How do you ensure members get the right form of retirement income for them? Premier's Ray Tang looks at the steps to ensure good member outcomes, in the latest Technical View.
The Financial Conduct Authority's review of the open-market option process is, for many, a long overdue piece of work.
Helping members on annuities
Always use a whole of market service.
Lifestyle and medical conditions can improve income levels.
Offer a support service where possible, and financial advice should also be available.
However, in recent weeks I have come across many people asking "why start there?" Surely the starting point is earlier, when deciding whether an annuity is right for the individual member.
Best practice uses a process which ensures the best and most appropriate annuity is selected.
It also ensures employees and pension scheme members are educated so they can fully understand the wider options available at retirement.
Education
This is not just about educating the forthcoming retiree on annuities, how they work and how they can enhance their income; initially an employee needs to understand all retirement options.
Flexible retirement such as pension drawdown is only right for a small number who understand investments and their risks. But inevitably the question will be asked of a scheme or adviser: "why didn’t you tell me about that option?"
Planning
If an annuity is the right option, the next stage is making available a service which allows the individual to fully understand how the annuity can be structured and what this means to their own personal retirement income and securing the financial future of their loved ones.
Providing budget planners and explaining the need to consider inflation and dependant income is vital to ensure long-term comfort.
Open market
The third stage is providing access to a whole-of-market service where all annuity providers can be researched. There is still a large proportion of the public who are unaware of how their postcode, lifestyle and health can maximise their income in retirement.
More than 50 per cent of people are believed to retire with high blood pressure. If they had disclosed this information, it could easily generate an extra £100 per month for a 65 year old entering retirement with a fund of £100,000, by using an impaired annuity contract.
Efficient process
Once the annuity has been designed and provider selected, time becomes a vital factor. With annuity rates subject to short-term rate guarantees, an emphasis on electronic communication can save time.
Having an online annuity system available to employees and pension scheme members will speed up the members’ cases and possibly shorten the process of form filling and transferring pension funds by four to five days. This can prove vital in a climate where rates seemingly move the wrong way.
Member satisfaction
How many schemes and employers check that their former active member is settled into retirement in a worry-free way?
A simple communication – perhaps a telephone call – can go along way to closing off a retirement case satisfactorily.
Impaired life annuities
Education and advice are key issues that always need to be considered by any group of trustees or an employer when designing a retirement process.
A comparison tool helps retirees to understand how different choices have important material effects on their annuities – and educational information within the comparison tool itself will assist members in selecting the product which best meets their needs.
Impaired life annuities are important considerations, with potential increases of up to 40 per cent on standard annuities.
This uplift includes lifestyle factors ranging from smoking, hypertension and diabetes, to impaired life factors such as heart attacks and cancer – so it is important the retiree answers all medical questions factually in order to fully benefit.
An annuity provider recently confirmed there have been many cases where a lower annuity was paid due to the limited medical information provided, when subsequent requests for a medical report revealed a higher benefit would have been applied.
A final point is cost. What extra effort goes into processing an annuity which has a fund value of £200,000 compared with one having a fund value of £75,000?
Some advisers take a remuneration based on a percentage of the fund value. However, why not use a service which charges a cost-effective flat fee that is paid by the trustees, employer or as a deduction from the pension fund?
The same amount can therefore be charged regardless of size, something the retail distribution review has now given flexibility for.
Ray Tang is an annuities consultant at Premier
