The financial crisis has wreaked havoc on our personal finances, so much so that few areas have escaped.
Shares have been volatile, mortgages difficult to get, while savings rates have been at rock-bottom levels. Yet there is another area that has also been severely hit – annuities.
Annuity rates have slumped alarmingly since the financial crisis and they just keep falling. As at the end of March, a £100,000 joint life annuity for a man aged 65 and woman aged 60, with two-thirds spouse pension and level payments paid, would get you £6,080. Today, it would pay £5,749.
It is little wonder that people are delaying taking their annuity. According to Schroders, more than one in five were delaying taking an annuity because they felt the income returns were poor compared to other investments.
But the financial crisis is not the only thing contributing to lower annuity rates. The other main factor is how long someone will live. The trend is very much for longer lives, which has an adverse impact on rates. Increasing levels of impaired annuities (which pay people a higher income if they have suffered, say, a heart attack) mean that the "poor" lives are not subsidising the "good" lives as they used to.
Those in postcode areas where people live longer are also seeing a rate reduction.
It could also get a lot worse. New European rules could force providers to value annuity liabilities using gilt yields rather than bond yields as they do now. The result, experts predict, will mean an increase in capital requirements, which according to best estimates will reduce rates by between 20pc and 30pc.
The Coalition may have proposed to scrap compulsory annuity purchase but for the vast majority of people, this won't be an option because their retirement pots won't be big enough to pass over the need to lock-in an income level for life.
Yet buying an annuity is, arguably, the most important financial decision you will ever make. If you make the wrong choice it could cost you thousands of pounds in lost retirement income.
It is six years since the Financial Services Authority changed the rules to compel pension providers to inform customers about the open market option – the term given to the right to buy an annuity from any provider you choose.
The hope was that more people would scour the market for a better deal rather than accept the offer from their pension provider. But little has changed. The apathy is a major concern because people could boost their retirement income by as much as 20 per cent simply by shopping around.
One of the problems is that insurers have a vested interest in keeping quiet about the open market option because they do not want to lose business. They may have to tell customers that they can shop elsewhere, but they do not have to (and do not) offer comparisons to illustrate how good or poor their rates are against other insurers.
Add in the cumbersome process of buying an annuity from a company other than your pension provider – delays can leave you without pension income for at least a month – and you have another reason not to use the open market option.
Insurers reckon that most people do know they can shop around, it's just that they get a better deal from their pension provider. Yet financial advisers are not convinced – and
nor, it would seem, is the Government, which wants the industry to justify why the open market option take-up is low.
nor, it would seem, is the Government, which wants the industry to justify why the open market option take-up is low.
Advisers still believe that most people, to their cost, just grab the offer from their pension provider. Married people all too often opt for a single-life annuity when buying a joint-life annuity may be the better course of action, while most fail to consider the effects of inflation. Impaired annuities are also overlooked too often.
The golden rule is not just to take the first annuity that comes along. Check whether there are better rates on the "open market'' (look at the FSA's comparative tables on its website). And if you are in any doubt, take advice – annuity rates are not compromised by commission.
You have spent years grafting and saving for retirement. You owe it to yourself not to be hasty and simply tick the annuity box from your pension provider without a second thought.
http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/7975169/Apathy-could-cost-you-20pc-extra-income-in-retirement.html
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