Steve Hunt highlights the issues advisers face in getting a good deal for clients with small retirement pots
In the next 12 months, over half a million people are expected to retire. With the baby boomers now coming up to retirement this is likely to peak at over 800,000 a year in three years time* That is over 15,000 a week. Currently, the 35% of these who do actually shop around for the best annuity are mostly going to IFAs. The average fund size is less than £30,000.00**
Quite possibly the financial product that has had the most tinkering and interference from the State has been pensions. Even Pensions Simplification was re-named by those in the industry as Pensions Complification! So how might an IFA's initial fact find go with their client?
Let us for a moment imagine the scenario: 'John, thanks for coming in. Lets have a look at your pension...'
But before the IFA proceeds, here are a few things he may wish to examine before making his recommendations to his client.
Is there a guaranteed minimum pension (GMP) within the plan or is it a 226 or even a Section 32; what was the GMP revaluation rate and are there sufficient funds in the Section 32 to cover the GMP or was the GMP converted to protected rights? Oh, it's a 226 not a Section 32 - but is there a guaranteed annuity rate (GAR) in your 226. Well actually, it is not a 226 or a Section 32 it is an executive pension plan (EPP), currently contracted out under RST but it does have a legacy GMP.
Dazed and confused
Still with me? Well the pension commencement lump sum (PCLS) is more than 25% in your EPP because the PCLS has been calculated under the 3n80ths calculation. You also have an AVC, is that a FSAVC or AVC? If an AVC, have you taken benefits under the main scheme? If not, do the main scheme rules allow benefits to be taken from the AVC? Oh you also have a CIMP or it may be a COMP and the investment is a with-profit fund, is there an MVA on open market option (OMO)? Or is there an MVA on transfer? And, should you buy the annuity via OMO or IVT?
You get the picture. This is just a fraction of what IFAs need to know to be effective and give best advice in the retirement income market. The complexities of legacy pension accumulation product are vast and wide ranging but to be able to give best advice all these idiosyncrasies need to be known, understood and applied in the appropriate way.
But that is just one side, the individual's provenance of pension fund accumulation; decumulation can be just as daunting.
Should GMP be converted to protected rights? If buying an annuity GMP can stay as GMP but if funds are going into drawdown they MUST be transferred where the GMP is converted into protected rights.
So, what type of conventional annuity? Single life, joint life, level or escalating and if escalating, at what rate? 3% fixed, 5% fixed, RPI, LPI. Do you include a guarantee, if so, five year or 10 year? If including a five or 10 year guarantee how does that apply? Is it taxed? Does it affect inheritance tax? Then, of course, there are enhanced or impaired annuities. There are now 13 impaired/enhanced providers, do all IFAs know who they all are and the information they all need?
But what about with-profit annuities? Are they any good? How do they work? What ABR should I apply? What is an ABR? How does the new Prudential Income Choice Annuity work compared to a traditional with-profit annuity (WPA)? Oh, and don't forget impaired/enhanced WPAs!
Experts in everything
Take Mr. Smith who goes to his IFA, with his £10,000 fund. To comply with know your client and know your product the IFA, has to be an expert on all of the above.
The IFA puts Mr. Smith into a conventional annuity but overlooks the fact it was a 226 policy with a guaranteed annuity rate (GAR) or 11%. He spends several hours setting up the annuity. It takes him several MONTHS to have the funds transferred, for which Mr. Smith blames him for the delay. And the IFA receives for all this time, money and effort, £100 commission! Mr. Smith later finds out that he had this GAR and sues his IFA for £3,000 compensation! Any wonder IFAs are not very enthusiastic about retirement income aspects of their business.
Enter The Annuity Clearing House www.TheACH.co.uk. This has been set up with several objectives. First, to help IFAs earn an income from their own clients without all the specialist knowledge being required as ACH will pay IFAs MORE COMMISSION than if they had written the business themselves.
Second, take the liability away from the IFA as this will be taken over by the ACH who will have expert retirement income specialists to give best advice or write direct offer business. And, possibly most important of all give ALL IFA clients the service only usually available to clients with hundreds of thousands in pension funds. The minimum fund size for the ACH to work is just £500.
The ACH will go live on 1st September 2009 and will complete a full broker service to three impaired/enhanced providers, two leading conventional annuity providers, two with-profit annuity providers and one specialist retirement income provider offering a drawdown/third way option.
Legacy pension products and current pension products are very complex indeed; combine this with the massive array of decumulation products your non specialist IFA is about as well equipped to write retirement income business as your high street vet performing a quadruple heart bypass on a human being!
*Figures from ONS
** According to ABI
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