In his first guest blog for Investment Sense, Stuart Wilson, Head of Marketing at LV= Marketing Solutions, reminds anyone retiring soon needs to do more than simply shop around for the best Annuity rate.
Despite lacking certain linguistic essentials, like some vowels for example, this is actually one of the wisest things I have ever been taught.
Let me explain. I had barely started my career in Financial Services when I attempted to pass the ‘FPC’ (Financial Planning Certificate).
Papers 1 and 2 were easy but I failed – by a whisker – on my first attempt at paper 3. In a debrief with my Sales Manager at that time, we examined where I had gone wrong and dropped the vital 6 marks. We came to a question on the exam paper that, in the cold light of day, I immediately realised I had misread…I had given an oblique and completely incorrect answer in my rush to get it down on paper.
I began to try and justify my mistake to my Sales Manager, rationalising why I had answered a slightly different question to the one asked. Before I had got beyond the ‘Ah, well you see what I thought the question meant was…’ my Sales Manager turned his back on me, wrote ‘RTBQ’ in large capital letters on the flip chart behind him and then turned to face me again. Jabbing the pen at the letters to accentuate his words of wisdom he simply said: “Read The Bloody Question!”
That piece of advice has stuck with me and I was reminded of it recently when reading some of the more hysterical reactions to the ABI publishing the annuity rates offered by all of its members. Financial journalists jumped on the figures to decry the “rip off” facing consumers who end up stuck on the annuity rate of their existing provider which – in some cases – may be 30% or more lower than the ‘best in market’.
The main point drawn out in these articles is the benefit of shopping around for a better deal – using the ‘Open Market Option’ – and that is perfectly true and laudable: OMO take-up rates have been disappointingly low for many years. This means that, for whatever personal, logistical or practical reason, most people don’t ‘shop around’ for a better deal.
But while the journalists and the pundits call foul and the industry flagellates itself over a collective failure to ensure 100% of people buy their annuity from the best provider in the market, I can’t help feeling that we are not addressing the right question.
Consider all retirement income options
The fact is that annuities are not ‘the’ answer they once were, or at least they are not the only answer. The UK Financial Services industry is nothing if not inventive and there is now a range of options open to retirees that doesn’t involve a conventional lifetime annuity.
Now, it’s true that someone with a £10,000 pension fund may not have the range of options – never mind the capacity for loss – of someone with £100,000 to invest. But a focus on ‘shopping around’ belies the truth that a shopping trip using your OMO is the equivalent of visiting just one aisle of your local supermarket.
Investment Linked Annuities, Income Drawdown and Drawdown hybrids (such as Fixed Term Annuities) all offer alternative routes to retirement income and should at least be ruled out before any buying decision is made. Even someone with a modest pension fund may qualify for Flexible Drawdown if their State benefits and Scheme Pensions from previous employers take them over the £20,000 Minimum Income Requirement.
As a nation we need to be saving more towards retirement – a staggering 1 in 4 people aged 55-64 have not saved a penny towards a private pension (Source: Barings Asset Management) and may be wholly reliant on the State when they retire. But as well as educating people to save more, we need to ensure people are aware of all of their income options when (and if) they do finally decide to retire.
Focussing debate purely on annuity rate hides a much bigger and more complex financial planning picture and could lead some to a buying decision they later come to regret.
I was able to re-take my FPC3 paper, read the questions thoroughly and pass on the second time of asking. Many retirees won’t have that luxury because some buying decisions cannot be undone.
It pays to read the question.
Stuart Wilson, Head of Marketing at LV= Retirement Solutions can be contacted on 07899 951966 or by emailing firstname.lastname@example.org