An amendment to the Pensions Bill, could force every member automatically enrolled into a pension, to shop around for their Annuity when they retire.
Over the next three years, every worker in the UK aged over 22 and earning more than £9,440 per year will be automatically enrolled into a pension, to which they and their employer must contribute.
However, there has been criticism that too much focus has been on accumulating a pension fund and too little on the options at retirement. Many retirees fail to shop around for the best Annuity rate and consequently get a poor deal, potentially reducing their income significantly in retirement.
The amendment tabled by Gregg McClymont, the shadow Pensions Minister, says:
- Any qualifying money purchase scheme must direct its savers to an independent Annuity brokerage service or offer such a brokerage service itself
- Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with:
(a) an assisted path through the Annuity process;
(b) ensuring access to most Annuity providers; and
(c) minimising costs
- The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation
- The standards set shall be reviewed every three years and, if required, updated
Setting the standard
Whilst we welcome any steps, which encourage people to shop around at retirement we have significant doubts about these new proposals.
Of course the devil is always in the detail. It’ll be interesting to see what standards the Pensions Regulator sets, how non-advised Annuity brokers, who simply provide a transactional service, will work with the new proposals and how the regulator defines the term ‘independent’.
We believe anyone offering an Annuity broking service should be completely independent, allowing access to all Annuity providers; simply offering access to “most Annuity providers” really isn’t good enough as it could still lead to retirees missing out on the best Annuity rate.
Furthermore, with some non-advised Annuity broking services taking up to 3.5% commission and likely to be very protective of their profit margins, achieving the aim of “minimising costs” could be a challenge.
We asked well known pension campaigner Ros Altmann for her views on the Labour amendment. Ros said: “Labour are trying to help the customer with their suggestion of compulsory non-advised referrals to annuity brokers, but this is simply not enough to ensure people get the right kind of pension at top rates. If we are mandating in the customer interest, then people need proper safeguards and proper advice before they buy. “
Ros continues: “Annuity brokers are better than just buying from the existing pension company but will not ensure the customer gets best value from their pension fund. Only an independent whole of market adviser can do that. The irony is that people will pay as much as, or even more than the cost of advice to a non-advised broker, only they won’t realise this until the point of purchase (if at all). “
“The effect of regulatory changes under RDR have been to incentivise non-advised sales rather than advised sales. Thus RDR has worked against the customer interest. There are no controls over the charges that can be taken out of pension funds when buying an Annuity, and no value has to be delivered to the customer by a non-advised service; only selling them a product which may not be suitable or good value!”
“There are plenty of advisers who could help people do the best for themselves, but the RDR makes that much less likely and drives them to pay more to a non-advised service. As annuities are irreversible, it is vital that people are helped to do the right thing and not forced to pay far more for no advice than for the advice they really need.”
How to buy an Annuity
At present there are three ways an Annuity can be bought at retirement:
1. Direct from the provider of the existing pension
2. From a non-advised Annuity broker
3. From an Independent Financial Adviser (IFA)
Too many people are still buying their Annuity from their existing pension provider and missing out on other options such as Income Drawdown, which might be more appropriate, or simply not getting the best Annuity rate.
Whilst using a non-advised broker is preferable to buying an Annuity from the current pension provider, taking advice at retirement is always a better option.
Initially an IFA will provide advice on a range of options; after all, at current rates an Annuity is not right for everyone. Only once it’s been agreed an Annuity is the right solution, should the process of shopping around start.
Again, an IFA can add real value here, not only by contacting all providers to get the best rate, but also advising on the ideal ‘shape’ of Annuity, ensuring the right options are selected to protect spouses and financial dependents.
Finally, an IFA will look into the existing pension to confirm whether any valuable Guaranteed Annuity Rates exist, as well as providing advice on how the pension should be invested in the weeks and months leading up to retirement.