fca annuity review for financial advisers only – not retail clients
TRANSCRIPT
FCA Annuity Review
For financial advisers only – not retail clients
Agenda
• Why needed?
• Main findings
• What next for providers/advisers?
Agenda
• Why needed?
• Main findings
• What next for providers/advisers?
The Retirement Market - 2012
USP/VA£1.20bn
Annuity£14.05bn WP
£1.18bn
UL£0.12bn
Includes £4.5bn of ‘enhanced’ annuities
ABI, Q4 2012 Quarterly MSE Data
Are people getting a good deal?
Source: ‘ABI – Retirement Choices: Baseline to measure effectiveness of the code of conduct’ May 2013
• Aware of the OMO?
• People ‘shop around’?
• Change provider?
c91%
c63%
c30%
ABI Key Findings
c30% change provider
Agenda
• Why needed?
• Main findings
• What next for providers/advisers?
Providing certainty in uncertain times
SII
The cost of inertia
• How many consumers who purchase their annuity from their existing provider could get a better deal on the open market?
80%FCA Thematic Review of AnnuitiesFebruary 2014
The numbers
‘average’ increases - standard
FCA Thematic Review of AnnuitiesFebruary 2014
‘average’ increases - enhanced
FCA Thematic Review of AnnuitiesFebruary 2014
Important notes!
• We compared annuity rates offered to existing pension customers to the average of the top three rates available on the open market
• We used a single ‘health’ factor – smoking – to represent eligibility for enhanced annuities
FCA Thematic Review of AnnuitiesFebruary 2014
How income can vary between providers and types of annuity
Source: AMS portal and Partnership September 2013. Based on 65 year old with £50,000 pension fund, who has had a heart attack. Figures show best available income. Single life. Payable monthly in advance. No guarantee period. No escalation
Worst Standard
Best Standard
Enhanced0
500
1000
1500
2000
2500
3000
3500
4000
2574
31083434
Income
For illustration purposes only
Enhanced Existing0
10000
20000
30000
40000
50000
60000
70000
80000
Calculation to show fund needed to give £3,434 pa using existing rate on a pro-rata basis, using rates from previous slide.
For illustration purposes only
The value of advice
£16,705
….it is also important that they:
• Convert their pension to an annuity at the right time for them– (e.g. it may be more appropriate for them to use drawdown initially or to defer
taking an income)
• Buy the right ‘shape’ of annuity for them– (e.g. single life or joint life, level or escalating, enhanced or standard, and with or
without guarantee)
It’s not just ‘rate’
Annuity timing
• Pauline, aged 65
• Fund Value (after PCLS) £50,000
• Annuity available at 65 £3,482 pa
• Fund at age 68 £59,550
• Annuity available at 68 £4,001 pa
• Would take until age 88 to recoup the ‘lost’ income!
Source: Partnership November 2013 Single life annuity. Single life. Payable monthly in advance. No guarantee period. Level income. 6% net pa growth rate (net of 1% charge) assumed between 65 and 68. This forecast is not a reliable indicator of future performance and investments may grow at higher or lower rate than assumed Conditions: Diabetes, High Blood Pressure, Overweight.
For illustration purposes only
Level versus escalating income
Source: AMS portal and Partnership September 2013. Based on 65 year old with £50,000 pension fund. Figures show best available income. Single life. Payable monthly in advance. No guarantee period. Level income (no escalation) vs fixed increase of 3% pa
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 300
1000
2000
3000
4000
5000
6000
LevelEsalation 3% pa
For illustration purposes only
Acceleration in the last five years:
of the use of individual underwriting
and the growth of enhanced annuities.
.
Provider Behaviour
…Overall standard annuities offered to existing pension customers were expected to be more profitable than annuities written in the open market.
Profitability may be higher for standard annuities when compared to enhanced annuities….
Little competition in standard annuities
Competitive enhanced annuity market
Agenda
• Why needed?
• Main findings
• What next for providers/advisers?
• Retirement Income market study – (including annuities and drawdown)
• Identify ways of improving consumer engagement to prompt shopping around
• look at market dynamics – (for example, patterns of market entry and exit) to understand what drives the
high levels of concentration observed in parts of these markets
• look at how these markets are likely to develop in the future– in response to changing retirement patterns and needs.
FCA next steps
FCA Thematic Review of AnnuitiesFebruary 2014
More chance of losing out…
• Those with small funds – less choice
• Not shopping for Enhanced annuities
CHANCE
Your Annuity Matures
Collect £10
The effect of adviser charging
Fund after PCLS
Adviser Charge
Net Purchase Price
Income
Worst Standard
£50,000 Nil £50,000 £2,743
Best Standard £50,000 Nil £50,000 £3,076
Best Standard
£50,000 £1,000 £49,000 £3,014
Enhanced £50,000 Nil £50,000 £3,780
Enhanced £50,000 £1,000 £49,000 £3,704
Retiree aged 65, best rate from AMS and Partnership rates. December 2013. Based on fund after PCLS, pro-rated for adviser charge. Single life. Payable monthly in advance. No guarantee period. Level income
Enhanced based on diabetes, high blood pressure and overweight
For illustration purposes only
The effect of adviser charging
Fund after PCLS
Adviser Charge
Net Purchase Price
Income
Worst Standard
£20,000 Nil £20,000 £1,097
Best Standard £20,000 Nil £20,000 £1,230
Enhanced £20,000 Nil £20,000 £1,512
Enhanced £20,000 £500 £19,500 £1,474
Retiree aged 65, best rate from AMS and Partnership rates. December 2013. Based on fund after PCLS, pro-rated for adviser charge. Single life. Payable monthly in advance. No guarantee period. Level income
Enhanced based on diabetes, high blood pressure and overweight
For illustration purposes only
• Annuities remain the vehicle for most people
• Underwriting becoming a significant option
• Adviser-charging for ‘real’ cost available
Summary
Thank you
Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No. 05465261), and Partnership Home Loans Limited (registered in England and Wales No. 05108846).
Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Partnership Home Loans Limited is authorised and regulated by the Financial Conduct Authority. The registered office for both companies is Heron Tower, 5 th Floor, 110 Bishopsgate, London EC2N 4AY
No liability or responsibility is accepted by Partnership for the use or otherwise of the statements in this literature in any individual situations regarding the giving of advice. The financial Adviser remains solely responsible for ensuring the advice provided is appropriate and meets all legal and regulatory requirements.
Tax may be subject to change in the future and depends on individual circumstances .