Retirement Planner’s monthly survey of readers asked for opinion on the Financial Conduct Authority’s (FCA) latest retirement income market study.
The regulator’s paper found some providers were failing their end customers when selling annuities, meaning consumers were missing out on potentially higher incomes in retirement because they failed to look elsewhere when buying an annuity.
The regulator said it was particularly worried about providers who failed to tell customers they could actually be better off not buying a policy from them.
According to the regulator, firms were failing to tell people in ill-health that they could get a better deal if they bought an enhanced annuity.
The FCA recommended providers should be forced to give customers an overview of how their quote compares to other providers. But what do advisers think about the situation?
Nearly two-thirds (58%) of respondents to this month’s Inquiry thought providers should be forced to provide a comparison with their peers’ rates, though some thought it would be difficult to get the process up and running.
One said: “I do not criticise pension providers who have poor rates of annuities, providing they make it clear that the client should compare their rates with other providers by taking specialist advice. I use Annuity People and they always beat the rate of everybody else – and show the figures of the top five from their research.”
Another added: “Yes, I agree. But it is difficult to see how advisers would obtain the information and the search engines could be manipulated in their favour.”
Others thought a cost comparison would definitely help retirees make a decision to switch provider: “When policyholders are told they ‘might get more’, they think ‘why go through the hassle?’ If they knew they could get 20%+ more for life, they would know why the hassle was worthwhile.”
Several said it would increase fairness for consumers and give people information on which to base their decisions. The remaining respondents did not think it was a necessary step – 29% said ‘no’ while 13% were unsure.
“Cartel rules OK,” said one adviser. “This is the same as John Lewis ‘never knowingly undersold’ – as long as you can compare exact same item with them. Can’t be done.”
Stick or twist?
Advisers had plenty of thoughts on why people are reluctant to switch providers at the point of buying an annuity. Inertia was top of the list with 37%, closely followed by lack of advice with 32%. Other suggestions were lack of knowledge, lack of understanding and taking the “easy option” (see chart two).
One adviser summed up their thoughts: “They don’t understand the process, therefore perhaps it’s a case of ‘better the devil you know’.”
Another said annuitants “do not want to pay for advice”.
Advisers who thought lack of advice was the crucial element in sticking with an original pension provider had some strident views. According to one respondent: “Companies who hear nothing from their clients before due retirement date should be banned from automatically entering the client into an in-house annuity. It’s scandalous.”
A second added: “Pension providers should always recommend the open market option (OMO) and recommend an independent financial adviser who must show comparisons of the current pension provider, along with at least four other providers, before recommending the most competitive.”
Another adviser said it was “unfortunate” but it “isn’t possible to give advice charging a realistic fee on very small pension pots”.
Advisers who came down on the side of inertia also cited lack of financial education and the complexity of the decision. One adviser also said there was an “inherent unwillingness to bother looking around coupled with a lack of knowledge about how much they may lose out on”.
Sorting out the sales process
The sales practices employed by providers also came under scrutiny in the FCA’s report. It said, in an ideal retirement income world, provider sales practice would be “clear, transparent and allow consumers to purchase the retirement income product that best meets their perceived needs”.
Advisers agreed changes needed to be made. In fact, many advisers voted for several changes to take place – 83% thought documentation should be simplified; 53% said providers should be compelled to spell out clients’ guaranteed annuity rates; 35% thought standardised and simple language should be used; and 30% thought restricted panels should be outlawed (see chart three).
One commented: “It would be nice to have all the information the client requires on a single page – i.e. current pension value, current annuity offered by provider, current best annuity provided on the OMO, enhanced annuity figures, cost of providing annuity, and who to speak to for further advice and options.”
“This is all about the man in the street being able to understand his pension provision,” said another adviser. “It is not wrapped up in gobbledegook and clobbered by implicit charges. Having clearly understood annuity rates will help with the time to retire decision.”
The vast majority of advisers who responded to the Inquiry thought the OMO should be made compulsory ahead of annuity purchase. Nearly three-quarters (74%) backed the idea, while 24% were against it. The rest, 2%, were unsure (see chart four).
One adviser said: “Any person that can have a satisfactory retirement by purchasing an annuity should always take an annuity. It is madness to encourage people to take drawdown when a fall in their funds of, say 25%, would leave them short of their income target.”
A second commented: “Openness is what this is all about. The poor providers will not be able to lock in people and continue to make good money out of them by giving them below par pensions.”
A third said: “This would remove the possibility of accepting a lower income than was available in the marketplace.”
But there were differing views. One respondent commented: “Never works. Give people simplicity and they will use it. ‘Compulsory’ means another 32 pages of close-packed printing.”
Another said it was up to people to take responsibility for the own financial affairs.
Finally, two advisers used the old adage “You can lead a horse to water, but you cannot make him drink.