Step 2) is now far from straightforward. The FCA’s thematic review found that 60 per cent of retiring consumers “were not switching providers when they bought an annuity, despite the fact that around 80 per cent of these consumers could get a higher income on the open market, many significantly so”. The Pension Wise website suggests four main options – do nothing; take an annuity; take flexible income; and take cash. The guidance then suggests that the policyholder goes back to their insurance provider to find out what options are available from them. For actuaries getting to grips with the new process this represents a new risk – that of falling foul of the quite subtle regulatory requirements to provide the relevant information but not obscuring the availability of “guidance” such as that provided by the Pension Wise website. There must be risks here that pensioners will not look more widely and will not get the best deal for themselves – as supported by the FCA thematic review finding that many policyholders would have been better off finding a higher-income deal by looking across the market. This issue of course gets picked up in step f), but we have highlighted this to show how easy it might be for policyholders to take the route of least resistance and end up worse off. Also at this stage the options around whether or not to take a tax-free element emerge.
Step 3) is perhaps one of the biggest areas of uncertainty and risk for actuaries and policyholders in the entire process. How long is a pot of money likely to last? With an annuity the income is guaranteed to last as long as you live. We expect that a reasonable proportion of prudent, cautious middle-ranking policyholders will still like and indeed prefer the certainty afforded by an annuity. Of course, many will like the concept of a flexible income which they can manage over their lifetime, but assessing how long the pot will last depends upon at least two key unknowns:
• how long will the policyholder live; and
