘full fat’ annuity advice can be very helpful. I’m sure that he would agree that annuities and flexi-access drawdown are very different propositions for the consumer.
The way I think that this is best explained is to tell the individual concerned that with an annuity they have ‘insured’ their income for life, whereas with FAD they continue to bear all of the capital risk and cost of remaining invested, whether in below-inflation deposits or, say, Japanese Smaller Company stocks, to pick a random example (that I have come across!). I’m fortunate in that many people I advise have the option to combine both methods of pension decumulation.
We still face the fact that for many individuals, discerning the difference between ‘real’ and ‘nominal’ yields is problematic. I just quoted for a relatively small RPI-linked pension annuity and she felt the yield was ‘bad value’ compared to her keeping her pension fund invested ‘as it has done very well’. She might be right in nominal terms, but not in ‘real’ terms.
I’m with luminaries such as Zvi Bodie and Moshe Milevsky, et.al who argue that most retirees should hedge against inflation risk by purchasing ‘real’ annuities, with at least some of their pension pot, but that very rarely happens with ‘direct offer’ purchases (anecdotally at least) as consumers see a ‘higher’ nominal figure from a level annuity and prefer that to a ‘lower’ real figure from an inflation linked annuity. Sure, that choice has to be seen in context (other pensions, as an obvious example) but it does worry me as, one day, higher levels of inflation may well be experienced.
Mark
You hit the nail in the head. Real income versus nominal income!
90% of annuities are miss-sold because they are sold as level annuities! They are not sold a guarantee of a stable power purchase of their income in the future, but God knows what.
For people who do not follow inflation, RPI for the last 12 months was 3.2%! I do ask my clients in drawdown, if to put their annual withdrawals up by 3.2%, and in more than 90%, they said Yes.
90% increase their annual withdrawals by 3.2%? That will have a big impact on sustainability? Over a 30 yr retirement period. Makes DB inflation protected income even mare attractive.