MSE Blog: Do you know the difference between pensions guidance and advice?

atush

The problem is, whilst this is clear in the Conduct of Business Sourcebook, nobody really reads COBS.

Additionally, the regulator doesn't make it clear to folks because they assume knowledge and the press (sorry martin) don't really understand the guidelines either due to having degrees in English and/or/with Journalism.

And the regulators themselves are confused on this issue having upheld complaints from execution only sales?

sandsy

Daniel_Elkington wrote: »

Advice is the act of making a 'personal recommendation', ergo 'I recommend that you purchase this product'.

Doesn't it go further than that? Is 'I recommend you buy an annuity' isn't necessarily a personal recommendation?


But 'I recommend you buy the XYZ annuity product from ABC Life' is?

Daniel_Elkington

I recommend you buy an annuity is a personal recommendation, its not a very helpful one either.

The regulator doesn't like e-only as often the client doesn't know what they want. How can someone with no prior knowledge of a 5 year guarantee, let alone the 55% death tax on taking it as a lump sum, instruct someone over the telephone to apply it?

Andy_L

sandsy wrote: »

Doesn't it go further than that? Is 'I recommend you buy an annuity' isn't necessarily a personal recommendation?


But 'I recommend you buy the XYZ annuity product from ABC Life' is?

I suspect that the new guidance/advice/chat with someone who's had a weeks induction training won't make any recommendations just to avoid the problem, eg it will say:

"you could buy an annuity, which has these pros & cons...
you could do draw-down,which has these pros & cons...
you could blow it all on coke, hookers & sports cars which has etc..etc"

ie it just explains the options, possibly tailoring it to the receivers numbers

dunstonh

Doesn't it go further than that? Is 'I recommend you buy an annuity' isn't necessarily a personal recommendation?

It ought to be. Although you are right that it isnt.

The people giving this guidance are not qualified and only trained in basics. Typically to give investment drawdown advice, advisers have higher qualifications beyond the normal adviser ones (eg. J05, AF3 etc). So, how on earth can we expect untrained, unqualified people to steer anyone other than the obvious cases.

jamesd

dunstonh wrote: »

So, how on earth can we expect untrained, unqualified people to steer anyone other than the obvious cases.

Some obvious cases will handle a lot of the market:

1. desire to preserve capital for inheritance: automatically eliminates annuity and state pension deferral, leaving drawdown and related options.

2. small pot, into the range where annuity purchase pays out less than 100% of the money used to buy the annuity on average: tends towards withdrawing as cash and/or drawdown to get better value for money after observing that part of the annuity value is insurance against long life.

3. under age say 75, deferring the state pension pays more than annuity purchase for normal life expectancy, so recommending that instead of annuity is appropriate.

Life expectancy is what I think will be a commonly missed factor but the obvious cases where annuities are poor value compared to alternatives will take care of a lot of the lower value pot case and greatly reduce the volume of people who require something more.

One of the great benefits of even guidance may be a large drop in low value annuity sales in favour of deferring the state pension.

Linton

jamesd wrote: »

Some obvious cases will handle a lot of the market:

1. desire to preserve capital for inheritance: automatically eliminates annuity and state pension deferral, leaving drawdown and related options.

2. small pot, into the range where annuity purchase pays out less than 100% of the money used to buy the annuity on average: tends towards withdrawing as cash and/or drawdown to get better value for money after observing that part of the annuity value is insurance against long life.

3. under age say 75, deferring the state pension pays more than annuity purchase for normal life expectancy, so recommending that instead of annuity is appropriate.

Life expectancy is what I think will be a commonly missed factor but the obvious cases where annuities are poor value compared to alternatives will take care of a lot of the lower value pot case and greatly reduce the volume of people who require something more.

One of the great benefits of even guidance may be a large drop in low value annuity sales in favour of deferring the state pension.

On the other hand many people with no hands-on experience of investing will state that "no risk" is a requirement. Which will make annuities the only choice except for small pots when cash in hand is seen as more valuable than a very small amount of cash in the future. In general many people's stated objectives will be incompatible with each other and and they will need guidance (advice?) and time from someone with sufficient experience to help them come to an optimal decision.

On state pension deferral, clearly at the moment using small pots to allow deferral for a year or two could be beneficial, but what about when the rate goes down to 5%?

jamesd

If there is a true no risk requirement annuities are unsuitable because they don't meet that requirement, having a potential loss of 10% or more if the FSCS has to pay out, the uncertainty because the value of an annuity is not certain and the relevant court might impose a discounted value on which the FSCS would pay. Annuities are OK for low risk, though.

For the closest choices available to no risk there are the options of taking the money out and placing it in deposit accounts to get the 100% FSCS guarantee, deferring the state pension and trusting the government or buying gilts or NS&I and trusting the government. The savings accounts aren't completely no risk either but they are the closest available, being backed first by the financial institution, then by the industry via the FSCS and finally the government via its support for the FSCS.

For those reaching state pension age after the flat rate system comes in and who have the lower 5.8% deferral increase that can be compared to the annuity options available to them. At present the 5.8 inflation-linked value is higher than even the level annuity rates available in the annuity market around state pension age, with today's FT comparison giving 5.633% as the highest available for a single life level annuity with no guarantee at age 65. 5.8% inflation-linked easily beats 5.6% with no inflation link. For the annuities with guarantee periods the deferring can be combined with a term life insurance policy and will still be ahead at normal health. For dual life the deferring already provides some spousal inheritance and insurance could be used to increase that if desired.

enhanced annuities are potentially more interesting because they could pay out more. Even so, 10.4% then 5.8% inflation-linked will beat a lot of them.

One of the outcomes I'll be looking at to decide whether I think that the guidance and annuity market work by the FCA has succeeded is whether there is a complete collapse of the low value standard annuity market. If there isn't I'd take that as very strong evidence of guidance and FCA reform failure.

Few of these are really no risk, unless it's a product that delivers an uncapped inflation-protected income. Deposit accounts are just the closest to no risk that most people would think of because they would typically ignore losses due to inflation. That loss is also something that I'd hope guidance would explain, helping people to understand that there really isn't a no loss option, it's more a case of choosing which risks to take.

Linton

jamesd wrote: »

For those reaching state pension age after the flat rate system comes in and who have the lower 5.8% deferral increase that can be compared to the annuity options available to them. At present the 5.8 inflation-linked value is higher than even the level annuity rates available in the annuity market around state pension age, with today's FT comparison giving 5.633% as the highest available for a single life level annuity with no guarantee at age 65. 5.8% inflation-linked easily beats 5.6% with no inflation link......

The trouble is that 5.8% inflation linked only beats 5.6% with no link in the long term. Having lost a year or more of SP income the payback time starts getting rather close to life expectancy.

bmm78

jamesd wrote: »

One of the outcomes I'll be looking at to decide whether I think that the guidance and annuity market work by the FCA has succeeded is whether there is a complete collapse of the low value standard annuity market. If there isn't I'd take that as very strong evidence of guidance and FCA reform failure.

It has to be one of the key objectives of the guidance guarantee. The fact that internal annuity sales have been (relatively) resilient to the budget reforms has not been a positive sign, and there is a big onus on the guidance to encourage people to shop around and not buy from what is often the bottom of the barrel.

The treasury update on the guidance this month isn't exactly encouraging though. Apparently, if a customer is interested in finding out more about annuities they will be directed to the Money Advice Service annuity comparison table.

There are numerous issues with the MAS comparison tables. The comparison tool itself has been poorly designed and is cumbersome to use. The annuity comparison forms used by lead generation websites and the large annuity brokers have been developed over several years to maximise engagement and minimise drop-off rates. These concepts seem to be lost on a non-commercial outfit like MAS, and many people may be turned off before they even get a quote by the information overload.

Those who persevere and get a quote will be given a figure that may have little resemblance to what they could get in reality. There are some brief lifestyle questions, but minimal medical information is captured. I ran a test case for a 65 year old with significant health issues, and got an annuity rate of less than 6%. While the results are presented as only indicative, it isn't clear that they may be dramatically off the mark.

One of the barriers to shopping around identified in the various FCA reports has been that people don't consider it to be worth the hassle. If people are told by a government-backed service that there is only a marginal difference between what their current provider is offering and what they can get on the open market, a good percentage will just take the path of least resistance and buy an annuity from their existing provider (or not at all).

The keys to obtaining the best annuity rate are firstly a thorough medical questionnaire, and then following up with the "haggle" to squeeze as much out of the rate as possible. Both of these can have a massive impact on the rate available, and the guidance service should be focusing on this rather than giving misleading "indicative" quotes.

The decline in the proportion of enhanced annuity sales (the drop in volume was to be expected) has been a major "unintended" (but entirely predictable) consequence of the reforms. The guidance process as it stands is unlikely to improve things significantly, and needs a lot of fine-tuning to achieve this goal.