Dave Murton takes a look at the results of this month's Inquiry and highlights the need for more targeted education
The results of the survey confirm advisers' key concerns when recommending annuities. Most notably these include the "age 75" issue, lack of flexibility, restricted death benefits and the inability to pass remaining funds onto heirs efficiently.
What is very interesting is that these features are very much controlled by government legislation and to a large extent the hands of insurance companies are tied as they work within the rules to develop their annuity product range.
The A-Day changes did allow the introduction of capital protection in the form of value protection. However, 16 months on and only a few of the enhanced annuity providers have added this facility to their range of benefits.
Referring specifically to the purchase of enhanced/impaired annuities several comments were made regarding the need to make the process simpler.
In order to improve the enhanced annuity process, annuity providers have recently introduced a common health questionnaire and quotation request form. This has been received very positively by the financial adviser community, as only one form now needs to be completed in order to receive a quote from each of the major players in the enhanced annuity market.
Real time enhanced quotations are also becoming available from financial adviser websites and portals, and this will assist in making the process of writing enhanced annuity business both quicker and easier.
Apart from these items, the overwhelming message coming from the survey both in terms of statistical results and individual comments from the respondents is the lack of understanding among the general public and the need for education. Indeed, over 75% of respondents said that their clients know very little about annuity products when they come for advice and over 50% said that this lack of understanding is the main problem clients have when buying an annuity.
Perhaps this helps to explain why the rate of take up of the open market option (OMO) remains obstinately flat with only 45% of people currently exercising their right to purchase an annuity with someone other than their original provider.
Research by Tomorrow shows that the people who do not exercise their OMO are split into roughly three equal segments.
One third do look at exercising their OMO but decide that the annuity being offered by their existing provider is their best option. Another third have a pension fund that is below the minimum that most providers will accept and so are probably unable to utilise the OMO, and the remainder just accept what is being offered by their existing provider without investigating their OMO.
So moving your fund to another provider is not necessarily the best option for everybody, but everybody should be aware that this is permitted and other options are available. For example, personal circumstances could lead them to potentially qualifying for an enhanced or impaired annuity rate.
At Tomorrow we think that the government, insurers and financial advisers all have an obligation to improve consumers' understanding of their retirement options. At a high level it probably comes down to the following three key questions:
- When should people be educated and informed about annuities?
- How should people be educated and informed about annuities?
- Who should educate and inform people about annuities?
With regard to when people should be educated I think that it is generally accepted that there is a need to improve the level of knowledge about financial products across the population as a whole.
However, I do not think that 20, 30 or even 40 year olds need to have a detailed understanding of the open market option and all the various benefit choices that will be available to them.
Customers simply need to know when they invest in a pension, that they will have a choice at retirement over the way they will receive the benefits and the company that will provide them.
It is only once people are nearing their chosen retirement age that they will need access to detailed information about the choices available to them. A lot of information already exists in various publications and on a variety of websites, and of course financial advisers will continue to provide information to their clients.
The important thing is that the information should be both easily accessible and as far as possible easily understandable.
Arguably the first time a person becomes aware of the fact that they are entitled to an open market option is when they start receiving upcoming maturity letters from their pension provider. In my view, this is the appropriate time to start explaining a customer's options in more detail, but the presentation of their options must be reviewed.
For example, the information presented to some customers needs to be updated, and could possibly have more impact if it was changed from a few paragraphs within a letter to a separate leaflet.
Indeed, it may be that insurance companies should be forced to include the FSA's guide to retirement options in their initial maturity letter, and this should be expanded to encourage people to seek the advice that will help them pick the product most suited to their individual needs.
Everybody involved in the industry has a responsibility to constantly make people aware that they do have an open choice when it comes to converting their pension savings into an income. In an ideal world, everyone approaching retirement would receive individual professional financial advice, and all the options would be clearly explained to them.
Where this is not possible (and the review into the possibility of generic advice could help here), Regulators must ensure that sufficient information on their options are available, and providers should do everything possible to ensure customers have access to this.
The key message for me is making sure that everybody understands that they have a choice and that obtaining the right information could have a fairly dramatic effect on the income they end up receiving.
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