More transparency for annuity rates

By Deputy editor Tim Bennett Nov 16, 2012

Tim Bennett

Share with
friends:

Comments (0) Print this article

One of our biggest bugbears here at MoneyWeek – now that commission payments to financial advisers are on the way out – is the way the annuity market works. So it’s nice to see a positive proposal from the Association of British Insurers (ABI): they want all insurers to publish annuity rates.

The annuity market is a horrible mess. You graft away all your life and, assuming you are not among those lucky enough to get one of the few remaining state or large company final salary pensions, you try to build up a pot of money, with some help from your employer.

This pot is meant to sustain you once you stop working. For most people, this will involve buying an annuity when you retire – this is a contract agreed between you and an insurance company, whereby they take your lump sum, and convert it into a regular income.

The principle is sound enough. When annuities were invented, the idea was to force retirees into buying an income so they would not simply fritter away their pension pot on exotic holidays, then fall back on the state for help. But in practice there are many flaws in the system.

The biggest issue – sadly not the one the ABI is taking on – is the fact that annuity rates are appalling. For example, according to pension specialist MGM, quoted in The Daily Telegraph, a 65-year-old man with a £100,000 pension pot can expect an average, non-index linked, pension of about £5,300.

Sure, these days you can wait before taking your annuity and still retire with an income of sorts (this is called income drawdown), but with gilt yields at record lows and likely to stay that way, don’t hold your breath for a quick improvement.

But there is something you can do to mitigate rubbish rates – you can make sure that at least you get the best annuity rate available. Many people don’t realise that they do not have to accept the annuity quote from the insurer they have been saving with. You can shop around, (using your ‘open market option’) and you should.

MGM found that the average 65-year-old facing retirement could enhance their pension income by up to 50%, particularly if they qualify for an ‘enhanced annuity’ – a bigger income paid to those with health problems that might shorten their retirement period.

What irks the ABI, Thisismoney.co.uk’s Richard Dyson notes, is that some insurers do not disclose rates. And most never tell customers that the ‘open market option’ is available, in the hope that they will buy a sub-par annuity from them. The ABI’s proposal that every insurer be forced to publish their rates is hardly revolutionary – but it’s a step in the right direction.

Comments (0)

Published in Pensions | More articles by Tim Bennett

Share with
friends:

Related articles

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


>