Annuities: Buy in ignorance, repent at leisure
A minister has called for switchable annuities, which may be impractical. Meanwhile, says Chiara Cavaglieri, shop around
Saturday 11 January 2014
The annuity market which millions of Britons rely on for income in old age isn't working. Returns are falling fast and many of us are failing to find the best deal and potentially missing out on tens of thousands of pounds.
The answer, according to pensions minister Steve Webb, is "switchable annuities" so that pensioners will be able to shop around and change annuities in the same way that homeowners switch their mortgage every few years.
At first glance, giving consumers more flexibility is a positive move, not least because retirement incomes today are a lottery and can differ by 15 to 20 per cent or more depending on which provider is chosen.
However, commentators have been quick to point out that when you take switching annuities to its logical conclusion there are many other problems that could arise.
Tom McPhail, head of pensions at Hargreaves Lansdown, says: "I'm not sure that switchable annuities will ever actually get off the ground. We already have to work really hard to get people engaged with shopping around once let alone repeatedly if they are going to switch every few years". An even bigger issue is whether we can really expect insurance companies to offer annuities that will last for a lifetime if there is a caveat enabling annuitants to switch at any time. The natural outcome is that insurers would be more likely to reduce rates to reflect the added risk that they could lose the money at any point if their customers want to switch away.
Kusal Ariyawansa of independent financial adviser (IFA) Appleton Gerrard acepts the initial attraction of switchable annuities but argues that this move would give rise to far too many complications.
"I can see why Steve Webb argues that you should be able to swap to a better rate should rates improve in the future, but this could amount to being penny wise yet pound poor. For example, when is it best to swap, and what will the cost be? How long will it take to recover the costs? Will insurance companies impose exit penalties?"
Creating more costs in the system could be a huge setback when you consider that over half of pension pots used to buy an annuity are worth less than £20,000 and nearly 30 per cent are worth less than £10,000.
"Since people are living longer, the most sensible arrangement will be a cost-effective lifetime investment solution with an insurance element against short-term fluctuations or early burn-out," says Mr Ariyawansa. "As usual we should look to America where companies combine annuities with investment backed by insurance, thereby allowing the customer to benefit from stock market returns safe in the knowledge that there is a level of downside protection should something go wrong drastically".
Critics have argued that just about everything Mr Webb wants to see improved already exists.
People can currently buy fixed-term annuities that enable them to benefit from improving annuity rates further down the line and they can also use a combination of fixed-term annuities, income drawdown and phased retirement plans to run "mixed" pension arrangements with some annual income through their annuity and the rest of their savings invested – another suggestion from Mr Webb.
So do we really need more reforms, or do we need to work harder to ensure everyone who retires understands what their options are?
One of the easiest ways people can immediately boost their retirement income is to shop around.
The overwhelming majority still fail to take the Open Market Option (OMO) and potentially lose thousands by automatically plumping for the annuity rate offered by their pension provider. So better guidance on the products available is essential. This includes deeper understanding of investment-linked annuities, index-linked annuities, spousal benefit and enhanced annuities for people with health conditions which could include high cholesterol or high blood pressure.
Blair Cann, of insurance brokers M Thurlow & Co says: "Enhanced annuities used to be something of a joke but it is now quite possible to achieve significant improvements, some as much as 25 per cent".
Pensioners should also consider alternatives to annuities, like deferring buying an annuity and going into drawdown which is becoming increasingly popular.
But the Association for British Insurers recently revealed that 52.1 per cent of people who bought an annuity in 2013 had not taken advice.
Many buy annuities online because they believe fee-based advice is too expensive, but David Smith of IFA Bestinvest says they will typically pay more in commission and receive no advice whatsoever.
"Bearing in mind this is the single largest purchase anyone will ever make after their home, surely commissions have to be banned and everyone should be encouraged to take professional advice", he says.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
Shock poll shows voters believe Ukip is to the left of the Tories
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
New era of cheap oil 'will destroy green revolution'
Ukip founder Alan Sked and Nigel Farage 'begged Enoch Powell to stand as a candidate'
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
iJobs Money & Business
£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...
£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...
$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager In...
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
Day In a Page
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens