(PRWEB UK) 6 March 2013
The authorities have moved over the years to ensure that more of us are shopping around for the best deal in retirement starting with the introduction of the Open Market Option as part of the 1975 Finance Act. This allowed UK retirees with private pensions to shop around for the best annuity offered from the whole market in the hope that this would provide a higher income in their retirement. This option, which was initially slow to take off, has gained momentum over the years and today we see around half of retirees shopping around with their pension pots. Further measures announced recently will ensure even more will take this option and receive a better deal. Most notably the Association of British Insurers (ABI) Code of Conduct which proposes making it much more difficult for a retiree to walk blindfold into taking the usually lower income offered by their existing pension company.
In the past the incumbent pension company would send the retiree a quote for their annuity, together with the application forms and a return envelope, hoping that they would miss the few lines of text buried in the mountains of paper work encouraging them to shop around to get a better deal. Now, no application form will be provided and the text prompting them to consider all available options will be much more obvious. This is pertinent to the announcement by The FSA in early 2013 that they are to focus their efforts in ensuring that even more people get the opportunity of a better deal at retirement and will look closely at how pension companies offer their rates to those considering retirement.
So far so good? Well yes, but the world has moved on since 1975 and annuity rates certainly have. A 65 year old retiree today will, for a traditional annuity, receive a rate of just less than 5.8% therefore £100,000 would buy an income of £5,758 for the rest of their life; whereas in the 1990’s this would have been closer to £16,000 for the same sized funds. With annuity rates so high at that time why would anybody consider any alternative to the standard annuity? Well, not many people did and for that matter there weren’t many alternatives either; at present with annuity rates at historic lows, there are many substitutes for the traditional annuity. For a start we now have medically enhanced annuities that take into account the annuitant’s health and lifestyle. The annuity company take the view that a pre-existing illness or an annuitant’s lifestyle could lead to a future disorder, they factor this into the life expectancy of the retiree and offer them a better rate.
However, for those unlucky enough or it might be said lucky enough, not to qualify for an enhanced annuity there are now many alternatives to the standard rate annuity. Firstly, there is, for example the Invested or With Profits annuity, here, the funds remain invested for the life of the annuity. This option would give an initial income of £7,064 for the same £100,000 invested for the same 65 year old. Obviously, this option comes with some risk attached, but for the right investor this could be the perfect option.
Another example of an alternative to the traditional annuity is the Fixed Term or Temporary Annuity. This option allows someone to retire and take income for a set number of years, typically five, after this time they are given a Guaranteed Maturity Amount with which to shop around again at the end of the term. This would allow them to benefit from any deterioration in health and any future annuity rate increases if they came about; again, for some people the perfect option.
Consideration must also be given to those fortunate enough to have secured pension income of over £20,000 already. They now have the option to withdraw their remaining pension funds in cash, all in one go if they so desire. This option called, Flexible Drawdown, became available in April 2012. For some people a very attractive option.
A traditional annuity is a one off, final investment, made for life, with NO going back. Once it’s set up it is for ever. So with so many alternatives available, that could be much more suitable, why do an increasing number of retirees in the UK not take advice at retirement? There is an ever increasing number of Non-Advised annuity companies who are selling annuities with no professional qualifications. Someone who could have been selling second hand cars last week could be selling annuities this week.
Scott Mullen of My Pension Expert said “As a company around 20% of the annuities we sell are Invested/With-Profits annuities, 28% are Fixed Term Annuities, 46% are enhanced and only 6% are a traditional non enhanced annuity. What this shows is that of all those retirees who come to us for annuity quotes just under half will end up with an alternative to the traditional lifetime annuity whether enhanced or not. Yet with Non-advised companies not offering these alternatives you would expect to say that half of the retirees who go to a Non-Advised company are missing out on a more suitable alternative.”
At retirement advice is crucial because so many of the options are permanent. With so many options available how can a non-qualified individual taking the same remuneration as a fully qualified IFA be a viable option? Surely now is the time to seek more regulation in this area of financial planning or must we wait for the next mis-selling crisis in the future?
My Pension Expert is a company of Diploma Qualified Financial Advisers specialising in retirement options.