Pensions Management article on trustees and annuity reform – Ros Altmann

    Ros is a leading authority on both private and state pensions,annuities and
    retirement policy. Numerous major awards have recognised her work to
    demystify finance and make pensions work better for people.

  • Ros Altmann

    Ros Altmann

    Pensions Management article on trustees and annuity reform

    Pensions Management article on trustees and annuity reform

    Management article on trustees and annuity reform

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)

    The issue of
    compulsory annuitisation almost derailed the entire Pensions Act
    last year, so this is clearly an important topic. Annuities are a
    ‘special case’ in the financial products arena. Government forces
    most people to buy an annuity with their accumulated pension savings
    and once bought, it cannot be changed. Shouldn’t Government,
    therefore, help ensure people can buy the right annuity for their
    own circumstances, at a competitive rate? And what is the
    responsibility of DC scheme trustees when it comes to annuity
    purchase? Have they been acting appropriately and ensuring members
    receive the right annuity and top rates?

    Annuities are an excellent idea for providing lifelong pensions. But
    the majority of buyers find them complicated and need help to
    understand them. However, it is generally only those with large
    capital sums who actually get any advice. Almost all other
    annuitants are left to make this daunting decision on their own. In
    theory, there is the opportunity to take an ‘open market option’,
    which allows people to ‘shop around’ for a better annuity than the
    one offered by the company who managed their pension savings, but,
    in practice, this entails filling in so many forms, that people are
    put off. It is actually much easier not to take the open market
    option, as all this requires is ticking the box on the form provided
    by the pension company and sending it back. The result is that
    people often end up with the wrong type of annuity, or get a poor
    rate, or both. The difference between best and worst annuity rates
    can be 20-30%, and even more for those in poor health. This is a
    cause for concern.

    I think it is vital that Government ensures everyone considers, with
    a specialist adviser, the few basic questions they need to think
    about before buying their annuity.

    • Could they qualify for enhanced rates?
    • Should they cover their spouse?
    • What about inflation-protection?
    • What guarantee period?

    How would such a specialist advice system work? The FSA would need
    to approve a particular type of advice for annuity purchase,
    (without the normal 6-hour full fact find); just answering the few
    vital questions. The retiree would have someone to help them
    understand the important issues when finding the right type of
    annuity and then find the best rates (choosing from one of the top 5
    perhaps). With a specialist, this exercise would be easy. For each
    individual, it is often impossible. The FSA produces useful annuity
    information and decision trees can make any advice process easier,
    quicker and cheaper, but decision trees and leaflets are not enough.
    People need someone to talk through the relevant points, before
    making this irreversible decision.

    If the person’s circumstances are simple, (often they have no other
    income apart from the state pension and could not consider
    investment-linked or other annuities) this should be enough to
    select the right annuity. If their circumstances are more complex,
    they would be told to take more advice.

    Specialist annuity advice should not take too long and charges could
    be levied on a fee basis, with perhaps a minimum of £100. The key
    point here is that the cost of advice is already potentially
    included in the product – up to 1.4% is currently deducted on
    annuity purchase anyway, whether an adviser is used or not. Even a
    £20,000 capital sum, could provide over £280 to cover an adviser’s

    As defined contribution pensions spread widely, if mandatory
    annuitisation remains, urgent action is required. Government has
    already announced some useful reforms, starting in April 2006, when
    those who saved under £15,000 can take a lump-sum rather than an
    annuity, but providing advice for all annuitants would be a
    significant step forward. Ensuring retirees consider the vital
    questions before purchasing their annuity, could make many
    pensioners, typically those with moderate capital sums, better off
    for the rest of their lives. At no cost to Government.

    So far, annuitants do not seem to have realised they may have bought
    the wrong product, but how much longer will it be before we see the
    first complaints from people who find Government forced them to buy
    an annuity, over 1% of their pension savings was deducted as
    ‘commission’, yet they had no adviser to help them make the right
    choices? If they buy the wrong type and have to live on a much lower
    income than they should – but can never do anything about it – would
    they think Government was overseeing the annuity system
    appropriately? What about trustees of DC schemes who may not have
    taken sufficient care to secure the right annuities for retiring
    members? If the trustees did not select an impaired life annuity for
    someone in poor health, or did not buy from a top-rate provider,
    will they find it easy to defend a future challenge from a member or
    their family? Could this be another pension scandal? DC trustees
    beware – annuity decisions must be taken with care.

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