Advisers must use the annuity dilemma to reach out to clients

Annuity rates have taken a nosedive as turbulence has returned to markets. Worries about US and eurozone economies have caused stocks to tumble but the dilemma remains the same as during the banking crisis of 2008: should clients wait or buy now?

Malcolm McLean (pictured), consultant at Barnett Waddingham, says advice is crucial during market turmoil as often clients do not grasp the impact it will have on their savings.

Move or delay?

‘People don’t appreciate how great an effect this will have on them,’ says McLean. ‘If the rate falls by 1%, then that’s 1% less income for 30 years. That could be hundreds of thousands of pounds lost. People need to consider whether to move quickly or delay buying, leaving it invested for another year, or buying a short-term annuity.’

He says advisers taking trail on pension schemes need to earn that payment by helping clients make the right call. Without an adviser, whether clients make the right decision is down to ‘sheer luck’, he says. So how should advisers respond to this high-stakes challenge?

Arthur Childs, director of Surrey-based Arch Financial Planning, argues advisers should not let the market dictate long-term planning decisions. ‘These should not be market-driven decisions; this short-term stuff does not go too well with long-term planning,’ says Childs.

He argues that, looking beyond the headline falls in annuity rates, attractive rates are still available on enhanced annuities. Greater competition between providers is also helping to dampen the effects of the market falls.

‘There has been a lot of talk about annuity rates. They are falling but enhanced annuities [are not],’ says Childs. ‘We are finding a high percentage [of clients] are getting an enhancement. In fact, we rarely find someone who doesn’t qualify for some kind of enhancement.’

Interim arrangements

Even though the markets should not dictate planning decisions, Childs says turbulence could often lead to clients deferring their decisions to buy an annuity. In those cases, interim arrangements can be put in place.

‘When the market is on a downturn and annuity rates are falling I can put them into a risk-adjusted model portfolio, rather than have the funds all over the place. When markets are low, if you put a pension fund somewhere low-risk then the market may not get much lower but when things pick up, that will help a bit.’

The current climate presents advisers with a great opportunity to reach out to clients and prove their value. They can reveal the true complexity of their annuity purchase decision and its high stakes. Also, they can take advantage of a fairly immature enhanced market, provider competition and the investment tools at their disposal to solve the annuity dilemma.