There can be no doubt that the pension freedoms are proving popular with consumers. But the increased choice also brings a new level of confusion for many. One of the unintended consequences has been the increase in the lack of shopping around when people are looking for either an annuity or drawdown.
Although many pundits were quick to write off the annuity market following George Osbornes’ infamous Budget of 2014, this year we will see around 100,000 people invest in an annuity market worth £4bn. So the issue of shopping around is as important as ever.
Since the launch of pension freedoms, around 180,000 annuities will have been bought, but only half of those people have shopped around. What this means in practice is a significant loss of income. Taking the average value of annuity purchased (£55,700) and looking at the difference between rates shows people will individually miss out on £8,460 in income over a typical 20-year retirement. Not small change by any standard.
The FCA has just waded into the debate following the publication of its 121 page ‘Retirement Outcomes Review’. The report primarily focuses on non-advised customers and there is clear evidence most people take ‘the path of least resistance’ and purchase either drawdown or an annuity from their current pension provider.
According to ABI data shown in the report, 94% of non-advised drawdown sales have been to members existing customers, alongside 70% of annuity sales. By comparison, where customers are advised, only 35% of drawdown sales were to existing customers. In the annuity market the situation is even starker, where only 15% of advised customers stayed with their existing company.
The regulator has asked for views on what it sees as clear areas of intervention to safeguard those folks least able to engage with these complex financial decisions. Ideas include ‘default investment pathways’ and a corresponding charge cap for people it sees as not engaging with their investment decisions. The FCA is also keen to see if we can make it easier for people to access their pension without resorting to a transfer to drawdown.
Of course, unlike an annuity purchase, drawdown is not a ‘one and done’ transaction. Customers can choose to move their drawdown later in retirement, but my experience tells me this is unlikely to be the case. Although it is relatively easy to show how people lose out by not shopping around to get the best annuity, things become more complicated when you look at drawdown.
As an industry we are already working to include an information prompt in the purchase process to improve the take-up of shopping around for annuities. These prompts will simply show a comparison of standard rates and won’t show the additional income a customer could receive through an enhanced annuity. Keeping in mind up to 70% of customers get a better rate through qualifying for an enhanced annuity, and you can already see problems ahead.
The lack of shopping around is deep rooted and ironically, since the introduction of the pension freedoms, the situation has actually got worse, so to my mind we need some radical thinking.
Much of this work has actually been done as a result of the abandoned secondary annuity market. One of the key developments was to be the introduction of a broker service, matching annuity sellers and buyers. Rather then re-invent the wheel, why not simply make this technology available in the primary market and make shopping around for an annuity or drawdown compulsory?
Surprisingly consumer research supports such a view, with two-thirds of people aged over 50 agreeing you should have to shop around for retirement products rather than simply buying a product offered by the pension company.
So this feels like a win-win to me.