IFAs should be circumspect about the allure of annuities

IFAs have a very difficult relationship with annuities. Here’s Julian Stevens , an IFA himself, explaining the problem that faces many of them

The trouble is that because annuity rates were so terrible for so many years, whilst equity and bond funds were powering ahead, many advisers came to regard drawdown as the default option. Who wanted to be locked in for life to an inflexible annuity?

Last week , Just announced that in the first half of 2023, individual annuity sales were 54% up at over £470m. Just are important to IFAs, they look for new business from advisers and know their market.

This year they launched an annuity that can be classes as an investment on a funds platform. The breakthrough here is that an IFA can take an annual fee on the annuity and the annuity becomes part of the annualized projected income of the IFA, for valuation purposes. Most IFAs are very interested in valuations of their businesses as they own them.

It’s as much a breakthrough for annuities as conditional pricing was a breakthrough for the the liberation of DB transfer values. It means that customers get the products they want and the IFA increases the value of their business. What could possibly go wrong?

Adrian Boulding , someone who I have a high amount of respect for, recognizes the importance of IFA support and  pioneered the platform annuity through his consultancy Spire. He uses his analytic skills and common sense (a rare and valuable actuarial combination) to give an IFAs some rough and ready guidance as to how they can introduce annuities onto their client’s wealth platforms’

This is an extract from an article published by Money Marketing.

A 65-year-old retiree can now get an annuity yielding around 7% of their pension pot. While many will agree that’s attractive, we still need to ask the question, ‘who is the right sort of person to be buying an annuity?’. My thoughts are encapsulated in the table below:

Pot size Annuity value What to recommend Rationale
Below £25,000 Up to £30 per week Cash it in At only 15% of the state pension, this is too small to make a difference to regular living costs. Better to put it in the building society as a rainy day fund.
£25,000 to £100,000 Up to £130 per week Level annuity This is a good income, and the annuity will boost living standards throughout retirement. Level is OK here as the state pension now provides £200 per week and rises at least with inflation each year.
£100,000 to £250,000 Up to £330 per week Mix and match some annuity with some income drawdown With state pension smaller than the private pension, inflation protection is important. But increasing annuities are very expensive, so it’s better to mix a level annuity with an income drawdown plan holding growth assets.
£250,000 to £1m Up to £1,300 per week Sophisticated blending of annuity and drawdown There are some great tools available that enable an adviser to ‘mix and match’ annuity and drawdown in a way that accurately reflects the client’s risk profile. Adjust the blending over time as the client ages.
£1m to £5m Up to £6,000 per week Income drawdown The super-wealthy can self-insure against living too long. Planning for inheritance and getting the money out of the pension at a bearable tax rate are the key considerations for this group.

Finding the right client for an annuity is a little like Goldilocks and the Three Bears. The size of their pension pot, or combined pots, needs to be not too small, not too large but just right.

Generic guidance on annuity purchase doesn’t get much better than that

Adrian is spot on, for most people with limited assets, the state pension determines the shape and nature of the wage for life. You might question how many times an IFA talks with a client who has less than £100k in a pension pot. but this table could be adapted by those at MaPS providing guidance and adopted by many firms within and without the FCA’s regulatory perimeter , offering guidance rather than telling people what to do.

Ah – but “the counterfactual demands circumspection”

As advisers found when discount rates made CETVs a “no-brainer” for those with DB benefits, seizing the opportunity presented by the current state of interest rates and bond yields, can lead to problems down the line. A “once in a lifetime” decision, such as to annuitize the pot(s) carries some of the same advisory risks.

Competition from rival annuities

One risk is  regulatory. Under the Consumer Duty, the adviser cannot justify using Just on the grounds that the annuity is paying the client’s fees. The annuity is for life and the fees are for advice ,principally at the point of implementation. The annuity must be competitive on the open market, which could be hard for Just (or any insurer).

Competition from new and relevant products

But there are other risks, relating to the markets. At 65, an IFA’s client might expect to live 25 years. Even if we believe that the current annuity rates are too good to miss, there is a reasonable chance that the long term returns from wider markets can provide better pensions than one driven primarily by today’s interest rates.

Adrian knows only too well, what the historic numbers are for a CDC pension relative to annuities and this is why I, as a 61 year old falling into one of Adrian’s sweet- spots for annuity purchase, am playing a waiting game.

I am a natural risk-taker and am unlikely to buy an annuity, even at 6-7%. However , I find the prospect of my pension being managed to ensure it lasts as long as I do, compelling. I would like a pension that is invested for my long-term which gives me an immediate and inflation protected income.

Ironically, it may be Adrian I have most to thank, for the delivery of a CDC pension which I can exchange for my hard-saved pot!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to IFAs should be circumspect about the allure of annuities

  1. ros altmann says:

    Hi Henry
    Thanks for keeping us all informed on pension developments
    I must admit that I’m surprised there is no mention of the client’s age or state of health, nor whether they are concerned about death benefits that could support an under-pensioned partner if the client passes away soon after taking out the annuity. The ‘your capital could be a risk’ message is often lost.
    Also the fact that a 7% annuity rate includes the erosion of the capital value over time and cannot be compared with a bond paying 5.5% or 6%, where the capital is still in tact at maturity. These are important messages, along with the inflation issue that of course is already highlighted to some extent.
    Pension freedoms have undoubtedly combined with QE to make standard (single-life level) annuities a poor decision for most in their 50s or 60s. Now rates have risen again, there is still the inflation issue and health concerns to consider.
    I don’t have anything against annuities per se, but the idea that they are ‘risk free’ and can be debated.

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