How to avoid the great annuity rip-off: buy wisely #UKPensionNews #IN
02 Monday Sep 2013
There is currently a boom in companies targeting savers in their sixties who want to take their pension. Most retirees do this by buying an “annuity”. This is a simple insurance product purchased by 400,000 people each year: you hand over your pension pot and in return an insurer pays an income until you die.
Annuities are an extremely profitable business for insurance companies. Unfortunately, many retirees play into their hands by failing to shop around different firms, which offer wildly varying payout rates.
To attract custom, competitive insurers pay middlemen to act as “distributors”. Until recently, the middleman was typically a financial adviser who assessed your needs and gathered quotes. But rapidly advisers are being replaced by brokers offering more basic services. Even household names such as Virgin and Tesco are launching these “annuity supermarkets”.
Why the scramble to sell annuities? Quite simply, this lucrative market is starting to bulge. “Baby boomers” – the swell of population born in the Forties and Fifties – are now nearing retirement age.
Many older members hold generous final salary pensions, where an annuity purchase is unnecessary. But not everyone is so lucky. With final salary provision dying away over the past two decades, younger baby boomers will be the first to retire with most of their retirement nest egg stored in stock-market-linked pensions.
In effect, a rush of people are approaching retirement age with ever-larger pension pots that can be used to buy an annuity. Firms such as Virgin and Tesco will earn up to 3.25pc commission on each annuity they sell. Find a customer with a £100,000 pension pot and that’s an instant £3,250. This kickback is factored into the rates customers receive.
The commission looks more palatable if customers get the best deals. Sadly, my investigations have found that some brokerages, including Virgin, fail to unearth the top offers because they do not explore the whole market and offer only rudimentary medical screening. In some instances, customers with serious illnesses miss out on up to 27pc extra income. Regardless, the broker pockets 3.25pc and moves on.
This is worrying. There is growing appetite at a government level to funnel all pension customers through an annuity supermarket for better incomes. And within weeks, an industry directory listing all sorts of advisers and brokers will be advertised to savers.
City regulator the Financial Conduct Authority must urgently step in to ensure only high-quality outlets are promoted and help prevent the death of advice. Buying an annuity is an irreversible, life-changing decision – which makes this possibly the best case for seeking expert help you will ever encounter.
For example, how many savers fed through the annuity machine realise they can reject this expensive insurance altogether? Rates are incredibly low, typically paying £6,000 a year on £100,000, down from £15,000 in the Nineties. A 65-year-old must live until 82 just to get his or her money back.
If you are in good health, why not consider waiting until nearer age 75 to buy a secure income? In the meantime, you can go into “income drawdown”. Your pension remains invested in the stock market while you make small withdrawals. The fund can grow (if invested cleverly); in 10 years’ time, annuity rates may have jumped; the older you are, the higher the payout; and if you develop health issues, the boost is even bigger.
It’s not the right option for everyone. Many will find the risks too great: if your investments crash and you withdraw cash too quickly, your savings could run dry.
Expats Pensions Comments:
Thankfully Expats Pensions does not work with Annuities. If you are planning to live abroad, it is possible to avoid the trap of being forced to purchase an annuity. We specialise in helping clients evaluate the possibility of transferring their personal or company pension with them overseas. Please see our site for more information www.expatspensions.com