Yesterday saw the latest initiative from the Association of British Insurers (ABI), to help increase consumer understanding of Annuities and how to get the best retirement income.
An Annuity is the most popular way of turning a pension into an income at retirement; indeed some 400,000 are taken out each year.
However, too many retirees are still buying their Annuity from the same company with which they held their pension. Potentially losing out on thousands of pounds by not getting the best rate, or considering an Enhanced Annuity, which would pay even more due, to health or lifestyle issues.
In short, the message that shopping around is vital at retirement is not getting through to would-be retirees.
In response, the ABI has produced a set of specimen tables, which you can visit by clicking here, to show the Annuity rates offered by its members. The hope is that they will help to highlight why shopping around for the best Annuity rate is vital. However, the tables are not designed to replace price comparison websites, but to “show what is available and of the need to get expert advice.”
The tables form part of the ABI’s Retirement Choices Code, which was launched in March, but will the tables help retirees get a better retirement income?
The case for
- Anyone looking at tables will quickly see the huge gap between the best Annuity rate and the worst. On one example we ran the difference was 20%; which should be enough evidence to confirm that shopping around is worthwhile
- The tables include Annuity rates for a range of Annuity providers who are not actively seeking new business and therefore are generally not on other price comparison websites
- The tables will also definitely help to drive home the message that buying an Annuity from the current pension provider will rarely provide the highest income
- The tables will undoubtedly be useful to journalists. Why will this help people get better retirement incomes? Because they will used by our friends in the personal finance press to highlight the importance of shopping around and more publicity of the benefits of doing so has to be a good thing
The case against
- The tables are very simplistic. Despite this they are not terribly user friendly, with only limited client circumstances available and only a small pension fund of £18,000 quoted; well below where we believe the average to be. How hard would it have been to have included other, larger, fund values?
- Despite not being marketed as such, some people will undoubtedly see the tables as an alternative to a price comparison website. This is dangerous as the rates will only be updated “every two months”; in practice Annuity rates can move daily
- Only ABI members are included, this means a handful of Annuity providers, who may actually be very competitive, are not showing on the tables
- None of the examples show the effect of adding a guarantee period or indexation to the chosen Annuity. This could leave inexperienced investors, and let’s face it most people only buy an Annuity once, without vital knowledge to make sure they select the right options
- Whether you buy your Annuity direct from a provider, via a non-advised Annuity broker or from an Independent Financial Adviser (IFA) you will pay a fee or commission. These fees or commissions are not included within the figures shown on the ABI tables, which means they are not reflective of the ‘real world’
- No mention is made of other retirement income options, such as Income Drawdown , Fixed Term Annuities or Investment Linked Annuities . An Annuity is a one off purchase, which can never be changed, retirees should therefore consider all other options before the decide an Annuity is right for them
So, will the tables help people get better retirement incomes?
Whilst the tables definitely help to emphasise the importance of shopping around, as well as demonstrating it is rarely worthwhile buying an Annuity from your current pension provider, we can’t help feel it is something of a missed opportunity.
The tables are too simplistic, don’t include all Annuity providers or options, and there is a danger the data could quickly become out of date, rendering the information meaningless.
Furthermore, and this is probably our biggest concern, no mention is made of the alternatives to an Annuity. Even before a retiree searches out the best Annuity rate and starts deciding which options to include, they need to ask the fundamental question: “Is an Annuity right for me?” This latest initiative does nothing to help answer this question and could potentially be dangerous due to the lack of consideration given to alternatives.
Are you close to retirement?
This might mean an Annuity is right for you, or indeed an alternative might be preferable. Either way you can rest assured we will find the right solution for you.