Pensions and Annuities Research:

16 October 2002: 
Consumer research supports case for value-for-money annuity reform, says ABI

As the Government puts the final touches to its Green Paper proposals to modernise annuities, an ABI (Association of British Insurers) research report sheds new light on what consumers actually want and need from annuity reform. The report was launched today at an ABI seminar attended by representatives from the Department for Work and Pensions, the Treasury, Inland Revenue, the FSA and insurers.

‘Annuities – The Consumer Experience’ includes findings from the first authoritative and in-depth analysis of customer opinion on this subject. It highlights the need for Government action to focus on maximising the retirement income of the majority of savers.

Joanne Segars, Head of Pensions at the ABI said: “For the vast majority of people, an annuity is the best way to maximise both income and security in retirement. But we want to see greater flexibility as well, particularly for those who are concerned to ensure value for money from their annuity if they die soon after purchase. We have therefore today called on the Government to allow money-back guarantees as part of our package of reform proposals.

“This report should end the guess-work about what consumers actually want from annuity reform. We now understand better how to target reform to benefit customers and alleviate the concerns people have about the product.’

The consumer research, commissioned by the ABI and conducted by IFF Research Limited, revealed that:

· 47% of annuity customers said they were either very or fairly interested in receiving a money-back guarantee, and are willing to pay for this in reduced annuity rates.  Very few annuity customers view their pension fund as a lump sum to leave as inheritance.  But they do want to receive value for money from their annuity if they die soon after purchase.

· There is an annuity advice gap, with more affluent customers more likely to take advice and to access niche products such as impaired life and enhanced annuities. A third of annuity customers acknowledge that they need more information and advice about annuities but they are reluctant to pay for it.

· People are not saving enough for their retirement and need to be encouraged to save more.  44% of current annuitants rely on the state pension as their main source of income. 26% depend on fairly small annuity incomes.

· Women in particular are not saving enough. There is significant disparity between both the personal and the annuity income of male and female customers. There is a clear need to raise awareness of the need for saving and to help women in particular to save more throughout their working lives, for example by creating incentives for employers to contribute on their behalf.

The report shows that some of the recent developments in the market are on the right track. The ABI launched its Statement of Good Practice for providers in August 2001 to encourage shopping around. The ABI also worked with the FSA, to produce a fact sheet to provide customers (at no cost to them) with sufficient information to enable them to identify the right annuity for them and to shop around for the best rate.

Joanne Segars continued: “A majority of customers are still coming to retirement with a very small level of private savings. It is vital therefore that any change to the annuity market helps these people to maximise their income. The Government must remain focused on this goal.

‘We will be urging the Government to base its proposals for reform on the issues highlighted in this report. But it is even more important that they address the need to encourage greater levels of pension saving. This is the twin strategy we need to combat poverty in retirement.’

Notes
1. In addition to proposals for a money-back guarantee and generic advice, the ABI have urged the Government to:
- make it easier for people to combine a number of different pension funds to purchase one annuity;
- treat protected rights monies the same as other pension fund monies so only one annuity needs to be purchased, as recommended in Alan Pickering’s report;
- allow the tax free lump sum to be taken at a different time from the annuity; and
- allow those with small pensions to take their fund as a lumps sum. This could be done by raising the trivial commutation limit to £5,000 and giving consumers a choice whether to annuitise or commute. This would also address the difficulty of purchasing an annuity on the open market for a small amount.
2. Annuities – The Consumer Experience is available from the ABI Press Office.
3. The consumer research was conducted on behalf of the ABI by IFF research. Interviews were conducted with 500 people who have purchased an annuity in the last 3 years and 101 with people that have retired but have yet to annuitise their pension fund. All interviews were conducted in May 2002.
4. The proposed money-back guarantee would work in the following way:
 Mr Smith retires at age 65 with a personal pension pot of £40,000. He takes £10,000 as a tax free lump sum and buys an annuity with the remaining £30,000.  His annuity has a money-back guarantee. Mr Smith receives £6000 in annuity payments over three years but then dies at the age of 68. This means that £24,000 has not been paid out in annuity income. However, because Mr Smith purchased a money-back guarantee, that £24,000 is paid to his partner or estate (less tax) as a lump sum. Mr Smith/heirs have therefore received full value from his annuity.
5. For a copy of the ABI’s response to the ‘Modernising Annuities’ paper or the statistics from the research, please contact the ABI Press Office.
6. An Annuity is the only product that can offer people an income in retirement while protecting them from outliving their resources. There are 257,000 annuities sold each year, representing £6.2bn in new premiums.

Keywords: Pension, Annuities, Annuity, Pensions

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