A better deal for retirees?
The complicated and sometimes imbalanced world of annuities is heading for a welcome shake-up. At present, when retiring, many individuals opt for the perceived simplicity of buying an annuity from their pension scheme provider. However, many people do not realise they can purchase their annuity from any provider – they are not obliged to stay with their pension company.
Accordingly, the Financial Services Authority (FSA), the financial services watchdog, has announced a review of annuities. This will focus on the risks incurred by consumers who do not shop around before purchasing an annuity, in order to establish whether they are losing out. It will also examine the rates available to consumers through the Open Market Option, compared with the rates available exclusively to existing pension policyholders.
Furthermore, the review will evaluate whether consumers’ ability to shop around is helped or hindered by providers and whether the problem is concentrated among particular consumer groups or annuity providers. “An annuity purchase is an important one-off decision that has long-term consequences for individuals if they get it wrong,” notes the FSA.
Of course, it is not just enough to shop around when buying an annuity – you also need to know what you are shopping around for. Annuity rates have plunged over recent years and financial website Moneyfacts calculates annuity incomes have fallen in 15 of the past 18 calendar years. Meanwhile, the average annual annuity income for a 65-year-old man has plummeted by 56% since 1994. The difference between the best and worst payout you can find in retirement is significant.
According to ratings agency Fitch, life insurers Prudential, Aviva, and Legal & General reap the greatest benefit from the propensity of savers to buy their annuity from their pension scheme provider. Annuities account for about 30% of UK sales at Prudential and Aviva, and more than 15% at Legal & General and, notes Fitch, annuities generate higher margins than most other UK financial products.
Before buying your annuity, it is vital to take expert advice. You have worked hard to build up your pension pot so, when the time comes for you to buy your own annuity, do yourself justice by making sure you get the best possible deal.
Many people continue to labour mistakenly under the impression they have to buy their annuity from their pension provider and yet, simply by shopping around, you could enjoy anything up to20% in extra retirement income.
Until the next time Paul Hoskin from Hoskin Financial Planning.