22nd August 2013
Information published about annuity rates by the Association of British Insurers is driving home more than ever why pension savers need to take care when buying an annuity writes Jill Insley
The ABI has published tables showing the annual incomes that would be paid out to savers living in three different areas – Manchester, Wimbledon and Sutton, south London – bought with a pension fund of £18,000. The tables show results for a single flat rate annuity, or a joint annuity that pays half the income to a dependant after the death of the policyholder. They can also be adapted to take account of poor health through smoking, being overweight, or having suffered a stroke.
The tables show clearly why those preparing for retirement should take advice on their annuity purchase and not simply accept the policy offered to them by their pension provider.
The lowest annual income for a joint life income with no health problems living in Wimbledon – £769.56 a year from Scottish Widows, Clerical Medical and the Halifax – is £238.08 lower than the £1,007.64 a year offered by Reliance Mutual. Assuming the policyholder lives for 30 years, the difference means he or she could miss out on income worth £7,142.40.
Those suffering ill health can benefit even more from taking advice on what type of policy to buy and shopping around. A few insurers specialise in providing annuities “impaired health” or enhanced annuities to those whose life expectancy is likely to be shortened by their medical problems.
But again, no one insurer offers the best rates for every condition: LV= offers the biggest income, £1,262, for someone who suffer speech problems after serious stroke; Partnership pays the highest amount, £1,277.76 to someone who has smoked for 10 years or more and has a high Body Mass Index (BMI); while the Prudential comes top with £1,778.23 for a policyholder who has smoked for 10 years or more and suffers lung impairment.
The ABI hopes the tables will encourage more people to consider their options before buying an annuity. Research by the specialist annuity provider Partnership has found that just 13 per cent of consumers realised they could get less income from their annuity if they stayed with their existing pension provider.
Andrew Megson, managing director of retirement for Partnership, said: “In addition our analysis has revealed that more than 50 per cent of 65 year olds have a health or lifestyle condition that could make them eligible for an enhanced annuity. However in 2012 just 4 per cent of people who took out a product with their existing product provider chose this type of annuity.”
Laith Khalaf, head of corporate research for investment services provider Hargreaves Lansdown, hopes that publication of the rates from all but one small annuity provider will put pressure on those offering the lowest rates to improve the incomes they offer.
But he warns that those looking to buy an annuity should not regard the ABI tables as a “shopping around tool”.
“The rates are several weeks old; there is no mechanism for customers to apply; there are also obviously only a limited number of profiles modelled which don’t take into account anyone’s individual circumstances precisely, or the type of annuity they want,” he said.
He also pointed out that some of the annuity incomes quoted in the tables would only be available to existing pension policy holders of the companies concerned. Reliance Mutual, which came top for non smokers, does not offer non smoker rates on the open market.
Malcolm McLean, a consultant with independent actuaries Barnett Waddingham, agreed that people approaching retirement needed more information than just the highest rates available at that point in time.
“There are many other considerations to take into account other than price when choosing an annuity, notably timing and type of annuity – single life, one with spouses benefits, inflation protected and so on. The tables do not really help much if at all in that wider respect.
“As things stand at the moment individuals contemplating an annuity or the possibility of an income drawdown plan must be encouraged to seek professional independent advice. Otherwise the scope for them getting it wrong is immense.”
How to improve your retirement income:
* If you know what exactly kind of annuity you need, get quotes from an annuity supermarket such as Hargreaves Lansdown or Annuitysupermarket.com