PENSIONS SPECIAL,
PART 1: ANNUITIES
In the first episode of a two part pensions special, we look at annuities and drawdown
and ask how you decide what is the best value for clients. Is drawdown suitable for more
people than is often thought, or an accident waiting to happen? What is the impact of
buying annuities without financial advice?
1 Drawdown needs reform
2 Savers get a bad deal without advice
3 Still major barriers to good retirement outcomes
ADVISER KNOWHOW EPISODE 42 26 SEPTEMBER 2013 PENSIONS SPECIAL, PART 1: ANNUITIES
KEY POINTS
KEY POINTS FOR THIS WEEK’S EPISODE
FEATURING AN INTERVIEW WITH
INDEPENDENT PENSIONS’ EXPERT ROS
ALTMANN
1
DRAWDOWN NEEDS REFORM3
¬ The £20,000 minimum income requirement is too low given inflation
¬ People with AVCs or final salary schemes should leave small pots in drawdown
¬ New hybrid annuity-drawdown products are needed
¬ Most people assume you need at least £50,000 – £100,000 to go into drawdown
¬ Those who do nothing could get a better annuity rate if they later get ill
SAVERS GET A BAD DEAL WITHOUT ADVICE
¬ It can be more expensive for a customer to buy direct form a broker than to receive whole of market advice
¬ Advisers disclosing upfront their charges puts off customers
¬ It can be unprofitable for advisers to advise on small pots
¬ Supermarkets could soon offer a simplified annuity advice service
¬ Over simplification could end with too many people getting it wrong
¬ Annuity purchase is a one-off decision
¬ Self-servers usually select a single life annuity
STILL MAJOR BARRIERS TO GOOD RETIREMENT OUTCOMES
¬ Low base interest rates and a low gilt yield environment keeps annuity rates and GAD rate low
¬ Fundamentally, people haven’t saved enough and their pension pots are too small
¬ The biggest barrier to good annuity income is lack of advice on savings
PROGRAMME TRANSCRIPT
“We’ve had flexible drawdown come
out in the last couple of years and I
think it’s a bit of an accident waiting
to happen. ”
David Thomas, Chadney Bulgin
Yet again, it’s been a big year for pensions. Auto-enrolment is working its way across UK business, while the pensions industry itself has come under fire for high charges and a lack of cheap advice. To discuss these issues, and more, I’m joined in the studio by independent pensions expert, Ros Altmann. But first, let’s hear what advisers have to say.
VOX POPS
Annuities and drawdown: Is more reform needed?
Keith Churchhouse, Chapters Financial
We are going to remain in a low base rate, low yield environment, and the reality is that people are suffering from low annuity rates and low GAD rates. So, from that point of view, more reform has to come in. How they will do it, I don’t know because it really is a money spinner for the government and the reality is that they are not likely to lose that cash-flow.
David Thomas, Chadney Bulgin
We’ve had flexible drawdown come out in the last couple of years and I think it’s a bit of an accident waiting to happen. The level has been set at £20,000 and, in today’s money, that’s not very much. In theory, someone could take all of the rest of their money out of their drawdown pot today and leave their £20,000 income. Will that be sufficient in five, ten, twenty years? Almost certainly not, in my opinion.
David Prior, Newell Palmer & Associates
On the whole I don’t think that there’s a huge amount of reform needed when it comes to annuities and drawdown. It’s certainly a lot better than it was twenty years ago.
What are the biggest barriers to a decent retirement income?
Keith Churchhouse
I think that the biggest barrier has to be the fact that people don’t save enough. It’s as simple as that.
David Thomas
Well, currently, annuity rates are probably the biggest barrier by a long chalk, because that drives both GAD rates and annuities themselves.
David Prior, Newell Palmer & Associates
The biggest barriers to people having a decent retirement income I feel is the fact that people aren’t getting the advice any more to save.
Are advisers doing enough to make annuity and drawdown advice accessible?
Keith Churchhouse
Probably not, dependent on
profitability. But then the reality is, that for smaller pots, will they address that issue? Probably not. Maybe the internet will do that, maybe we will find third sector parties, such as supermarkets, who have high levels of distribution, moving in to address a simple annuity service.
David Prior
It’s a very complex arena, because if someone buys the wrong annuity, they’re stuck with it for the rest of their lives. So you have to make sure that you get it right. It’s not like putting them into the wrong pension plan and you can transfer it later. With an annuity, you’ve bought it. That’s it. So it is a complex area and there’s a danger that if you try and simplify it too much, and just let people make their own decisions through an online portal, too many people will get it wrong.
END OF VOX POPS
Will Robins, Features Editor, Citywire
If you’re reaching retirement, and you don’t feel that you can afford advice, what happens? Do you just buy a single life annuity? Or is there anywhere else that you’re being pushed towards?
Ros Altmann, Independent pensions expert
Well, the thing that worries me most is that, right now, it can be more expensive to buy direct from a broker than it can be to go with full, whole of market, independent advice. Because of the RDR, where advisers have to tell you up front how much they are going to charge you, a lot of customers may get put off, or advisers would feel that customers are just not going to pay. But when they go online to a broker, and select for themselves usually a single life level annuity, and they come to the point of purchasing it, they will be
ADVISER KNOWHOW EPISODE 42 26 SEPTEMBER 2013 PENSIONS SPECIAL, PART 1: ANNUITIES
faced with a commission charge that can still be charged, not by advisers, but by a self-service, online broker, that could be higher than the advice charge that the adviser would have charged them in the first place.
Will Robins
Buying an annuity is not your only option, there’s drawdown as well. If you go into that level, it’s not just buying the right shape or kind of annuity, but looking at all of the other options available as well.
Ros Altmann
I think that there is a whole new layer that needs to be considered, which currently is often not being considered. Even if you’ve got a small pension pot, or perhaps especially if you’ve got a small pension pot, the ‘do nothing’ option is often not even considered. If your small pension pot is an AVC or an addition to other types of pension, for example, employer final salary pensions, then £10,000 converted into an annuity is probably not going to be much use to you at age 65. You’d be better off, in many cases, just leaving it there. You’ll get investment growth, you might get a bit of protection against inflation and if you get ill you can buy much better later. If you’ve got a big pension fund, then you can start considering drawdown options. I would love to see new products come in which are a kind of hybrid between annuities and drawdown which could also suit small pots. So that you could get your tax free cash out, perhaps, if you want
to. But, at the moment, you’ve got drawdown, which is supposed to only apply to big pots, usually the absolute minimum is considered to be £50,000. Very often it’s £100,000. Buying an annuity with all of your money if you’ve got up to £50,000 or between £50,000 and £100,000, is often going to be the wrong thing to do. But, if you don’t have an adviser, you are not going to have somebody to actually talk through the options with you and the risks of buying an annuity.
Will Robins
Thanks very much, Ros.
Ros Altmann
Thanks.
Will Robins
You can download the cribsheet for this week’s edition at citywire.co.uk/ adviserknowhow or bnymellonam.co.uk/ adviserknowhow.
Or you can find the link and add your views at @AdviserKnowHow on Twitter.
“the thing that worries me most is that, right
now, it can be more expensive to buy direct from
a broker than it can be to go with full, whole of
market, independent advice”
Produced in association with BNY Mellon, Adviser
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VIDEO
Past performance is not a guide to future performance
The value of investments and the income from can fall as well as rise so you may get back less than you originally invested
For Professional Clients only. This is not intended as investment advice. Any views and opinions contained therein are those of the individual as at the date of issue, are subject to change, do not represent the views of BNY Mellon Asset Management International Limited and should not be taken as investment advice. BNY Mellon Asset Management International Limited (BNYMAMI) and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This video may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. This video is issued in the UK and in mainland Europe (excluding Germany) by BNYMAMI, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. CP10750-07-02-2014(6M).
