Are there code of ethics risks for advisers making retirement income recommendations?

8 July 2020

Companies with a heavy focus on annuities-based products are facing a challenge with financial advisers making clear that the likelihood of a prolonged low interest rate environment makes it difficult to build an annuities-based retirement income strategy.

What is more, there are questions around the types of recommendations advisers can make about such strategies in a prolonged low rate environment in light of the strictures of the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics, particularly Standards 5 and 6.

The early results of a survey currently being conducted by Money Management ahead of its free Retirement Incomes Webinar on July 15 (sign up here) had revealed strong adviser concern around recommending annuities in the current environment – something which will be discussed by a panel of experts which will include the Australian Financial Complaints Authority’s (AFCA’s) ombudsman, Shail Singh.

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Respondents to the survey were asked whether, given the likelihood of an extended period of low or even zero interest rates, they regarded annuities as remaining central to retirement income strategies. And their answers will concern annuities-focused business such as Challenger and AllianzRetire together with a number of industry superannuation funds who have made annuities a part of their member product offering.

The survey found that 80% of respondents were not currently regarding annuities as central to their discussions with clients around retirement incomes strategies.

But, at the same time, the survey made clear that the most frequent advice being provided to advisers to their clients who were approaching or had reached retirement was that they should hold to their strategies, avoid crystallising their loss and look to the long-term.

Interestingly, the survey revealed that the majority of advisers were not recommending that their clients necessarily stay longer in the workforce.

Asked whether they were recommending that those clients who could should defer their retirements, 60% of respondents answered no.

The Money Management retirement incomes webinar will an authoritative panel made up of:

  • Andrew Lowe, Challenger
  • John Maroney, SMSF Association
  • Shail Singh, AFCA
  • Shaune Egan, AMP
  • Tim Dowling, Allianz Retire+

Advisers can participate in the continuing Retirement Incomes survey here.

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An experienced adviser will advise and recommend what is best for the client regardless.

Interesting that advisers are contributing opinion based on a low interest rate environment and can be assumed to be comparing potential long term growth from alternative retirement strategies, however, for many part Age Pension clients, there can be a meaningful uplift in their Age Pension payments when an Annuity is used as a component or in combination with other strategies such as an Account Based Pension.
There may be only either 60% of the purchase price or 60% of the income payments assessed against the Age Pension benefits thereby potentially providing a valuable increase in these payments.
This could in turn result in a reduction in income payments from an Account Based Pension, thereby preserving capital over a longer time frame and extending the life of the investment in retirement.
It is important to take all aspects into account because the potential uplift in Age Pension over a long time frame must be factored in to the analysis of an extended low interest rate environment.
An increase in the Age Pension purely as a result of including an annuity effectively lifts the overall return on the funds allocated to the purchase of the annuity.
In addition, a client that does not qualify for Age Pension because of assets or income, may then qualify for Age Pension but then also benefit from the concessions available to recipients.
Secondly, if a client is conservative and risk averse and requires security and consistency , in a low interest rate environment , it may be difficult to obtain a meaningful return from alternative guaranteed options which also would not have the advantage of the income or asset reduction treatment an annuity may provide against Age Pension calculations.
It is simply far too shallow to say that annuities are not competitive in a low interest rate environment without taking into account many other factors.

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