A recent YouGov survey reports 33% of consumers are interested in cashing in their annuity, with a further 12% in the ‘don’t know’ camp. We have devised several customer profiles to assist our thinking:
The financially better off and GARs
There will be customers who received an annuity rate at a relatively high rate compared to today’s returners; some of these may be enjoying guaranteed annuity rates or GAR policies. For this cohort, if they are healthy, they could now receive a single amount that could be more than they invested originally.
The chance of these people transacting is high, and their expectations, subject to their health, are likely to be exceeded. A straightforward process should suffice.
Never wanted an annuity
Some people never wanted to take an annuity and may have felt pressured into doing so. They hence may be motivated to sell-out, regardless of the consequences. For these customers, understanding and managing their expectations will be difficult, and if they transact or not will depend as much on the advice and management of these expectations.
Some people will read the headlines in the press and opportunistically look to see if they can get a better deal. All else being equal, this may turn into a debate about having a guaranteed income for life and short-term cash.
Traditional advice, or at least risk warning, will be an essential component, to inform consumers about the issues of longevity and the eroding effects of inflation. It is likely that most of these will not transact, but they will need advice and prices to come to this decision.
Frustrated with low income
Clearly there are retirees whose income is lower than they would like, and just want more money. They may feel aggrieved at the banks, governments or companies – and feel that they should be receiving more income.
All else being equal, a single cash payment is going to be no better for them than a regular income. However, they will need a lot of help and discussion to placate their frustrations and to enable them to make the right decisions.
Ill-configured annuities – change in circumstances
For some they will have a single life annuity, instead of a joint life. It may be an annuity that has no escalation component, and, due to changes in their personal circumstances, they may want to re-configure their annuity.
All else being equal, they could cash in their existing annuity and buy a new one in the new configuration.
The issue here will be the cost of administration over the benefits to the consumer. Moving from a single life to joint life may well be worth the cost of change.
Ill-configured annuities – poor purchase
For some people, they did not shop around and purchased directly off their pension provider, often without advice or due consideration. Perhaps they took a single life policy without escalation.
When presented with a price to purchase their income, they may well be disappointed, and hence motivated to look for blame and compensation with regard to the original purchase. This is going to be problematic for all concerned.
Around 70% of consumers qualify for an enhanced annuity due to their health issues, although far less receive these benefits. Whether this is the fault of the consumer, the adviser or the provider does vary and is often a grey area. Clearly, if someone in ill health received a standard annuity, then they are going to be disappointed by the fee they are offered for their income when their health is assessed.
This is going to be problematic for all parties, as the consumer may be looking for compensation from the original provider, adviser or both. While not the focus for the secondary market, how consumers’ expectations are managed for this could make or break the reputation of the secondary market.
Cashing in small incomes
There are many small incomes, which quite frankly are a nuisance for the providers as well as the consumers, and the opportunity to commute this will be welcomed by many.
Clearly, a low-cost transaction is favourable. There is the possibility some providers may promote this route to reduce its administration of these small pots, even offering enhanced values to do so.
Managing consumer expectations
Clearly, for some consumer segments, their expectations will be rewarded with a transaction. However, for others this will not be the case, and they will be disappointed. The graphic below tries to demonstrate this.
From the above we have come to the following views:
- Advice/guidance will be needed for a large proportion of people.
- The proportion who transact is likely to be far lower than those who request a price.
- If remuneration for transacting is on a winning-provider-pays basis, this is likely to be proportionally high due to the low conversion rate. Hence, a fee for advice and a small fee for the transaction cost may well be appropriate.
- Managing expectations, by providing indicative prices, could well be an important part to manage consumer expectations and minimise the administration costs of full pricing.
- How we manage consumers who did not purchase the appropriate annuity and feel disgruntled with their original purchase, be this mis-sold or mis-bought, is a major issue for the success of this market.