Would you take medical advice from someone who was selling cars last week? Well why would you trust that same person with your retired life’s income?
We all know the professionals that we can trust in life from Dentists to Doctors, Accountants to Lawyers and we go to them should we need the right advice in that relevant field. We trust that through their hard study and years of relevant experience we will receive accurate advice based on training and professionalism. In addition to this many are part of professional bodies that give guidance and oversee the industry involved ensuring self-regulation and the maintenance of the required high standards. In all there is every reason to have confidence in the individual and their advice.
So why do so many people entrust their retired life’s income to someone who, quite literally could have been selling second hand cars last week and this week is giving them guidance on buying an annuity through the growing number of Non-Advised annuity companies?
The authorities have moved over the years to ensure that more of us are shopping around for the best deal in retirement starting with the introduction of the Open Market Option as part of the 1975 Finance Act. This allowed UK retirees with private pensions to shop around for the best annuity offered from the whole market in the hope that this would provide a higher income in their retirement. This option, which was initially slow to take off, has gained momentum over the years and today we see around half of retirees shopping around with their pension pots. Further measures announced recently will ensure even more will take this option and receive a better deal. Most notably the Association of British Insurers code of conduct which proposes making it much more difficult for a retiree to walk in to taking the usually lower deal offered by their existing pension company.
In the past the incumbent pension company would send the retiree a quote for their annuity along with the application forms and a return envelope hoping that they would miss the few lines of text buried in the mountains of paper work encouraging them to shop around to get a better deal.Â Now, no application form will be provided and the text encouraging them to shop around will be much more obvious. This leads on further to the announcement by The FSA in early 2013 that they are to focus their efforts in ensuring that even more people get the opportunity of a better deal at retirement and will look closely at how pension companies offer their rates to those considering retirement.
All good so far? Well yes, but the world has moved on since 1975 and annuity rates certainly have. A 65 year old retiree today will, for a traditional annuity, receive a rate of just less than 5.8% so Â£100,000 would buy an income of Â£5,758 for the rest of their life; whereas in the 1990’s this would have been closer to Â£16,000 for the same sized funds. With annuity rates so high at that time why would anybody consider any alternative to the annuity? Well, not many people did and for that matter there weren’t many alternatives either; at present with annuity rates at historic lows, there are many substitutes for the traditional annuity. For a start we now have medically enhanced annuities that take into account the annuitant’s health and lifestyle. The annuity company take the view that a pre-existing illness or an annuitant’s lifestyle could lead to a future illness, they factor this into the life expectancy of the retiree and offer them a better rate.
However, for those unlucky enough or you might say lucky enough not to qualify for an enhanced annuity there are now many alternatives to the standard rate annuity. Firstly, we have, for example the Invested or With Profits annuity, here, the funds remain invested for the life of the annuity. This option would give an initial income of Â£7,064 for the same Â£100,000 invested for the same 65 year old. Obviously, this option comes with some risk attached, but for the right investor this could be the perfect option.
Another example of an alternative to the traditional annuity is the Fixed Term or Temporary Annuity. This option allows someone to retire and take income for a set number of years, typically five, after this time they are given a Guaranteed Maturity Amount with which to shop around again at the end of the term. This would allow them to benefit from any deterioration in health and any future annuity rate increases if they came about; again, for some people the perfect option.
Consideration must also be given to those fortunate enough to have secured pension income of over Â£20,000 already.Â They now have the option to withdraw their remaining pension funds in cash, all in one go if they so desire. This option called, Flexible Drawdown, became available in April 2012. For some people a very attractive option.
A traditional annuity is a one off, final investment, made for life, with NO going back. Once it’s set up it is for ever. So with so many alternatives available, that could be much more suitable, why do an increasing number of retirees in the UK not take advice at retirement?
There are an ever increasing number of annuity comparison companies out there today that are competing for the chance to shop around for those considering retirement. However, many if not most of them, only offer a Non-Advised service. They obtain the annuitants’ information, provide some quotes and give some facts and figures but cannot give advice.
They only offer traditional annuities. Quite literally, someone who was selling second hand cars last week could be selling an investment which is fixed for the rest of an individual’s life.Â They will never hear of the alternatives, never have the opportunity to change their mind and worst of all, there is no recourse! The Non Advised companies make it quite clear that they offer NO ADVICE and RECCOMENDATION. In effect they present the quotes and expect the retiree to select the one they want from the list. Would the same person go to seek medical advice and choose their treatment form a list?
Yet these companies sell millions of pounds worth of annuities in the UK every day. They compete with Independent Financial Advisers like My Pension Expert who offer full advice and recommendation. Scott Mullen from My Pension Expert said “There is a huge difference between advised and non-advised companies offering their services to people considering their retirement options. We advisers will ensure that we offer all available options, explain them in detail to the retiree and help them determine which of the many routes is best for their circumstances. We will search the whole market and then make a recommendation.
This recommendation means we are accountable for the decisions made, ensuring our clients have recourse to further support if necessary. In essence we offer a warranty with the sale.” Independent Financial Advisers must be registered with the Financial Services Authority and have an Advanced Diploma in Financial Planning. IFA’s must also prove on-going professional development by registering a minimum of 35 Hours per year of Continuing Professional Development which ensures they are very much up to date with on-going changes and attain each year a Statement of Professional Standing. In addition to this IFA’s pay FSA fees which contribute to the Financial Services Compensation Scheme (FSCS) which protects investors in the event of a collapse of the annuity company.
Despite all of the requirements imposed on Financial Advisers giving advice at retirement they are remunerated to the same level as someone offering NO advice. In fact non advised companies can still take a commission from the annuity company which in the eyes of the investor never seems to be coming from their pension pot, whereas in reality it is of course. Following the FSA’s retail distribution review IFA’s must now be much more transparent with the cost of providing advice while Non Advised companies who take the same amount of remuneration for the sale can still hide behind commission.
Annuity providers make no distinction between advised and non-advised retailers and actually give higher commission rates to those who place volume business. At retirement advice is crucial because so many of the options are permanent. With so many options available how can a non-qualified individual taking the same remuneration be a viable option? Is now the time to seek more regulation in this area of financial planning or must we wait for the next mis-selling crisis in the future?