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