Helping retirees to get the best income possible from their small pension pots is proving to be a real challenge for the industry. Helen Morrissey takes a look at the options available
Annuity issues have been a hot topic in recent years with debate raging on how advisers can get the best deal on the open market for their clients. We have had real innovation in terms of product design with the advent of variable annuities and the huge expansion in the impaired annuity market. We have also seen huge strides forward in terms of improvements in transfer times with the ABI Options campaign encouraging the industry to work together to slash annuity transfer times. However, despite these huge moves forward there remains one issue still to be contended with how best to help those people with small pension pots.
There are indeed several issues to be looked at here. For a start, average pension pots have remained stubbornly around the £27,000 mark for some time which severely limits the adviser as to how many options these people can be offered. Income drawdown or variable annuities would not be suitable for such case sizes and many providers are loath to offer even the most mainstream annuities for cases below the £20,000 mark.
I used the FSA comparison tables to see what the options would be for a 65-year-old female non-smoker with a £25,000 pot and was offered a choice of just seven providers. When the amount was reduced to £8,000 the number of providers dropped to just four.
Small pension pot challenge
However, the challenges do not end there for those with small pots. Transacting such small pots can prove problematic for advisers too. This often means they are loath to take on this business which further limits people's options. "The key challenge is to make it pay," says Rockingham Retirement managing director Steve Hunt. "Broking an annuity case involves a lot of work and as we know the payouts for small funds are not much. Broking an impaired life annuity on a £20,000 fund could take the adviser 10 hours of work and at the end of that he may only get £100-200 commission. Even then there's no guarantee the client will choose to exercise their OMO as they may choose to stay with their pension provider. It's a very small return for a lot of work and they have to deal with all the compliance issues as well."
While the ABI's Options campaign has done much to improve the time it takes to transfer pension money to an annuity provider, it can only come into play once all of the relevant documentation has been received which can be a tall order. However, according to MGM Advantage's sales and marketing director Aston Goodey, providers can take a stand to relieve advisers of at least some of the burden.
"The provider can certainly share in some of the admin burden such as chasing up ceding schemes," he says. "I think we also need to look at other options such as making commission more flexible to allow the adviser to take an income that is commensurate with the level of effort taken to broker that business. I also think the industry needs to do what it can to help advisers to e-enable their business and make their processes more efficient."
The Annuity Clearing House
There are signs that the industry is starting to move down this route with the imminent launch of Rockingham Retirement's Annuity Clearing House which aims to help advisers transact annuity business quickly and efficiently. The system will enable the adviser to search the market for the most appropriate annuity before filling out the client's details on a form for the client to send out. Rather than taking the adviser days, if not weeks to submit the information, Rockingham's Hunt believes this process will now only take minutes and will bring valuable cost and time saving benefits.
"We are in final stages of testing and I¹ve likened the development process to climbing Mount Everest with a monkey on your back," he says. "However, if it were easy then everyone would be doing it. Once launched it will be a fantastic service that enables an adviser to broker on a whole of market basis in terms of product from start to finish in seven minutes. They can broker these cases much quicker and so it makes it a worthwhile exercise. But getting to that point of condensing this long process into seven minutes is a huge leap."
Using the Annuity Clearing House software the adviser will be able to offer quotes on impaired, enhanced, with-profits and impaired with-profits annuities. Hunt believes the service will be launched early in the New Year and that the concept is already attracting much interest from advisers.
Dealing with customers direct
While such a service will undoubtedly enable advisers to offer a much more efficient service to clients, what other options are there? If the retiree is unable to find an adviser willing to transact their annuity then should they look to approach the provider direct? Late last year Legal & General launched its direct to consumer annuity business but what safeguards are in place to ensure the individual gets the best deal possible?
"The service is non-advised but we ensure that advice is there for those who need it," says Legal & General annuities director Phil Naylor. "In these cases we can either refer them to an internal adviser or else refer them to a third party who is able to give them the advice they need. We¹ve tended to find that the people who approach us direct have already been researching their options and so are capable of making an informed decision about their retirement income." Goodey agrees, saying the direct to customer offering could form a real growth area in future.
"There's definitely a move towards it and we¹ve been partnering with Aegon in providing the impaired section of their direct offering," he says. "I do think other providers will come into this part of the market and offer a non advised service for the smaller ticket business with the option of advice if needed. We may even see banks starting to offer customers an annuity service it¹s definitely a model for growth." Preparing for the future Goodey may well be proved right in his prediction of small pots becoming a growth area particularly with the advent of National Employment Saving Trusts (NEST) in 2012. While the long term purpose of NEST is to increase people¹s retirement savings in the short term we could see many more people coming into the market with small pension pots.
"I think NEST will make the situation much worse over the small term," says Prudential's head of business development retirement solutions, Vince Smith-Hughes. "While triviality will deal with some of them we could still be seeing many people coming into the market with a couple of £10,000 pension pots. This is worse than coming with just one £20,000 pot in terms of the options available and so we need to ensure our processes are as efficient as possible and that we educate people so that they understand the issue."
According to Naylor improving education will be key to helping these people get to grips with the situation and he highlights the employer as the key starting point in the process.
"I think we should be trying to engage people much earlier on in the process," he says. "There's no point engaging with them six months before their planned retirement date if they¹ve actually retired two years before that. We need to be talking to people five years beforehand, not six months. Employers are probably far more trusted by their employees than any insurance company and so any information given out by them is more likely to be read. However, there is more that we can be doing as an industry and the ABI has published guidelines on what we should be telling consumers at the point of retirement."
So it seems that while the issue of how to deal with small pension pots is not going to go away any time soon there are at least indications that the issue is uppermost in the minds of the industry and that progress is being made.
"In terms of what more can we do as an industry we need to give people as much information as possible so they can make an informed decision," says Goodey. "We need to recognise those advisers willing to operate in this space and help them transact their business in a cost efficient way. We may also see providers continuing to move into this area and could even see the banks starting to play a role. One thing is for certain this will continue to be a huge issue going forward."
Helen Morrissey is editor of Retirement Planner
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