A national default annuities service should be established to help advice-starved consumers through an increasingly complex at-retirement market says the Financial Services Consumer Panel.
The FSCP wants a default annuities service to have a public service obligation similar to Nest’s, requiring it to accept all annuitants, irrespective of their pot size and financial capability. Employers and trustees should also be required to offer a similar non-advised service, it says.
The proposal is the latest call for action on a disfunctional annuity market, following Labour’s amendment to the Pensions Bill that called for a centralised brokerage service for all auto-enrolment savers, which was defeated by the Coalition.
The FSCP has also called for changes to the trivial commutation taxation rules to allow people with multiple small pots with a combined value of more than £18,000 to take them as cash lump sums.
It also wants the Money Advice Service to develop an annuity adviser website and require member firms to adhere to a code of conduct.
In a review of annuity provider literature sent out over the last decade the FSCP found ‘systemic complexity’. A report published today found a significant shift to non-advice in the mass market for annuities partly driven by reforms to charging structures introduced by the retail distribution review (RDR).
The report’s authors said there is a danger that this shift in distribution channels will undermine the intentions of the RDR, leaving most customers with no choice but to use commission-based, non-advice services.
The report found non-advice services are often more profitable than advice services because they have lower delivery costs, yet can often charge more, especially for enhanced annuities.
Some enjoy very high commissions, of 5 to 6 per cent, as compared with an average of 1.5 to 3 per cent from providers keen to secure high-volume distribution channels.
The report says the higher profit margins for non-advice mean that although advice is theoretically economic for pots worth about £25,000, in practice it is rarely offered for pots worth less than £100,000, unless the customer has other investible assets or a pre- existing relationship with an adviser.
The report found the non-advice market is further complicated by the entry of annuity providers as distributors. Providers are either establishing their own brokerage or buying an existing service to secure distribution. If they cannot retain the customer as a “rollover” annuitant, they can still benefit from commission in the non-advice market.
But the research found examples of very high quality services in the non-advice market, where firms voluntarily adhere to a code of conduct that includes a whole-of- market search and puts the consumer’s interests first. Conversely, the many examples of poor practice mean that the general outcome for consumers can be akin to a lottery.
FSCP chair Sue Lewis says: “400,000 annuities are sold each year; this will increase significantly as those who have been auto-enrolled into pension savings reach retirement age. The open market option has been around for a long time, but still isn’t working for many people, who are getting less income in retirement than they could. We are seeing a shift towards purchasing annuities via ‘non-advice’ routes, which means reduced consumer protection if things go wrong.
“The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand. We urgently need to reform this market, particularly for those with smaller pension pots, who usually can’t get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward”.