Retirement income could be one of the pension buzz phrases of autumn 2007, as the Government announces the results of its review into the annuities market.
This dates back to December, when the Treasury published its Annuities Market report, giving the Government's verdict on the annuity market, and where it believed improvements were needed. The next step was putting together an informal group to look at this area, headed up by the Treasury and the Department for Work and Pensions (DWP), but including interested parties such as FSA, consumer groups, and the ABI.
The review group was originally tasked with investigating why more people didn't exercise their open market option at retirement. The review wanted to increase the number of people choosing this action from the current level of around a third. It also wanted to make sure people make informed choices about annuities and to increase the number obtaining the best rate for their given choice of annuity.
In answering this brief, the review could come up with a range of solutions. The emphasis appears to have moved to how people make decisions about their retirement income, with the emergence of a two-stage structured process. During the first stage, the type of annuity is selected (for example with escalation or on a joint basis). The second stage considers which provider to buy the annuity from. Of course, advisers will be used to this approach. This 'assisted sale' holds many benefits for people buying their retirement income.
The Government's concern is not enough people are seeking help, and relatively few use the open market option. However, people don't just need more information; they need the financial capability to understand the choices.
The fact that only a third of people use the open market option isn't an indicator that only a third of people have considered it. Annuities are a highly competitive area. Although people may have the opportunity of buying their annuity with a provider whose rates are only, say, fourth ranked, this may not be reason on its own to move to the most competitive provider on the list. Moving annuity provider takes time and effort, from all parties involved, even when advisers are involved. It's possible that taking an open market option means the first annuity instalment is missed, and all this for the sake of only a few pence increase in the monthly payment.
The Government's concern with annuities matters. Partly because this is a booming market. In 2006 400,000 annuity policies were set up, worth £9bn. Watson Wyatt recently predicted this could increase by 50% to a market worth £14bn in 2012. This is also an area where Government wants members to receive the best annuity rates possible.
Unfortunately, life doesn't work like that. Different providers will be competitive in different parts of the annuity market. However, there may be some who do not want to be competitive.
Exerting too much control leads to lack of innovation, and the annuities market needs new ideas and concepts. The number of people seeking solutions is growing rapidly, but people's needs are also changing. As the baby-boomer market begins to retire, they will want to see more choice and flexibility over their retirement income to meet their demands.
Annuities - and all retirement income solutions - are going to be an exciting part of advisers' future. This autumn could be the time to set the framework in place, to make sure we can evolve as an industry to meet our customers' needs.
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