Creating Certainty in Uncertain Markets

Phillip Brown - Head of Retirement Products at Partnership - presents an in depth analysis of annuities sector.

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One of the most valuable roles an IFA can play is in helping clients make the critical transition from accumulating their pension pot to transforming it into a retirement income.

This is a process which needs very careful consideration because the decisions you both make now can literally dictate the client's standard of living for the rest of their life. Yet advisers who secure a reputation for offering great annuity advice can find themselves with a lucrative and growing client base - especially as yet more corporate pension provision shifts from defined benefit to defined contribution

Here are my five golden rules to getting it right:

1. Never assume clients know about OMO

Regardless of efforts by the FSA and ABI, it's estimated that 61% of over-55s still don't realise they can take arrange a retirement income with someone other than their original pension plan provider (source: YouGov). While pension companies are now obliged to make this choice clearer, they still tend to present their own annuity contracts as the simplest and least painful option at retirement.

Start telling clients about the open market option (OMO) - and what it could mean in terms of income enhancement - well before they need to retire so they are prepared to do that extra legwork when the time comes.

2. Assume every client has a health condition until proven otherwise

Enhanced and impaired annuities are often viewed as a niche market but our analysis suggests that 40% of annuitants have a health or lifestyle condition that could qualify for an enhanced rate - and a further 10% could benefit via a joint contract with their spouse or partner. So make questions about a client's health and lifestyle an integral part of the annuity search.

To help you, the UK's leading enhanced annuity providers - including Partnership - have agreed a Common Quotation Request form providing all the key health questions to ask the client and helping ensure like-for-like quotations between providers. To download, go to www.commonquotation.co.uk.

3. Encourage clients to fully disclose health conditions

Annuities are perhaps the only financial contract where being in poor health can work to a client's advantage. Most people are used to ‘downplaying' bad health or poor lifestyle choices when it comes to arranging insurance. So make clear to clients that - as counter-intuitive as it may seem - this is one financial situation where it really pays to stress one's frailties and weaknesses - especially if they have a condition that will require additional medical verification.

4. Look beyond the headline rate of income

The wake-up packs that insurance companies are now obliged to send out to retiring customers are obliged to show a range of income rates including single life, joint life and with escalation. This is welcome information but inevitably means that the single-life level-paying contact looks by far the most attractive option.

In my view, one of an IFA's biggest value-adds is taking the time to work with the client to balance immediate income needs sensibly against the potential benefits of opting for escalation and/or spouse's income. The different permutations can seem confusing to the client but this is well worth taking time to explain.

In particular, a fixed escalation of, say, 3% can usually work out cheaper than RPI-linking and enables clients to catch up then exceed the income on a level-paying contract in just a few years.

5. Don't delay
With interest rates at historic lows and annuity yields well off their mid-2008 highs, your clients may be tempted to hold off locking into an annuity rate in the hope that income levels will improve. But simple maths shows that delay rarely pays off.

For example, say a 65-year old man were to defer annuity purchase just one year and his pension fund increases by 6% in the interim. Our calculations suggest it would take 10 years to recover the income he missed out on over those 12 months*. Moreover, if his fund experiences no increase in value during the deferral period, it would take 33 years to recoup the lost income.

Rather than delaying, most of your retiree clients could be better off using your expertise to seek out the very best annuity rate available on the market here and now. And of course, once you've identified the best rate available - do remember to compare it with what the client would have got if they hadn't taken the open-market option. It never hurts to remind clients of the real value of your advice.

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*Based on: male smoker; £50,000 fund after tax-free cash; Partnership Enhanced Annuity rates as at 6 July 2009