Retirees rejecting turbo-charged annuities
Two-thirds of people accessing their pensions are failing to take up guaranteed annuity rates that pay recipients a super-charged income, according to Just Retirement.
During the 1980s personal pensions were often sold with a guaranteed annuity rate. As these were priced at a time when the economic climate was very different, retirees with guaranteed annuity rates are able to enjoy a guaranteed income that is far greater than they could currently achieve by shopping around on the open market.
Stephen Lowe, group communications director at Just Retirement explains: “When we researched what people could receive from a guaranteed annuity rate the typical income paid was between 9% and 12% but in some cases it topped 14%. Pension providers made these promises when rates were higher and now have to honour them – their loss can be your gain.”
By contrast a standard annuity rate is around 4.5%.
Mr Lowe adds: “In fact the guarantees are so valuable that providers must tell you if your pension plan has one and, with bigger pension pots, you are compelled to take regulated advice if you are thinking of giving it up.”
However, despite the benefits of a guaranteed annuity rate thousands of people are turning them down every month. According to figures from the FCA in the last quarter of 2015 more than 9,000 of the 15,000 whose plans offered a guarantee chose not to take it up.
Guaranteed annuity rates can be less flexible even than standard annuities. You may not be able to get guarantees or protection for your spouse. Plus, you may have to retire on a specific day such as your 65th birthday. However, it is important to be aware of the income that is on offer before you reject it altogether.
“Be open-minded and check all your options”
Mr Lowe adds: “Pension choice only works if people are open-minded and think about all the options. It’s true that in the past customers who didn’t shop around often ended up with poor value annuities. That doesn’t mean people should automatically ignore all annuities. Some people have these very attractive guarantees rates. Many thousands more can access higher, personalised plans that take into account health and lifestyle factors and can be bought with capital protection built in to ensure a positive return on the money invested even if you don’t live to a great age.”
He adds: “The key point is to thoroughly check the facts by finding out what annuity rate would apply to you and then to use that as a benchmark to test other options. You may be surprised.”
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.