Simplifying annuitisation – an oxymoron?

CEO of NOW: Pensions Morten Nilsson

Let’s not allow our members to lose millions each year!

In the UK the annuity market has developed a bad reputation; there is a perception that annuities do not provide members with value for money and that insurers are acting in their own interests and exploiting consumers.

Furthermore the government policy of mandatory annuitisation has not helped build confidence in the industry.

Despite the UK having the largest annuity market in the world, the high concentration of market participants has reinforced the sentiment of distrust from consumers. Whilst there has been no direct evidence of oligopolistic powers in the annuity market, the largest ten firms represent approximately 90% of the market and consolidation is continuing to occur. With the advent of automatic enrolment the size of the industry is set to grow significantly over the next 10-15 years as the number of DC members increases.

Moreover, as a subject matter, annuities are rather complex, prices vary greatly and for many the process and questions are counter intuitive. As purchasing an annuity happens once in a lifetime, any choice cannot be reversed. Consumers often lack the adequate guidance about the risks associated with them and this can lead to bad and uninformed decisions. Many consumers feel the choices are difficult and overwhelming and the fact is that far too many people end up with the wrong products which have serious implications on their future lifestyle.

Research has shown that those who seek advice often are left with better outcomes; the real problem is that a lot of people cannot afford advice and those with small pots are priced out of the market and therefore are unable to buy an annuity of value on retirement.  The current state of the market has led to approximately one in five annuity buyers failing to get the best rate, and each annual cohort of pensioners loses around £500m-£1bn in lifetime income[1], by not using Open Market Options UK pensioners have lost £7bn in the last decade[2]. This highlights the fact that having a system whereby individuals are unable to shop around due to complexity and high costs leads to annuitants not attaining the best outcomes possible.

The figures above highlight the fact that The Open Market Options have not worked efficiently and consumers now require a simplified guide with an automate advisory process and cost efficient access to more individual advice where needed. Enabling all to receive the right product and at a fair price. The need for reform is therefore of paramount importance, members should not be losing billions of pounds especially as more annuitants come to the market with the introduction of automatic enrolment. As an industry we can ensure better value to our members and give them the value they deserve when converting their savings into a retirement income. All that is needed is better and simpler guidance to help members through the annuity process.

[1] NAPF – Treating DC scheme members fairly in retirement?

[2] Retirement Supermarket

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