The Pensions Advisory Service (TPAS) recently launched a new online annuity planning tool. This aims to help people with the choices and decisions they have to make when they want to turn their pension pot into an annuity. This includes answering questions such as level or increasing, benefits for a partner or not, and do I qualify for an enhanced annuity?
Recent Association of British Insurers (ABI) research1 shows the need for this type of tool, with around 2/3rds of people buying a single life annuity and only 6% buying an escalating annuity. Education around the value of the attaching benefits is needed so that people don't automatically select the highest possible starting annuity.
The 'at retirement' market is a huge area in the UK with more than £11 billion1 placed into annuities in 2007. The introduction into the UK of variable annuities, which sit between conventional annuities and drawdown, give people another option to consider. This will increase the complexity of the retirement market - an area that desperately needs to be simplified. This is illustrated by the fact that it is easy to go through 30 screens or more when using the TPAS planning tool.
This complexity when people decide the time is right to take their pension benefits illustrates the need for proper financial advice. Advisers can help clients understand which option is best for them and their family, walking people through the risks and rewards which each option entails.
Help is at hand for advisers too. Some providers are introducing retirement planning tools which help advisers illustrate the benefits of taking savings in one order or another. These look at all savings which a client has, not just pensions, and suggest the most tax efficient way benefits can be taken to meet the client's needs.
Anything which helps educate consumers around their ideal choices is worthwhile, but education is only one part of the jigsaw. One of the key aims of the TPAS annuity tool is to help more people exercise the open market option. The ABI research shows that around 85% of people get an annuity within 5% of the best rate available on the open market.
So this part of the market appears to be working fairly well. What other market in the UK (other than monopolies) can boast a mere 5% difference between the cheapest and the dearest?
The bigger issue is around those providers who don't publish their annuity rates. Why are their rates 20% or 30% off the pace when differences in the open market are so much closer? A report by the Cass Business School in March 2006 showed that there are more than 100 annuity providers2. Yet only a very small proportion - 10 or 12 - voluntarily provide rates for the FSA tables.
It is crucial that people believe they are getting a good deal from their pension savings. To protect customers, and help them know that they are getting a reasonable deal, the Financial Services Authority should require all annuity providers to show their rates on the FSA comparative annuity tables.
Assistance like the TPAS annuity tool for consumers, and Standard Life's forthcoming Retirement Manager for advisers are excellent aids, helping people decide the best option available. However, these measures only go part of the way. There is an opportunity to give customers greater transparency when converting their retirement savings into income. The FSA should do their part to ensure annuity buyers are getting good value by making sure all insurers publish their rates - including the 90 plus insurers that don't currently do so.
1. ABI Research Paper No 8, 2008 - Pension Annuities
2. Cass Business School report, March 2006
Speaking at Professional Adviser's conference
Equity release panel
Speaking at PA360
TISA's Peter Smith
Shone a light on 'closet trackers'