Category — Annuities and Income Drawdown
11 September 2014
- Budget reforms drive massive move away from annuities and into income drawdown
- ABI figures show 50% year on year fall in annuity sales and >50% rise in income drawdown which carries high fees
- Fall in annuity sales would be even greater if pension firms allowed customers to use the new freedoms properly
- Pension providers still failing to put customer interests at the heart of their business
The Association of British Insurers has just released figures that show the dramatic drop in annuity sales following the Chancellor’s Budget bonanza for pension savers. The figures show that, when they do actually have a choice, customers do not want to buy annuities. The Budget moves may help tens of thousands of people obtain better value from their pension funds and allow them to make better use of their savings.
Number of annuities sold falls by nearly half: Relative to the previous year, the number of annuities sold in the period April to June 2014 was 48% lower than the same period in 2013. The value of annuities purchased was down 42% (to £1.8bn).
Proportion of drawdown relative to annuity sales value doubles: In the same period, the number of new income drawdown products sold increased by 55% and the value of funds used to buy drawdown rose by 37% year on year. As a proportion of the value of annuities sold, the value of drawdown products was 37% in Q2 2014, doubling from 16% in 2013. Clearly, income drawdown has become much more popular for pension savers, as more of them realise they do not have to buy an annuity.
Annuity sales still propped up by providers failure to offer customers the new freedoms: These figures do not give the full picture of savers’ attitudes, however, because pension providers are not yet allowing their customers to take proper advantage of the new pension freedoms that have been introduced. Immediately after the Budget, the Treasury announced that people would no longer be required to buy either an annuity or drawdown product within six months of taking their tax-free cash out of their fund. The aim of this was to ensure that people would be able to take their tax free cash now and then wait until after next April to be able to take advantage of the full freedoms if they wished to. However, pension providers have refused to allow customers to take the tax free cash without immediately transferring the rest of their customers’ funds into an annuity or drawdown. Therefore, many savers are still be forced to buy annuities even though this may not be right for them.
Trends in enhanced annuities remain troubling: One particular concern is that the proportion of annuities that reflect people’s health properly has only increased from 25% to 29% of products sold. The sales of enhanced annuities have increased, but remain only a small minority of products purchased. For those who fail to shop around and buy from their existing provider, only 8% receive an enhanced rate, compared with 59% of those who buy from an external company. It is so important that people ensure they buy the right kind of annuity that reflects their own circumstances.
The rise in drawdown forces customers to pay high fees: The publicity surrounding the Budget changes has helped many people to realise they will no longer have to buy an annuity, so they are increasingly putting their pension fund into an income drawdown policy so they will be able to benefit from either new products or full withdrawal next year. Ideally, they really would be best to just take tax free cash and leave the rest of the money alone until 2015, but the pension firms are not allowing this. Therefore, there has been a surge in income drawdown sales which means customers are incurring large costs. In other words, the inflexibility of the pension providers in denying customers the new freedoms is forcing those that were relying on taking their tax free cash, perhaps to repay their mortgage or for other pre-planned spending, to incur significant charges that they should not need to bear.
Customers really need expert advice before guidance starts – an opportunity for IFAs: It is vital that, in the coming months, pension firms do make the necessary investments in customer service staff and new systems that can allow pension savers to benefit from the new pension rules. There is also a significant role right now for financial advisers, who should be able to help people make best use of the opportunities available to them. There is no free guidance in place yet, so the need for advice is even greater for those who are reaching pension age in coming months.
When will pension companies really put customer needs at the heart of their business?: It is very disappointing to see that UK pension providers have not been willing or able to allow their customers to benefit from the freedom and flexibility that the Chancellor intended them to enjoy. If the industry really wants to restore its credibility, it needs to invest in the systems that will ensure customer needs and wants are catered for properly. There are worrying indications that firms are failing to cope with customer calls and this is a clear indication of the systemic failure to put their customers at the heart of their business.
Table 1: Changes in annuity sales and drawdown sales
% change year on year
Annuity sales – number
Annuity sales – value £bn
Average fund size
Income drawdown sales – number
Income drawdown sales – value
Average drawdown fund value
Drawdown value as % of annuity sales
Table 2: Trends in enhanced annuities
% of annuities bought from existing provider
% enhanced annuities out of total annuities
% enhanced annuities bought externally
% enhanced annuities bought internally
September 11, 2014 No Comments
4 August 2014
- Standard annuities assume purchasers are in good health – selling them to someone with heart trouble and cancer is unjustifiable.
- Treating Customers Fairly requires protection against such annuities mis-selling.
- I challenge providers and regulators to justify selling annuities without clear risk warnings or suitability checks.
The case of Mr. Wayne Davies vividly highlights the injustices of the UK annuity sales process. It is the worst case I have seen of the UK annuity system failing its customers. While battling cancer, he emailed me in desperation, after both his pension provider – Royal London – and the annuity company it had a tie-up deal with – Prudential – denied responsibility for selling him an unsuitable product. I want to make it clear that annuities can work well for some customers, but the current sales process fails to ensure the right type of products are sold to the right people.
Urgent action is needed to remedy the failings.
In March 2013, Mr. Davies, now 62, was in poor health and needed his pension after being made redundant. He was undergoing tests for cancer, had a history of heart trouble, was partially disabled by polio and had smoked for forty years. He was sent many pages of paperwork by his pension provider, full of terms he had not come across before. He had saved £27,000 with Royal London, which does not itself offer annuities.
Instead of sending their customers to a service which would help them choose the right type of annuity at a competitive rate, it had a tie-up deal with Prudential, under which it received 2.5% commission on each annuity sale. The terms of the deal did not require the Pru to offer annuities which catered for people in poor health, nor ensure competitive rates for the standard annuities. Mr Davies did not understand annuities and was offered his tax free cash plus a standard single life annuity at a 4.4% rate – giving him around £17 a week. He was in such poor health that this cannot be considered a suitable sale, yet there are no regulatory controls to protect customers such as this properly.
The Regulatory system and pension companies leave it up to each individual to know what to do. Two weeks after he bought the annuity, he was confirmed as having cancer. He immediately wrote to Royal London but was not told that he could have undone the annuity at that time within the ‘cooling off period’. He subsequently realised that this annuity was not right for him and went to his MP, who wrote to Royal London and the Prudential but each blamed the other and he received no redress. A complaint to the Financial Ombusman has also delivered no result.
Power of the media:
Following his email to me, I looked at his paperwork and passed his details to Jo Cumbo at the Financial Times, who took up his case and he has now received an apology and his money back. I am delighted that the pressure from Jo Cumbo at the Financial Times resulted in the return of Mr Davies’ pension fund, but this media intervention should not have been necessary. How many more have not had such help?
This is not an isolated case:
Mr. Davies’ situation is not an isolated case, although it is most dramatic example I have seen. Over the years I have received countless emails from distraught widows left penniless after discovering that their very ill husbands had died relatively soon after buying a standard single life annuity which assumes the purchaser is in good health. Nobody was required to make it clear this was an unsuitable annuity for them but these widows were not willing to speak to the Press for fear of suggesting their husbands had somehow done wrong. Mr Davies is the only living customer to have contacted me and was willing to speak to the media.
Around 1000 people a day buy annuities without clear risk warnings or suitability checks:
Every day, on average around 1000 people lock their pension savings into annuities, without clear risk warnings or suitability checks before they buy. Many are unwell, yet their pension provider does not normally know about their health – they cannot possibly know because they are not required to ask. There are still no safeguards in place to stop this happening. I hope others who have been sold standard single life annuities when they were seriously unwell will contact their company for redress.
I challenge pension providers and the FCA to justify this:
Can pension providers and regulators explain how selling standard annuities, which assume good health, without actually asking any specific health questions, comply with regulatory requirements of ‘treating customers fairly’? Without clear risk warnings of suitability, customers are not being given a fair chance of buying a suitable product.
Annuities are irreversible, so pre-sale checks are vital:
Annuities can work well for some customers, but they are complex products that should be sold with more care. Giving customers a fair chance of doing the right thing, taking account of their own health and personal circumstances, is particularly important because annuities are a unique financial product – once purchased, they can never normally be changed. Customers must therefore understand firstly whether they actually need to buy one or not and then what type suits their circumstances. The reams of paperwork sent to customers fail to make clear how annuities work and do not help people understand how to find the right type of annuity or best rates. Just writing about ‘open market options’ and the availability of other types of annuity, does not explain the basic principles of annuities, nor ensure customers find the help they need with these complex products.
Customers don’t understand annuities:
Like so many others who have contacted me, Mr Davies simply did not understand the language of annuities. Even the most cursory of checks would have revealed that a standard single life annuity was not suitable for a smoker with heart trouble, currently undergoing tests for cancer. With just a five-year guarantee, he was highly likely to lose three quarters of his pension fund as a result of this purchase, but, because nobody had to explain how the annuity worked, he did not realise that the rest of his fund would go to the Prudential, not his family. The wording of the paperwork is unclear. It is written by people who deal with annuities daily, while customers have never come across these products before.
What should be done? – Require suitability checks and clear risk warnings to explain annuities:
The free at retirement ‘guidance guarantee’, which could help people understand their pension options, will not be in place until next April. In the meantime people with serious health problems will continue to lock into unsuitable annuities that mean they lose much of their pension fund. I am, therefore, calling on all pension providers and the FCA to address the shortcomings of this process immediately.
The ideal is to have an independent financial adviser to go through all the relevant options and recommend their best course of action, but there should also be immediate changes to the way annuities are sold. Basic suitability checks should be made mandatory now, so that annuity firms cannot sell standard annuities to customers in poor health. Customers should be automatically offered impaired life or enhanced rates if they are not in perfect health. Absolutely clear risk warnings should explain that the balance of their pension fund will stay with the insurer after they die, and not be paid to their family, unless they specifically cover a partner.
I challenge providers and the FCA to explain how the current sales practices are fair to customers.
August 4, 2014 4 Comments
26th March 2014
Pension flexibility begins – at last more freedom, but advice needed
Buying standard annuity was like only insuring your house against fire – no help if you’re flooded or burgled
Wealthiest already have the opportunities introduced by the Budget – it’s right to give same freedom to all
Pensions more attractive now: The debate around the advantages and disadvantages of the Budget pension reforms is still raging. Make no mistake, these reforms are a game changer. Notwithstanding the importance of ensuring the reforms work as intended, the new pension regime makes pensions far more attractive and should help restore a culture of long-term saving.
Annuities deeply unpopular: The overwhelmingly positive reaction to these announcements has highlighted the unpopularity of annuity purchase. From April 2015, there will no longer be strict rules on how our pension money can be spent in later life. Just like pensioners elsewhere in the world, we will trust those who are responsible enough to save for retirement, to be responsible enough to manage their money wisely. Of course, not everyone will. Of course there will be those who blow the lot on frivolities. But that will be the minority – as evidence from Australia, America and elsewhere has shown. Fears of falling back on the state are also overdone, since means-testing of pensioners under the new single tier state pension will be vastly reduced.
Would you spend all your money on insuring your house against fire and not flood or burglary?: With full information or advice, most people would not choose to annuitise all their pension money in their 60s. Standard annuities cover the risk of living much longer than expected, but there are many other retirement risks that single life, level annuities, which most people buy, do not cover. They do not protect against inflation, do not cover a partner, do not help if you become ill or need care, or allow you to leave a legacy if you die young and do not let you to benefit from good future investment returns or rising interest rates. It is rather like buying a house and only insuring it against fire. If it burns down, the insurance pays out, but if you are burgled or flooded you have no protection.
People can now make proper decisions at retirement: Until now, people did not have to engage with decisions about their money at retirement, because if they did not have enough for income drawdown, they ended up buying an annuity almost by default. Suddenly, people will have flexibility to do what they believe is best for themselves, rather than being pushed down a particular path of buying annuities, or prevented from accessing their own money by actuarial rules on income drawdown – supposedly designed for their own good. But people will need help.
Need expert advice and new products: The challenge is to ensure people can access affordable advice that is impartial, independent and not driven by product sales, as well as facilitating new products that are more flexible and adaptable to modern life. Annuities may be right for some people, but not for all. Everyone should have real choice about how to use their pension savings, rather than being told by the financial industry that the annuity is best.
Specialist basic advice, not unregulated guidance: In future, the money spent on fees and commissions just for buying an annuity could be used, together with extra from the Government and industry, to fund specialist basic at-retirement advice to help people understand their options. More choices and options are needed to meet retirement risks that standard annuities won’t cover. In particular, those who need care may still have money left to meet the costs, whereas if they have given it all away it is lost to them.
Only fair to give same freedoms to everyone, not just the wealthiest: We must look beyond nanny state notions of what people should do and treat everyone as grown-ups. After all, those with the largest pensions – who have received the most tax relief – have been allowed to avoid buying an annuity and have had freedom to do as they choose since 2011. The Government has now extended that freedom to everyone – surely that is only fair. Pensions are finally moving into the 21st century.
March 26, 2014 No Comments
19 March 2014
Unbelievable news – pensions and savings revolution
So much of what I’ve been calling for is suddenly happening – exciting or what?
Pensions and ISAs more flexible, limits more generous – a Tory votewinner
After so many years of waiting for good news, suddenly so much comes at once. Like the proverbial Number 13 buses, a whole raft of policies has all come at once – and they are good news. It’s also a brilliant Budget for Tory election prospects of course. The devil of some of this will be in the detail but overall this is just good news all round. And will even bring in more tax for the Chancellor short-term as pension lump sums will deliver higher tax revenue than taking small amounts of income or delaying annuity purchase.
ISAs now more flexible: The Chancellor has delivered a Budget for savers, albeit against the backdrop of pitiful interest rates, but allowing a £15,000 ISA limit and all of it in cash, will suddenly increase the interest income that people can earn, since they will no longer be taxed on it.
The Chancellor will finally allow people to choose whether they put all their ISA allowance into cash, or stocks and shares, rather than only being allowed to have half in cash. You can switch, as you wish, between different investments and will be able to do what’s best for you. If you are saving for a house deposit, you can put your money into cash and not worry about investment risk. If you’re retired and trying to live on your savings, again you can shelter more money from tax without being forced to take more investment risk.
First £5,000 of savings interest to be tax free: Currently, there is a 10% starting rate of tax for very low earners, up to £2880 of income, but that starting rate is now rising to £5,000 and the 10% rate is being cut to zero. This will help poorer savers and will also be simpler.
Pensions flexibility massively enhanced: There are so many good news aspects for pension savings in this Budget that it is hard to know what to pick out. The overall message is, pension savings are going to be more flexible at the point of retirement. You will be able to save more into pensions knowing that there will be less restriction on what you can do with the money.
Nobody needs to buy an annuity and before you do, you_ll have to get face to face advice: All DC pensions look set to be freed from the annuity straitjacket that has so disadvantaged people in the past. As the Bank of England’s policies have brought long-term rates so low, annuity rates have plunged and people get very poor value from the annuity market. The FCA recently exposed just how badly some annuity companies are treating customers and I have been campaigning for the changes that have been announced today for years. The Chancellor now says before buying an annuity people will be entitled to face to face impartial advice. That will be consulted on, but is so important. I don’t know if they are frightened of a new mis-selling scandal, like I’ve been warning, but whatever the reason it’s essential that people understand what they are doing before buying an irreversible annuity.
Taking more pension funds as cash: Currently anyone with pension savings below £18,000 can take all the money as cash, with a quarter tax free. In addition, your two pension pots worth under £2000 can be taken as cash but the remainder has to be either annuitised or put into drawdown. The Chancellor is massively extending these limits, so that anyone with pension savings under £30,000 can take it all as cash and up to three funds below £10,000 can also be cashed in, with tax paid at the marginal rate.
1. Minimum income requirement cut to £12,000: Those who are in income drawdown currently can only take their money without restrictions if they have secured pension income for life worth £20,000 including state pensions. That limit is now being cut to £12,000 a year income. Many will be able to achieve that from state pensions plus a bit extra, so they will end up being able to invest in flexible income drawdown and have access to their money.
2. Capped drawdown limit increased to 150% of GAD rate: People are currently restricted to taking only a certain amount each year from their pension fund. This limit is set by the government actuary at 120% of the rate on a single life annuity. The chancellor is increasing this to 150% (it has only just been raised from 100%) which will be welcome news. This will also help people in poor health, who currently could get better than standard annuity rates but were penalised by the income drawdown system.
3. 55% penal tax rate on drawdown is being reduced to marginal rate: Many people have been stung by the tax rate on drawdown being 55% for monies left over, but the Chancellor is cutting that to just the marginal tax rate. This is far fairer.
Tory vote-winning budget: This is undoubtedly a Budget to boost Tory votes. Savers and those with good sized pension funds will feel far better off and have been pleading for some help – at last it has arrived. Even smaller savers are being helped, with higher amounts of pension money being available as cash lump sums for smaller pension funds and with a zero per cent starting rate of tax on savings income, added to which rules for ISAs are becoming far more generous.
A budget for savers at last! Well well, who_d have thought an election was coming up next year? Many of the measures will only start in the run-up to the next election. A master political strategist has really thrown down the gauntlet now!
March 19, 2014 2 Comments
17 March 2014
A Budget wishlist for pensions and savings
- Exempt savings interest from tax for two years
- Or allow full ISA allowance in cash
- Allow small pension funds to be taken as cash
- Relax restrictions in capped drawdown to allow for ill-health
- Introduce new incentives to save for long-term care – ISA savings set aside for care could pass on free of inheritance tax if not spent
- Stop meddling with pension rules
What might the Chancellor do to address the crisis in our pension system and restore some faith in the value of saving? After five years of rock-bottom interest rates, as the economy is recovering, will this finally be the Budget that restores some hope to savers?
For the past few years, policy has focused on encouraging more borrowing, increasing bank lending and helping mortgage borrowers, in an effort to revive the economy.
Continued ultra-low interest rates and ever-cheaper mortgages have been great news for the one-third of households who have a mortgage, but the other two thirds have hardly benefited. Indeed, these policies have left many older people facing plummeting savings income or feeling forced to take on more risk by investing in stocks and bonds, or both. Company pension schemes deficits have risen sharply as low interest rates have taken their toll and anyone buying an annuity has seen a permanent reduction in their income.
Here are some ideas of what the Chancellor could do to help.
- Exempt savings income from tax for the next two years: As interest rates have been kept artificially low, it would be great news for savers if they were allowed to receive their interest income tax-free. A temporary tax break would cost the Chancellor very little while rates are so low, but would at least give a small boost to savers’ net income.
- Relax the restrictions on ISAs: The Chancellor could allow ISA savers to choose whether to put their whole ISA allowance into cash or stocks and shares, and be able to transfer freely between the two. Young people saving for a house deposit, or retirees needing to live on their savings, cannot afford to gamble on the markets, but then they can only put half the annual ISA allowance into Cash. Improving ISA flexibility would help offset at least a small part of the damage done by falling savings interest rates, by enabling savers to receive a bit more income tax-free.
- Relax the rules for annuity purchase to allow £10,000 or even £18,000 to be taken as a lump sum: The financial services regulator, FCA, recently highlighted what terrible value current annuity purchasers often receive and this applies particularly to smaller pension funds. Currently, unless total pension savings are worth under £18,000, or an individual pension pot is valued below £2,000, the funds have to be turned into an income, which normally means buying an annuity. However, annuity companies offer very poor value for smaller annuities and if the Chancellor were to allow funds up to, say, £10,000 or even £18,000, to be taken as a taxable lump sum, people would not have to buy an annuity but could invest the money as they wish to. This would also bring in more revenue to the Exchequer, since many people who receive only a few extra pounds a week from a small annuity will not pay tax on that income, whereas receiving a lump sum may result in pensioners paying basic rate tax on their fund.
- Introduce fairer rules for capped income drawdown – particularly to recognise ill-health: Some form of ‘enhanced’ or ‘impaired life’ drawdown, allowing those with poorer health to withdraw more each year.
- Introduce new incentives to help people save for care: The Chancellor could announce new incentives to help people save for later life care needs. The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this. A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care. If the ISA could be passed on free of Inheritance Tax if it is not spent on care, then many people might start earmarking their ISA savings for care. Such an incentive would also help focus people’s attention on the need for care savings.
- Stop meddling with pension rules: This could allow some stability for people to plan their later life finances.
The last few years have done dreadful damage to savings incentives. No economy can survive and thrive without long-term savings and it is important that policymakers encourage more people to save for their own future needs. Let’s hope this Budget will finally produce some long overdue good news for savers.
March 18, 2014 No Comments
10 March 2014
- Media Pressure forces ABI to make more promises to treat customers better
- Annuity Customers need action now – not waiting yet another year
- Regulator needs to act quickly to ensure proper protection, not self regulation
ABI has promised to treat annuity customers better for years – still not happening in too many cases: I’m pleased to see that the media pressure is helping the ABI to realise that it must ensure that its members improve the way annuities are sold. Despite years of promises and initiatives to raise standards, customers are all too often treated appallingly.
Basic suitability checks needed and selling annuities without customer response should be banned: Basic checks are not carried out to assess suitability, there is no control on value for money and no basic requirements to treat customers fairly. Indeed, annuity selling is the ‘wild west’ of the pension market. Whether it is insurers selling standard annuities to customers in poor health – because they do not even ask the most basic questions to check whether the annuity is suitable – or insurers buying poor value annuities by default for customers who have not responded to say they wish to, the market is simply not serving customers fairly in far too many instances.
Great that ABI wants £10,000 pots to be taken as cash: Although I’m delighted that the ABI is calling for funds worth less than £10,000 to be allowed not to annuitise, it is important that customers are told of this option. Currently, annuity brokers and providers do not make this clear.. Annuity rates for smaller funds are particularly poor and many people fail to achieve good value from their pension savings.
Annuities are unique – FCA must act to stop irreversible unsuitable selling: The Regulator needs to step in urgently to ensure companies do actually treat customers fairly. Annuities are a unique financial product and require special care when being sold. Ideally customers need advice before buying because many of those who buy can actually take the fund as cash but don’t know it.
Customers being short-changed day in, day out: So far the ABI has been far too slow to implement proper change and customers are being short-changed day in and day out when they unwittingly buy the wrong annuity = often at very poor value – from ABI members who have failed their customers.
Conversation with in-house team is hardly impartial!: Offering them a conversation with an in-house team won’t be enough unless there are proper protections in place. Customers need unbiased effective communications, information and preferably advice, since they pay to buy their annuity whether they are properly advised or not.
Reforms needed now, not in 15 months time: I’m delighted that the ABI is making further concessions to try to improve customer outcomes, but there is a lot more that needs to be done to ensure this market works well. Since most annuities can never be changed, the reforms are needed immediately, not in 15 months time.
What should happen?
- Customers are not automatically offered an annuity
- Annuity companies must ensure products are suitable before being sold – basic suitability checks must be made
- Customers should be encouraged to take financial advice
- Brokers should not be permitted to charge high commissions, while IFAs who can offer the best protection to customers are forbidden to do so – no commission should be permitted on annuity sales. A fair fee, for a fair service.
March 10, 2014 No Comments
14 February 2014
- FCA Review is welcome but customers need urgent action not another review
- More delays mean more consumer detriment as companies sell unsuitable annuities to customers who do not understand the complex issues and jargon
- Need suitability checks and ban commission for all annuity sales to remove bias against advice
The FCA’s Thematic Review of Annuities is certainly welcome. Its findings that the market is not working well are hardly a surprise, given the extent of media coverage in recent months and years but it is encouraging that many of the problems are finally receiving regulatory attention.
Just launching another review leaves more customers at risk: The FCA has powers to protect consumers properly, but it is launching another review rather than acting immediately. The reason why immediate action is so important is that this market affects so many people and the transactions they are making are irreversible. More than 1000 people every week are buying annuities and the market is worth £14billion each year.
Those in poorest health and those with lowest savings are most at risk, yet the Regulator is still not taking action: The FCA is right to highlight that consumers in poor health and those with the smallest funds are suffering the worst detriment, but no action is being taken to stop this yet. If the FCA knows that many companies do not offer annuities suitable for people in poor health, why does it not ban them from selling a standard annuity to such customers? Why not introduce compulsory questions to ask about health?
Why are there no suitability checks before selling this irreversible product?: The way annuities are sold, without any suitability or ‘know-your-customer’ checks, makes it inevitable that many people will not have the chance to make best use of their hard-earned pension savings. The insurance industry has had years to get this right, but so far the pace of change has been glacial. Meanwhile, millions of pensioners may be poorer for the rest of their lives, as they have bought annuities that are not right for them, and will never be able to change them.
The market failure is about more than lack of ‘shopping around’ for better rates: The tone of the FCA review is that if only people would shop around for a better rate than their existing provider can offer, all the problems would be solved. This is simply not the case. There are so many problems in this market and the failure to find best rates is only one of them.
Other serious failings: The lack of disclosure of hidden charges, the lack of requirements to ensure the annuity product is suitable for a customer, the ongoing failure to ensure customers are written to in plain English and understand the jargon being used, the regulatory bias against financial advice which has allowed non-advised services to charge commissions that can be higher than the cost of full advice without clearly disclosing these to customers before the point of purchase are all damaging to customers. They ideally need advice to help them understand the complexities of this decision and the asymmetry of knowledge and power works against customer interests in this market more than most others.
Report indicates customers are at fault: The Report seems to suggest that the lack of engagement with the open market option is a failing of customers, rather than a failure of the sales process and the market itself. The Report suggests that customers ‘lack confidence’ to switch to a new provider, that they do not ‘fully understand’ the decisions they need to make and that they suffer from inertia. In reality, however, insurance companies often make it impenetrably difficult to move to another company. Reams of paperwork, full of jargon means most ordinary people have no hope of really understanding the complexities of annuities, buying from their existing provider is far faster, easier and saves much form-filling and chasing up of information and many people try to switch but end up giving up because they need the money quickly and the process is so time-consuming or difficult. If the FCA were to require a proper and standardised process for decisions at retirement, and encourage people to use the money they will automatically pay when they buy an annuity to actually pay for advice, then customers would have a much fairer chance of doing the right thing.
Do FCA objectives conflict and will customers’ interests be prioritised?: It is telling that the FCA states its objective is to secure an ‘appropriate’ degree of protection for consumers but also to protect the integrity of financial firms. There is a conflict between these two objectives. As so many financial firms are involved in selling annuities and making profits from those sales, the need for consumer protection could jeopardise some of those business models.
Treating Customers Fairly is about far more than shopping around – need right product first: The FCA says it will ‘consider very carefully whether changes to its investment rule book are needed to create a market that treats its customers better’. TCF is about much more than just shopping around for a better rate – it’s got to be about finding the right product first and whether any product is needed at all. The study was only to assess the difference in income between shopping around or not shopping around, rather than considering whether customers are being sold an unsuitable product.
Findings on broking websites are welcome, but don’t mention commission bias against advice: I am pleased the FCA mentions that broking sites must prominently disclose the costs, but it fails to mention the commission bias against advice which makes non-advice far more profitable than advice. Even more worrying, the FCA seems to believe that using broking websites ‘allow people to buy an annuity direct, which can save money by foregoing professional financial advice’. This is actually not necessarily true. The FCAs own RDR rules allow the sites to charge commission, with no controls on those charges, which can result in customers paying more for non-advice than for full advice. There needs to be proper acknowledgement of the value to customers of taking individual advice before buying this irreversible product, rather than trying to go it alone without any protection at all. Even more worrying is that the FCA found these websites, which can charge more than using an IFA, were misleading and did not describe annuities properly. This is such an important financial decision and so much money is at stake that proper regulatory scrutiny is vital.
What reforms are needed: The FCA’s investigation needs to focus on more than just identifying why people are not ‘shopping around’ and preventing existing providers from selling to captive customers. It needs to include consideration of how to help people understand their options properly, including doing nothing for the moment if they do not need extra income immediately and making sure they know what kind of product they should be ‘shopping around for’. Getting a better rate for an unsuitable product is not good enough. People need to know what product they need first. Reforms that are required urgently, which would actually help customers properly, include:
- Ensure annuities are no longer sold as a no-risk product that is suitable for all – buying an annuity is a ‘risky’ decision and customers need warnings to understand all the risks before making this irreversible purchase
- Require all annuity providers to treat customers fairly – which means mandatory suitability and know your customer checks (including checking for health issues, trivial commutation and whether to cover a partner)
- Reform the Conduct of Business Rules so that pension providers do not automatically offer annuities to all those reaching pension age – customers should have to decide what is best and find help or advice for this
- Introduce standard forms and paperwork that enable customers to understand all their options – including taking all as cash, or doing nothing for now. Make sure the forms are tested on customers to ensure they meet a ‘plain English’ test
- Ban commission on the sale of annuities by any party, not just IFAs and do not permit non-advice services to hide their costs until the point or purchase while advertising ‘free’ services. All costs should be disclosed up front in order to remove current bias against individual financial advice
- Investigate annuity pricing to identify any excessive profitability and investigate why some companies offer such poor rates and consider the issue of small pots urgently since there is no real competition in this area of the market.
A fuller background briefing on annuities is here, if you want more detail on what has gone wrong. http://bit.ly/1kBoI5A
February 14, 2014 2 Comments
12 February 2014
FCA Annuities Review is bound to find serious failings
- Annuities scandal must be ended to ensure better value pensions
- Annuities are sold as a ‘no-risk’ product, suitable for all but are actually high risk for those who buy unsuitable, irreversible pension income
- The FCA must act urgently as Treating Customers Fairly is about more than just ‘shopping around’
- Providers must make suitability checks, give risk warnings and fair charges – currently they are not bothering to check and just making good profits
The FCA will be publishing its thematic review of the annuities market on Friday. It is almost impossible to imagine that the review will not find serious failings in annuities and significant damage being caused to customers who buy the wrong annuity, at the wrong time and at a poor rate. I have been highlighting this market’s shortcomings since 1999 and still, 15 years on, the market is failing its customers. Each time the Treasury or FCA looked at annuities, they found failings but left it to the insurance industry to regulate itself and reform its processes.
The Association of British Insurers has continually promised to look after customers better, to ensure that companies selling annuities would make sure everyone understood that they could find a better annuity rate elsewhere and received information that would be in plain English and user-friendly. The latest initiative was the introduction of the ‘ABI Code of Conduct’ but none of the reforms so far has actually achieved the objective of treating all customers fairly. TCF is about far more than just ‘shopping around’ for a higher rate for a standard annuity. Even though the FCA’s TCF rules require that financial providers must not sell products to people which may be unsuitable for those who buy them, insurers do not even ask the most basic questions of their customers before selling an annuity, so how can they possibly know whether the annuity is suitable or not?
There are no suitability checks. The pension company who has looked after your pension fund does not have to ask if you are in good health or poor health, nor whether you have a partner, or are still working – all of which would be vital pieces of information to assess whether a standard single life annuity (the one most commonly offered and bought) is even a suitable product for you. They do not have to check whether you might be able to take all your fund as cash (under helpfully-named ‘trivial commutation’ rules), instead of buying an annuity at all. And the insurer may also be offering a very poor rate for this unsuitable annuity, but there are no controls on the value for money that must be offered and once you have bought it, you can never change it. The extent of market failure is enormous.
Currently, annuities are sold with no controls on charges or value for money. There is no real customer protection at all – even though the product is completely irreversible in most cases. The standard annuity offered is a single life, level annuity, which has no inflation protection and covers only the person buying, not his or her partner. Many companies do not offer annuities that reflect poorer health, yet this could give people much higher pensions that they never find out about. This scandal has lasted long enough. It’s time for the Regulator to act. Every week of delay will see more than 1000 people at risk of locking into the wrong product for life and possibly wasting their pension savings.
10 things the FCA annuities review needs to address:
- Stop providers automatically offering annuities to all those reaching pension age – Reform Conduct of Business Rules
- Introduce standard forms and paperwork that enable customers to understand all their options – including taking all as cash, or doing nothing for now. Make sure the forms are tested on customers to ensure they meet a ‘plain English’ test
- Ensure annuities are no longer sold as a no-risk product that is suitable for all – the Regulator should recognise that buying an annuity is a ‘risky’ decision and customers need warnings to understand all the risks before making this irreversible purchase
- Require providers to treat customers fairly – which means mandatory suitability and know your customer checks which help check annuity suitability – checking for health issues, trivial commutation and whether to cover a partner
- Require providers to highlight the value of independent advice before purchasing an annuity so that customers have someone to help them understand the complexities of this decision
- Cap charges for non-advised annuity selling and require disclosure of costs up front in order to remove current bias against individual financial advice
- Ban commission on the sale of annuities by any party, not just IFAs and do not permit non-advice services to hide their costs until the point or purchase while advertising ‘free’ services
- Ensure annuity companies are obliged to Treat Customers Fairly in terms of value for money relative to other providers – FCA to conduct regular checks on the pricing of annuities
- Encourage alternative approaches to taking income from pension funds to allow more flexibility, rather than committing all funds to a product that may turn out to be wrong
- Introduce controls urgently as delays will mean thousands more making the wrong decisions
A fuller background briefing on annuities is here, if you want more detail on what has gone wrong. http://bit.ly/1kBoI5A
February 12, 2014 2 Comments
2 February 2014
Last week, there was an important debate in the House of Lords, organised by Baroness Sally Greengross, head of ILC-UK, sponsored by Legal and General and attended by annuity providers, brokers, advisers and consumer groups. The topic was ‘Are Annuities fit for Purpose?’
On the panel were Tim Gosden and Kerrigan Proctor of Legal and General, Dan Hyde from the Daily Telegraph, Sue Lewis of the Financial Services Consumer Panel, Tom McPhail of Hargreaves Lansdown, Jane Vass from Age UK and me. The following is a summary of my views and you can link to my presentation slides and transcript of my full remarks here http://bit.ly/1fNwzaO .
- If customers are buying annuities without any advice, without suitability checks and without having to provide relevant information, we have no idea whether the annuity they buy is fit for purpose.
- The FCA has failed to protect annuity customers.
- They are regulated as a ‘no risk’ product that is suitable for all who buy them and there are no controls on value for money or fees and charges.
The purpose of annuities is to help pension savings meet retirement income needs but the market is not working well for customers: The problems are not just about whether annuities offer good value at today’s low rates, but include a sales process with hidden fees and charges paid by unwitting consumers and failure of providers to ensure those buying standard annuities get suitability checks or advice before buying.
Annuities are supposed to meet retirement income needs but rates have fallen sharply: Annuity rates dropped sharply to around 5% in 2012. They have now recovered from their lows, but the hundreds of thousands of people who bought last year will be permanently poorer because they cannot undo the deal. In the past, annuity rates were much higher and offered better value but even the best annuity providers were paying very poor annuity rates a year ago.
Annuities are being sold as a ‘no risk’ product which is suitable for everyone: The FCA has absolutely failed to protect pension savers in this market. It has consistently left it to the ABI to self-regulate. As the excellent report from the Financial Services Consumer Panel recently highlighted, this is not working and urgent changes are needed to make the market operate more fairly for customers. This is despite the fact that annuities are a unique financial product because they are both complex and irreversible. If a better product comes along in future, you will never be able to buy it if your pension savings have been spent on an annuity.
Nobody needs to give customers risk warnings or make suitability checks, it’s just caveat emptor, even though this purchase is irreversible: Many of those who buy an ordinary annuity are in poor health and could have received a much better rate if they had used an advice or guidance service. This cannot be ‘treating customers fairly’ but there are no safeguards to prevent such sales.
As retirement becomes longer and starts later, one-size-fits-all does not fit all any more: When retirement was expected to last five or ten years, and started for everyone at a uniform age, such as 60 or 65, buying an annuity was more suitable, but as retirement has changed significantly, with people both working later and living longer, the one-size-fits-all annuity product is not really fit for all at all. It is just too much of a lottery.
Annuities insure against ‘living too long’ but there are other risks that they won’t help with: The major attraction of annuities is that they will continue to pay you however long you live – a kind of insurance against living ‘too long’. But people will face many other risks during their later years. Standard, single life, level annuities offer the highest starting income so they are most often bought, but will not protect against inflation (after 25 or 30 years the income will probably be worth much less) and there is no provision for partners or dependents. I estimate that future widows could lose out on £1billion a year of income from their husband’s pension savings as a result of purchasing a ‘single life’ annuity instead of ‘joint life’ because they thought shopping around for the ‘best rate’ was the right thing to do. Therefore, standard annuities have no flexibility to adapt if health or market circumstances change, so they will not necessarily suitable for everyone.
Ensuring everyone shops around using their OMO is not an answer: The FCA has relied on the open market option (OMO) to drive better outcomes, but this is not the answer. It often leaves people bewildered, or leads them to just shop around for a better rate, but for the wrong product! Getting the best rate for a standard annuity is not good enough. People need firstly to decide whether doing nothing or taking the fund as cash, would be a better option, but they often believe they actually have to buy an annuity even if they do not need to.
There are no requirements for suitability checks, risk warnings or controls on fees and charges: Firms can sell customers an annuity without any risk warnings or suitability checks and there are no controls on the charges, rates or value for money offered by annuities. Firms can charge what they like and price the annuities as uncompetitively as they wish.
Hidden fees and charges have biased market against advice: Following the RDR, brokers, pension providers and non-advice services are still allowed to charge commission for selling annuities without any advice, which need not to be properly disclosed until the point of sale, whereas IFAs have to agree a fee at the beginning of their engagement with the customer for at retirement advice. This puts people off taking advice and has biased the market against the advice people really need before making this irreversible purchase. Indeed, there are no controls on the amount of commission charged, with the FSCP having found some charge over 5% of the pension fund, and this means buying without advice can be more expensive than using an IFA. Many IFAs will charge a fixed fee, such as £750 or so, which is actually less than the 3.5% commission on a £30,000 pension fund which amounts to £1,050 with no individual advice or regulatory protection to ensure they are doing the right thing. This is a direct result of well-meaning reforms that were supposed to protect the customer!
So what reforms of the annuity market could help make it fit for purpose? As this transaction is irreversible, customers need advice and protection before purchasing. Annuities are not suitable for all. Unlike other insurance or investment products, if you have done the wrong thing, you cannot move to a better firm so it should be mandatory to provide proper information, risk warnings and preferably some advice before people buy. The following reforms are required:
- Do not allow anyone to charge commission for selling annuities
- Introduce proper controls on fess and charges
- Stop bad value products being sold
- Require risk warnings and suitability checks before sale
- Encourage advice
- Reform of the Treasury’s Conduct of Business rules, COBS19.4: Currently, annuities must be mentioned in the letters sent to customers. This requirement should be abolished so customers are just given standard information and need to decide whether, when and how to take income from their pension savings. This would force them to engage with the decision, rather than be left stumbling blindly into buying an annuity which may not be suitable for them.
The industry itself could also do more to look after customers.
- Agree to disclosure of fees and hidden charges
- Introduce ‘know your customer’ checks before selling annuities
- Will some of the insurers who operate to higher standards stand up against poor value instead of the ABI accepting very low rates being offered
- Develop new decumulation options that better fit with people’s lives: Perhaps some kind of simplified drawdown for smaller funds or for those who don’t want to choose their own investments, rather than buying one irreversible product despite having a 25 or more year time horizon.
So to conclude, when considering whether annuities are fit for purpose, I have three main points:
- If annuities are being bought without any suitability checks or advice we really have no idea whether they are fit for purpose for those buying them now.
- A standard single life level annuity, which is irreversible and inflexible and which people buy at a relatively early stage in their later life is unlikely to be suitable for all.
- High and hidden charges should be banned with no commission being allowed to be taken by anyone selling annuities
- The annuity sales process should not be biased against the advice people need.
As millions more people are auto-enrolled into DC pensions, we MUST reform the way this market is working.
February 2, 2014 1 Comment
19 January 2014
Sunday Times calls for urgent action to address annuities market
Please sign the petition to call for reform – You can sign here:
More than 1000 people every day at risk of buying the wrong annuity and thousands of widows will lose out
It’s great to see the Sunday Times running a campaign for annuities reform. This huge market is not working well for its customers and reform is required quickly.
Many people just buy the annuity offered by their current pension company which frequently pay terrible rates. That’s bad enough, but not only are they getting poor rates, many are also buying the wrong type of annuity. For example they buy a standard annuity when they could have qualified for a special one that pays more due to a health issue or they don’t buy an income to provide for their partner’s retirement, only their own, leaving their partner with no pension.
Annuities are a unique financial product, most customers do not understand them and they are irreversible. If you buy the wrong kind of annuity, or buy one when you don’t need to, you or your partner may live to regret it and you cannot change your mind. Therefore, it’s vital to understand what you are doing and make the right decision straight away. Annuities are complex and the market needs regulatory intervention to protect customers.
Unfortunately, there is almost no regulation of annuity sales at all and no controls on the value for money or charges – companies can charge what they like and will often take large sums from your pension fund just for selling you an annuity.
As auto-enrolment brings millions more people into pension savings, it is crucial to make this market work better for customers to deliver good value pension income.
The Sunday Times campaign calls for five significant changes that would really help customers to do the best thing for themselves.
If you want to support this campaign, please sign up and call for the Government and regulators to make changes.
These are the five things the campaign is calling for five key reforms:
1. Force insurers to make retirement options clearer to customers: Pension companies should not write to people before retirement to suggest they need to buy an annuity. Those reaching their previously selected pension age should just receive a statement of the fund value and some standard wording to tell them about the options they have. This would include explaining that they do not actually have to buy an annuity, that they could perhaps take their fund as cash, that they can use income drawdown or other products like fixed-term or guaranteed annuities and that they must find the right kind of annuity if they are buying one. Current rules require pension companies to tell customers about annuities and using the open market option to shop around for better annuity rates. This misleads people into thinking they have to annuitise, when many will be better off not buying an annuity at all.
2. Reveal the true cost of buying an annuity, whether direct or via annuity brokers: Buying an annuity will always cost money. Whether you buy from your pension company or use an on-line or telephone broker, you will have to pay fees or commission. The campaign calls for Regulators to require all annuity sellers to reveal their charges clearly at an early stage, rather than misleadingly suggesting they offer a ‘free’ service, yet then charging commission for selling you an annuity which they only mention at the point of sale.
3. Fully underwrite every annuity
Those who smoke or have medical problems, such as high blood pressure, are eligible for much higher pension income from an enhanced annuity. But the best rates are achieved when the annuity is individually underwritten to cover any health or lifestyle issues each customer has. This would produce fairer – and usually higher – income.
4. Ensure pension providers prove that customers have understood the importance of providing for partners: Unfortunately, many people think the secret of success with annuities is finding the highest rate. This is not necessarily the case. It is vital to considers cover for partners and it should be obligatory for customers who have partners and choose not to buy a ‘joint life’ annuity to sign that they understand the implications of not doing so. Millions of widows have been left with nothing because their husbands only bought a single life annuity. More than £3bn from people’s pension savings of people buying annuities in the next three years will be lost to their widows/widowers in future, leaving hundreds of thousands without their partner’s pensions in future.
5. Simplify the rules for smaller pension fund amounts: Currently, pension savers with individual pots of less than £2,000, can take the entire amount as a lump sum. But trying to annuitise sums under £10,000 is extremely poor value and results in savers potentially wasting thousands of pounds of their savings. The campaign calls for the level at which people are allowed to take their money as cash to be increased, perhaps to £10,000.
These five changes would make a massive difference to hundreds of thousands of pensioners, giving people a better chance of maximising the value of their pensions savings for themselves and their family and delivering better retirement incomes. After all, isn’t that the point of pension saving in the first place?
You can link to the Form to support this Sunday Times campaign here, please sign:
January 19, 2014 No Comments