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Time to stop the blame game on annuity sales

Time to stop the blame game on annuity sales

Too many people buy standard annuities. Figures published in the Sunday Telegraph this weekend show that the number of people who retire and could be suitable for an enhanced annuity is substantially higher than those who actually do purchase one. According to the Sunday Telegraph, 68% of men between the ages of 61 and 69 suffer from a condition that would qualify them for this type of annuity, yet only 31% are actually being steered towards them. As a result, many of the 360,000 people who buy an annuity each year are landed with a really bad deal.

This is one of the pernicious effects of the Retail Distribution Review (RDR). At the same time as the Association of British Insurers (ABI), under pressure from the pension’s minister, is pushing a new code of conduct designed to make insurers inform annuity customers of the better deals available via enhanced annuities, the RDR’s push away from commission is driving people with smaller pension funds away from the financial advice sector, leaving them to make the decision themselves.

Of course logically they are paying the same amount for the advice by fee that they used to pay by commission, except for the very small pension pots where the fees may be more expensive than the previous commission percentage. Indeed those with larger pots may well be paying less under the fee system but that ignores the way people think about these things, which isn’t necessarily in a logical manner. Being asked upfront for the cash to pay for the advice was supposed to make people shop around and get cheaper advice. Instead, for many, it makes it clear that it is possible to save all the money by not taking any professional advice at all. However, this can be a very poor bargain if the choice made is incorrect.

Most choices we make during our lifetime are not irrevocable. After all, educational choices, career choices and even marriage choices can and are frequently altered these days. Buying an annuity is the one of the few choices that can’t be amended at a later stage. Once you’ve committed to the decision, you’re stuck with it. This makes it one of the times that a person really needs to take advice from an expert.

So on one side, the public is being protected by the ABI's code of conduct which encourages them to make a whole of market decision by shopping around for the best annuity and on the other, they are being put off taking the expert advice they need by the upfront charges that RDR forces IFA's to communicate as part of their sales process.

It’s difficult to argue with either the code of conduct or the RDR. Both are focused on ensuring that new retirees get the best value for their lifetime savings and individually both should be welcomed. It’s just that because of the illogical behaviour of people, these initiatives frequently work against each other. It is difficult to see how we can preserve the best features of both whilst ensuring that they cease to contradict each other.

There needs to be some focus on this issue in the Department of Work and Pensions. It’s no use just complaining about the lack of intelligent annuity purchasing, and blaming the annuity providers for it, when one of their own rules is driving would-be annuitants away from getting advice at the very moment they need it most.

Otherwise, we will end up with the government being morally responsible for pushing new retirees into a position where they are deliberately taking uninformed decisions that they can’t undo and leaving them to live with the consequences of their decision for the rest of their lives.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

Google Plus: TomMurray

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