Time to take annuities seriously
Annuities have always been a serious business* but since the introduction of pension freedoms in 2015 most retirees (and advisers) have not taken annuities seriously and many invested in pension drawdown rather than purchase an annuity.
Annuities have been unpopular for three reasons:
I have been advising clients about their annuity options for over 25 years and I too have not taken annuities seriously for the last 10 years because the since the credit crunch in 2008 rates have been so low, but I really believe that it is time to take annuities seriously again.
The Case for Annuities
The case for annuities can be made very simply; they are the only policy that pays a high level of guaranteed income for the rest of your life. In this sense an annuity is a pension, and in the rush to introduce pension freedoms it is easy to lose sight of why you probably saved for a pension in the first place.
Annuity rates may be low at the moment but they are the only way of guaranteeing a regular income for the rest of your life with peace of mind and security no matter how long you live.
Is it a good time to purchase an annuity?
“Is now a good time to purchase an annuity”?
The thinking was that now fund values have increased since the March 2020 crash it might make sense for some people, especially those with relatively small drawdown pots, to purchase an annuity.
I understand from several annuity providers that annuity sales have increased significantly so it will be helpful to see if there is a case for purchasing annuities at the moment.
Engage with advice
I want to help people make the right decisions at retirement but it seems many people don’t want to help themselves by properly engaging with advisers.
In the old days (whenever that was), people were more open to taking advice and more trusting of experts but nowadays many people have a closed mind to advice and don’t necessarily trust advisers. This has not happened overnight but has crept us on us over the years, but the lack of engagement has been accelerated by events such as RDR which created the so-called advice gap and by changing attitudes and customer behaviour.
The big picture – There is an advice gap and some people think the answer is robo advice
What's the problem? – Just like the exams, robo advice relies on algorithms but these can disadvantage those who are less well off
What can de done? – Looks at ways to get real people involved with the advice process.
Ali Hussain wrote a very good article in the Times newspaper on Saturday 18th July in which he highlighted the commissions paid on non-advised annuity sales
I helped Ali with this article by providing some annuity quotes and giving some comments.
The article explained how although financial advisers were banned from being paid commission in 2013, the ban did not apply to brokers who sell annuities and some types of pension drawdown without giving advice.
Fixed Term sales
The big picture – Fixed term income plans are popular because they don't lock people in for life.
What's the problem? – Lifetime annuities have a poor reputation because of miss-selling. Could fixed term suffer the same fate?
What can de done? – Make sure they are sold / advised properly e.g. end commission bias.
Advice in the workplace
When presenting to trustees I always know when I have got their attention because I get a strange look when I ask; “Do you want your members to a second-class service”?
I go on to explain that if people contact me for help as they approach retirment because they may have seen my name in the papers on heard me on the radio ask one of the team will give them a personal service. This involves explaining all of their options and an offer to tailor our advice to their individual circumstances.
I once had a client who said: “Give me a one-handed adviser”. He went on to explain that I kept on saying ‘on the one hand this and other hand that’, but he just wanted the answer.
I understood his frustration but as soon as I explained there was not one right answer and it was important to consider both sides of the argument he was happy with my two-handed approach.
Fixed Term Plans
Historically, the only way to convert a pension fund into income was by purchasing a lifetime annuity or investing in pension drawdown. One is totally secure but inflexible, the other completely flexible but has a number of risks.
Then in 2007 the first fixed term annuity or fixed term income plan in 2007 was launched.
MOS annuity misselling part 2
Are you worried you may have been mis-sold an annuity? The letter that can help you beat the insurance bandits - By Jeff Prestridge for The Mail on Sunday Published: 22:31, 12 October 2019
This is a brilliant article in the Mail On Sunday - Hundreds of pensioners have backed The Mail on Sunday’s campaign calling for insurance companies to compensate all customers who were railroaded into taking out inappropriate pension annuities, going back to the early 2000s. Launched last week in the wake of a £23.9million fine imposed on Prudential for mis-selling annuities from 2008, our Justice for Annuity Victims campaign has drawn overwhelming support – not only from readers bamboozled into poor-value annuities they cannot escape, but also from pension experts.
FT Blow for pensioners
Blow for pensioners as bond market rally hits annuities - Financial Times - Josephine Cumbo, Pensions Correspondent September 5 2019
Since the beginning of the year, annuity rates — what is offered by insurers to turn a pot of pension cash into a secure retirement income — have fallen by 15 per cent. This means pensioners are getting a lot less from their savings.In practical terms, a £100,000 pension pot now buys a 65-year-old a yearly income of £4,654 or £759 less than at the start of the year
Telegraph annuity story
Annuity rates 'could hit rock bottom' as gilt yields plunge
18 August 2019 by Adam Williams in the Telegraph
Pensioners who take out an annuity are earning thousands of pounds a year less than previous retirees following a dramatic shift in interest rates in recent weeks.