Ros Altmann is one of the foremost pension experts in the UK. Regularly quoted in the press, Ros has advised Governments on pension policy, been a leading campaigner on a range of issues and fought for the rights of thousands of workers, whose pensions were taken away from them by flawed legislation following the failure of their employer.
We were delighted that our Marketing Manager, Phillip Bray, was able to meet with Ros to get her views on the Annuity market and where it is letting down pensioners.
First things first, why do you think so many Annuities, around 400,000 each year, are bought?
Because people are directed to buy an Annuity and the conventional thinking is that’s what you do with your pension pot; defined contribution trustees automatically tell you to buy an Annuity, especially with a smallish pot. Furthermore, most people don’t know how Annuities work. If you are told this is what you are should do, that it’s safe with no risk and it’s what you are automatically offered when you reach the point of retirement, what else would you do?
The way Annuities are regulated and represented, is as if there is no risk. No other investment, where you could lose all your money, or the vast majority of it, could be sold in that way. The fact that your capital is at risk is not mentioned to you or even referred to.
You are referring to someone who buys a single life Annuity with no guarantee?
Correct, and even with a five year guarantee, now that Annuity rates are so low, people could still lose significant amounts of money.
When Annuity rates were higher it wasn’t so bad. When rates were 10% and you took a 10 year guarantee you knew you’d at least get your money back. But now, with these exceptionally low rates, it’s not clear where the value for the customer is at age 65. As you get older they are better value because you have less time for the Annuity to last and by the time you are 75 a lot of the things which are likely to go wrong with you will be much more likely to have happened.
Talking about low Annuity rates, who or what do you think is to blame? Bank of England policies, increased longevity or Annuity providers?
A combination of all three.
I don’t think I can judge too much about profitability as there is no transparency with which to judge. The calculations that I’ve done suggest there must be exceptionally high profits on Annuity sales, because just to get your money back, with a small additional return you have to live to around age 90.
The vast majority of people who are buying Annuities are not going to live to 90, although, if you buy a joint life there is an increased chance that one of you might live close to this age.
Part of the issue is that most people buy an Annuity straight away, but nowadays, especially if you have other sources of income, you are still working, have other pensions or perhaps a defined benefit pension fund, you might not need the income now, so why not defer?
Every £10,000 of pension fund you have will give you around an extra £10 per week if you buy an Annuity in your mid 60’s, with no inflation protection. If you have other income you may not need that £10 per week just now, but you are not necessarily told about the ‘do nothing option’, which also provides free life insurance because if you die before 75 that £10,000 passes on tax free.
In Annuity terms, what that £10,000 will provide is tiny, but for most people a £10,000 inheritance as a tax free lump sum is quite a nice amount.
Now obviously if interest rates continue to fall, buying an Annuity now might seem to be the right thing to do. Equally though, if interest rates fall and inflation continues to go up you will see the real terms value of your income fall.
An adviser would talk you through these dilemmas; a non-advised Annuity broker isn’t going to tell you that you do not have to buy.
If in your opinion there are people annuitising at the wrong time or possibly getting a bad deal, what can the financial services industry, or the regulator, do to make retirees more aware of their options?
I see this as a regulatory issue. I don’t necessarily blame the industry, but I do blame the regulator, because it has had many many years to adjust the way the market works for the customer.
No one has looked at the decumulation phase, everyone has been focused on getting money into pensions rather than what happens when people take money out. What’s the purpose of Auto Enrolment? It’s to be able to take money out in later life but that’s not where the regulatory focus has been, so I think this is a massive failure of policy, yet again.
There have been tiny improvements, but they certainly haven’t got to where the customer needs to be.
The fundamental problem is that Annuities are regulated as if they are a low risk – or even ‘no risk’ – product. There’s been no proper investigation or transparency of the sales process or charging from a customer perspective. The FCA is starting to look at this area and I hope they will continue to do so. Meanwhile though, we have thousands of people buying an Annuity each year, which may or may not be right for them.
“The reform agenda has always been about shopping around and getting the best rate, which is putting the last piece of the puzzle before the first”
The reform agenda has always been about shopping around and getting the best rate, which is putting the last piece of the puzzle before the first. Retirees need to follow a three stage process
- Do I need to buy an Annuity?
- What is the right kind of Annuity for me to get
- Only then should you worry about the rate.
You’ve often talked about the need for advice at retirement, would you be in favour of banning non advised Annuity sales? Would you take it that far?
I’d say nobody should be allowed to sell you an Annuity, for which they charge you, without ensuring that you have understood the implications about what you are doing and giving you the proper risk warnings.
Who is looking after the customer?
Since I looked at this on the Myners review in 2000 I have been pondering this question, who is looking after the customer?
What did you make of the new ABI Annuity tables?
I think the tables are useful to highlight the huge difference in Annuity pricing, but I’m not convinced that in the medium term they will make things that much better. They are not real time quotes; they are not even real quotes.
In fact the tables could actually end up being a force for collusion.
In what way?
Well, I’m told that a lot of the Annuity providers don’t necessarily want to offer the best rate. Those who are doing bulk Annuity business or have large legacy pension books, are doing plenty of business and are therefore not too worried about having the best rates. So if you have got big boys coming and pricing lower it could force everyone else to reduce their prices.
What people don’t understand is the volatility of pricing in the market. Naturally people would think if a company is offering the best rate, then that’s the place I should go and look. You go and get a quote from them. But there’s no guarantee that whoever was previously offering the best rate is doing so now. Indeed some providers will have sold significant amounts of Annuities and then decide they need to take in less money due to their regulatory constraints, so they drop their prices.
It’s not a normal market; it doesn’t function in the way you would expect a market to.
Plus, you might have to wait weeks for your existing pension scheme to pay out and in that time things could have changed again. Of course, if you’ve got an adviser they can do that for you, if you’re on your own you can’t.
So why do you think people are reluctant to take advice in retirement?
Because they think it must be cheaper to buy direct.
Of course, we are encouraged to buy direct for almost every other purchase.
Yes, you always think if you buy online or do it yourself it will cost you less and if you pay an adviser it will cost you more; that’s what I was trying to say in my latest blog.
There are a few analogies I could use. Take a travel agent, you go to see them, tell them you want a specific location, ask them for the best hotel and how to get there, the travel agent does their research and books it all for you. Alternatively, go to the internet, do the research yourself and book it all direct with the hotel and airline.
What will cost you more? The travel agent of course, but that’s not true with Annuities. It can cost more to buy from an on-line broker than with face-to-face whole of market individual advice – and you have regulatory protection if you use an adviser.”
“I truly believe only advisers are looking after the consumer”
Who is looking after the customer? I truly believe only advisers are looking after the customer.
If you have a magic wand, what would you do to change the Annuity market for the better, both in terms of product and distribution?
First of all, you have to have an investigation into pricing. What assumptions are being made when an insurer or broker gives a quote? This should cover how long do they expect the client to live? What investment return are Annuity providers assuming they are going to make on the money customers hand over? What risk margins and profit margins are insurers adding in? This needs to be investigated urgently on customers’ behalf.
There has to be a reasonableness test for all of these questions if you are going to regulate this market properly. Is it fair to assume all annuity buyers will live to age 90?
Secondly, within the actual sales process, do not permit anyone to sell an Annuity and charge for that sale, if they haven’t provided assurance or some kind of customer protection that gives the customer a good chance of understanding what they are doing, the implications, warns them of the risk and helps them find the right product.
So if you want to be an Annuity broker you either have to give them some form of proper, albeit simplified advice or you can’t charge them more than a nominal fee for buying from you. You must tell them they don’t have to buy, that this is a gamble on how long they will live, that they may need to protect a spouse, that they may lose much or all their capital and so on.
So you would regulate to ensure that advice was always given, to put it another way, you would regulate against non-advised sales?
Yes. I believe that Annuities and the decisions taken during decumulation are complex and should be more strongly regulated. Many people seem to be convinced that it isn’t possible to give advice to people with pension funds of £30,000 or less. I’m not convinced. There are plenty of advisers but they lack the marketing muscle of the big brokers.
Something has gone wrong? Who is looking after the customer?
What I have always called for is simplified advice for Annuities. A session with an adviser to warn you of the risks and to help you understand the implications of different decisions, if you then want to go on and buy somewhere else or shop around, you’ll have the best chance of knowing what product you want to buy; that doesn’t need a full fact find.
Turning now to the Annuity product itself, who do you think it is right for?
Someone who has more clarity and certainty over what their future holds, which tends to be someone who is older, or who has a much reduced life expectancy. Also, someone for whom this is a part of their retirement income, who wants an element of their portfolio with longevity insurance in it.
At current rates I think most people would be ill advised to lock all their pension fund into an Annuity whilst they are still in their 60’s, certainly in their mid 60’s if they are still in reasonable health and have average life expectancy.
Do you think an Annuity is right for someone with a small pot, because they tend to get excluded from other options?
We have to find a better product for people with small funds, we are completely letting them down.
If they are in a ‘Lifestyle’ fund some people virtually start buying an Annuity a few years before they retire because the money is switched into an Annuity type investment profile years before they plan to retire.
What we actually need is more flexibility in the decumulation phase, which allows people to still benefit from investment returns, all the way into their 60’s, leaves open the possibility they might keep working beyond 65, which more people are doing and allows people to benefit from future investment returns, rather than just saying from age 55 I’m not worried about investment returns.
What about those people who have a zero capacity for loss don’t like the roller coaster ride of the investment market?
Well the Annuity could mean a 100% loss, if they buy a single life Annuity. I’d like to see a solution which provides smaller funds with the ability to benefit from the investment markets. But which provide a guarantee or underpin. This would allow some certainty but with some investment growth.
Does that mean you think investment linked Annuities should have a greater place?
Possibly, when you are buying at a relatively young age, this could be a 20 – 30 year investment; would you normally put all your eggs in one basket for such a period of time? Which of course you can never change and usually has no protection against inflation.
I’m not trying to pretend there are easy answers, there aren’t. We need to do a lot of work to identify options which work better for people. What I do strongly believe is that the current system is not working well for most people.
If you were sat in front of a 65 year old now and you spoke to them about their options what would you say to them?
That’s so hard to answer, it isn’t a one size fits all, that’s why people need advice, and it does depend on their circumstances. We have tried to shoe horn them all into one solution, as if they are all the same, and they’re not.
I would say think about your circumstances and your life, this is about what you want to do and about financial planning, not just buying a product. Have you thought about where your income will come from? How much will you get from the state? How much income will you get from each pension option? Have you thought about working part time? Have you thought about the need for care?
“These are all questions an adviser can help you with; a non-advised Annuity broker can’t do the same thing”
These are all questions an adviser can help you with; a non-advised Annuity broker can’t do the same thing.
Finally, if you could leave our readers with one last thought about their retirement, what would it be?
Simple, get advice.
Go and see an adviser and make a plan about where your income is going to come from and how you want to live. You have lots of choices and options, what’s right for you might not be for someone else. Individuals generally don’t have the tools for this type of planning, it isn’t straightforward and it’s not simple, so go to an expert and pay them to help you, just as you would pay a Solicitor or an Accountant and of course you will have regulatory protection if it goes wrong.
For some reason, when it comes to later life finances, people tell you it’s only about one or two products, it isn’t.
The only person who will look after you is an adviser.