TPAS, annuities and the variable quality of advice

There are many good IFA firms. Some are not so good. Yet, there is a solidarity in adviser world that results in any criticism being trashed as wrong, biased, provider based etc, etc. Criticism is good and right. If bad practice is not criticized, it is tolerated and that is iniquitous, especially for customers.

As a judge of numerous awards, I see stuff that would make the regulator cringe. In my work as a research consultant, I hear stuff that I am reluctant to write down. Good IFAs must recognise that the client has little way of differentiating the good from the bad. Thus, they have an interest in condemning bad practice.

The changes on pensions maturities announced in the budget are proving highly contentious, with strong opinions for and against. The Government has promised all retirees face-to-face guidance (initially advice, bit subsequently changed to guidance).

I am of the view that such initial guidance should be offered by an organisation that does not benefit from the outcomes, excluding both providers and advisers. Both have too much skin in the game. An organisation such as TPAS already conducts some 80,000 interviews annually and could gear up to handle the lot as long as it is accepted that face-to-face is neither wanted or needed on most instances. Before advisers jump up and down with rage, please note that TPAS will pass appropriate enquiries to them, which will, by definition, be warm and suitable.

The question for me is, how many advisers are fit to receive such enquiries? To illustrate my concern, let me use as an example, the case of a recommendation by an adviser in the Weekend FT’s Money section – not the Sun or the Sport, but the FT. The adviser, who I will not name here, says, “If you want to avoid an annuity – and frankly who wouldn’t since they are such poor value, you could construct a portfolio of gilts and bonds, which are far more flexible and give similar returns to residential property.” The money involved is £150,000.

He seems to be suggesting that a reader does this himself, or perhaps an adviser does so with a friendly stockbroker. Why is such advice wrong? Well …………….

  1. Almost everyone in investment world agrees gilts yields are at the bottom and only have one way to go.

When QE ends and interest rates rise, there will be some nasty pain. Bond yields increased dramatically last year on the suggestion of tapering of QE.

In short, Gilts and bonds are most certainly not low-risk. Our client could catch a horrid cold, ​from which he would never recover.

  1. Our adviser seems unaware of the impact of mortality drag.

​In the words of annuity expert, William Burrows:

​’Drawdown results in the deferral of annuity purchase and so the investor does not benefit ​from the mortality cross subsidy. This means that in order for a drawdown fund to provide ​the same income as an annuity there has to be an extra investment return each year to ​compensate for the absence of this subsidy.’

​Our adviser’s portfolio is hardly going to meet the return requirements – quite the reverse.

  1. Longevity risk

​Our adviser’s portfolio of Gilts and bonds will enjoy low income and might well suffer serious ​capital loss. The client will have to withdraw capital for any sort of reasonable income. What ​happens if the capital is exhausted before he dies? The adviser will be long gone! Annuities ​may appear to represent poor value, but they are the only game in town when it comes to ​insuring against longevity.

  1. Investment cost

​Our adviser recommends creating a portfolio of Gilts and bonds for £150k. Does he not ​realise how expensive this would be? In dealing costs and time costs, it would be way out of ​court. Moreover, does he have the expertise to choose the right stocks? Of course, not.

Personally, I believe that an annuity will be the default option for the majority who are healthy. I believe that some underwriting process will be necessary for all. There are legitimate ways to continue to invest and postpone buying an annuity, as long as mortality drag is understood, so that an appropriate investment strategy is adopted to generate an adequate return.

Unless the client has enough assets that provide income on which he can happily live without resort to capital, longevity insurance is required. Such cases will be in the minority.

I am afraid the only way to avoid a mis-selling scandal is to introduce a qualification similar to G60 that ensures advisers conducting this class of business know the basic rules and have adequate expertise in taxation, investment, mortality drag and longevity.

It is a coincidence that talk of a 15-year longstop on adviser liability has occurred now. In most cases, more than 15 years will have elapsed before clients realises that they received poor advice!

#annuities #pensionsadvice #pensionsmisselling #TPAS