A couple of weeks ago the respected financial Journalist, Dan Hyde, revealed the results of a Daily Mail investigation into the profit margins of Annuity providers.
To many people, the findings of the investigation were surprising: “Based on insurers’ own predictions, they claim to make £6,500 profit from every £100,000 of savings. But this assumes savers always pick the very best deal and live until they are 90.”
“In reality, on average someone turning 65 this year will die when they are 84 and the vast majority will not get the best pay-out possible. This means some insurance companies could pocket up to £29,000 from the average saver. It highlights why it is vital savers shop around for the best pension income.” (Source: Daily Mail)
So, if Annuity providers are making excessive profits and we’d agree that £29,000 from a £100,000 fund definitely falls into that category, what other options do you have?
First things first though, why buy an Annuity?
Well, despite the seemingly excessive profits of some Annuity providers, for many would-be retirees it is still the best way of turning a pension into an income.
Remember too, not all Annuity providers engage in this practice. Dan Hyde again: “This demonstrates why it is absolutely critical that retirees shop around for the best annuity. Firms that consistently offer the best annuities, such as Just Retirement, Partnership, Aviva, Canada Life, Legal & General, and LV=, all squeeze their profits to attract customers who search for the top rates.”
So, when is an Annuity the most appropriate option?
- When you want a guaranteed income, which can never fall and will be paid for the rest of your life
- When you want a relatively simple solution to providing an income in retirement
- Where you want to take no risk with your retirement income, although to fully achieve this goal you will need to include inflation proofing, which will significantly reduce your starting level of income
- When you have a smaller pension fund, which makes other options, such as Income Drawdown, less appropriate
However, if you are unhappy with the ‘greedy’ Annuity providers and are prepared to give up the simplicity of the guaranteed income provided by an Annuity, there are other options.
When should you consider an alternative to an Annuity?
- If you need the flexibility to increase and decrease your income in future years, perhaps because you will continue to work on a part-time basis or you have other income which fluctuates
- If you want your dependents to have other options on your death other than a simple spouse’s pension
- If you have a larger pension fund, generally accepted to be above £100,000, although there are times when Annuity alternatives are appropriate for smaller pension funds
- If you believe Annuity rates may rise in the future, or you will qualify for an Enhanced Annuity in years to come
Some would-be retirees will of course decide to opt for an alternative simply because they object to the profits made by Annuity providers. Whilst we sympathise, £28,000 profit on a £100,000 fund is excessive in our opinion, anyone considering an alternative still needs to make sure it is right for them.
There is no point putting yourself in a worse financial situation just because you object to the profit levels of Annuity providers. To put it bluntly, don’t cut your nose off to spite your face!
So, what are these other options?
If you need to turn your pension pot into income the most popular option is an Annuity; 400,000 of these are taken out each year.
However, there are a large number of other options, many of which are often overlooked by would-be retirees.
The main four Annuity alternatives are:
Income Drawdown Also known as Capped Drawdown this option means your pension fund remains invested and income is drawn down, subject to a maximum allowable amount each year. This option carries significant additional risk compared to an Annuity, as your income can fluctuate depending on factors such as investment performance, your age and gilt yields. However, it does allow for income flexibility and your dependents will have a wider range of options on your death.
Enhanced Annuity Whilst this is a form of Annuity, it’s probably worth a separate mention as not everyone who would qualify considers this as an option and therefore potentially loses valuable income. An Enhanced Annuity works in exactly the same way as a normal Lifetime Annuity, but gives a higher income if you suffer from health issues or have lifestyle factors, such as smoking, which could reduce your life expectancy. Crucially many relatively minor ailments may qualify you for a higher income.
Fixed Term Annuity This option gives you a guaranteed income for a period of time, which you select at outset, and a Guaranteed Maturity Amount or GMA at the end of that period. You can use the GMA to buy another Fixed Term Annuity or move to an alternative option such as Income Drawdown or a Lifetime Annuity. A Fixed Term Annuity can work well for people who don’t want to lock in to today’s low Annuity rates, however there is the possibility that your income can fall at the end of your fixed period.
Investment Linked Annuity Also known as With Profits or Investment Linked Annuities, this option links your income to investment performance, albeit often with a guaranteed minimum income level. Put simply, if investment performance is better than anticipated your income will rise, if it is worse your income will fall. Anyone choosing this option therefore needs to be happy to take the risk that their income could fluctuate.
Confused? Do you need help planning for your retirement?
The Daily Mail article concludes by saying: “The worst deals are often offered by companies shut to new customers, known as ‘zombie’ insurers, as they have little incentive to be competitive. These shoddy payouts are set to be exposed for the first time this summer when the Association of British Insurers publishes an annuity rates comparison table.”
We couldn’t agree more, but don’t necessarily be put off Annuities, it is still the right option for many who want a guaranteed income.
If an Annuity is the right for you then shop around for the best rate, make sure you include the right options and check whether you qualify for an Enhanced Annuity.
Always consider other options too; after all, an Annuity may not be right for you, especially if you want income flexibility, have a larger fund or want your dependents to have other options on your death.
We are here to help you find the best solution.