Fiona Murphy goes through this month's Inquiry on growth in the annuity market
Bouts of quantitative easing have led many to question whether annuity purchase is right thing to do as rates fall. But, despite this, there is a real need for annuities and the market is developing.
There has been a shift away from choosing between drawdown and a conventional annuity with a raft of hybrid products growing in popularity.
In addition the annuity market has made great strides this year with the ABI's code of conduct launched to help consumers shop around to get the best retirement income available.
In this month's Inquiry, we asked our readers how the annuity market is developing and how advisers fare with the different products on offer.
First we asked: What do you see as the main area for growth within the annuity market? More than half (54%) said enhanced annuities. A third (28%) said fixed-term annuities while one in ten (13%) said investment-linked annuities. Only 3% said variable annuities (see chart one).
Andrew Tully, pension technical director at MGM Advantage, says: "In the advised space, [enhanced annuities have] gone from being a relatively niche product to around 40% of retirement sales.
"Where it has not really grown is in the non-advised space, so I imagine that will develop more. Potentially 60% of people could get an enhanced annuity whereas at the moment it's only around 25%."
Stuart Bayliss, chief executive of The Annuity Exchange, believes occupational pensions are a growth area.
"It is relatively untouched by the adviser community," he says. "The vast majority of trustee DC schemes do not have access to the open market option. If the Pensions Regulator was able to adopt something similar to the ABI code, you have got a large group of people who at the moment don't get [the] service to operate through referral schemes."
What has driven growth?
So what has driven this growth? Half (46%) of participants said clients were realising the uplift in income they can get from enhanced annuities. But a quarter (23%) said clients were looking to employ a more portfolio style approach to retirement which may include several annuity products (see chart two).
Tully agrees: "The availability of more products and advisers being more comfortable with these products mean it is gradually spreading out the market and there are more providers coming [in]."
The minority (15%) said people were becoming disillusioned with drawdown, turning to annuities. Meanwhile, others felt the rise in annuity purchase resulted from our ageing population.
In addition consumers were retiring with smaller pots where an annuity would be the only realistic option. Others said those with low incomes would need a guaranteed return that an annuity could provide.
But how well do advisers understand the different annuity products? The majority (70%) believe advisers do not understand these products well now, but levels of understanding are growing.
A quarter (26%) said they have good understanding. Only 4% said advisers do not understand the different products (see chart three). Clearly adviser confidence is growing.
But Tully said misunderstanding arises "about some of the newer products or the niche products in the middle space".
He continues: "I think some advisers will be au fait with all of the products and some will be less comfortable with some of them, especially those not used very often."
Bayliss says: "Most of them understand enhanced. But [for example] temporary and fixed term annuities are not annuities; they're drawdown products with fixed guarantees. I don't think most advisers have got that continuum of risk and what goes with those product labels."
Underselling is the result. "People do not understand the pension income market as opposed to just annuities," Bayliss adds.
"You are selling to provide an income equal to an annuity or drawdown, whereas actually they are not retiring on day one in their 66th year and what you need to address is the income gap. If that means [you are having] to take half the level of income you need, then you need to look at the wider range of products and I don't think people are prepared to do that."
Legal & General has recently spoken to the press about the risk of mis-selling fixed term annuities. So we asked our readers if they agreed. A third (36%) disagreed, 16% agreed and nearly half were unsure (see chart four).
According to one adviser, mis-selling occurs when the client does not understand the product.
"With any product, people have to understand the upsides and potential downsides," agrees Tully.
One adviser felt there will always be complaints if clients see their fund value decrease: "The FSA will judge this as a mis-sale in their retrospective thinking and IFAs will have to pay."
Another said: "Any company going to the press with ‘concerns' over a certain product are more likely to be concerned that they do not offer it.
"How about offering annuity workshops where they could express their views in a more balanced and structured way."
However, others felt L&G were right to give a warning. One adviser described fixed term annuities as an "accident to happen". Another warned inexperienced IFAs see fixed term annuities as a further sales opportunity when the contract expires instead of acting in a client's best interests.
Bayliss adds: "Other than for people who become ill, there are very few fixed-term annuities that have come to term that have worked. That is because interest rates are much lower now than they were when those contracts were taken out.
"So the amount of capital you estimated you needed to buy the lifetime annuity at the end of the contract is way out.
"But, ironically enough, we are going to return to more normal interest markets so if you were going to look five or six years forward, it might be [better]."
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till