SAVERS tempted to cash in their pension pot under new rules taking effect in April have been warned against turning their backs on “good value” annuities.
Figures published by insurers last month showed that annuity sales fell by half in the months following the Budget announcement that retirees will, from April, be able to take their entire pension pot as a cash lump sum, including 25 per cent tax-free. The remainder will be taxed at the individual’s marginal rate, rather than the current 55 per cent charge that effectively forces many people to buy an annuity.
The returns paid on annuities have fallen too, as providers have responded to reduced demand and lower gilt yields by slashing rates.
Concerns are growing that large numbers of people for whom annuities are the most suitable option will instead enter drawdown (where their pension remains invested and they take income from it in tranches) or taking their entire pot as cash.
The Financial Conduct Authority (FCA) said on Thursday that, for people with average-sized pension pots and who are risk-averse, annuities bought on the open market still offer better value than drawdown.
The key lies in retirees buying their annuity on the open market, rather than directly from their existing pension provider.
But in the latest in a series of damning reports on the annuities market, the regulator said pension providers were failing to make their customers aware of their rights to shop around for an annuity.
Sarah Tory, financial adviser at Shepherd & Wedderburn Financial in Edinburgh, said: “Shopping around at retirement is key as many thousands can be added to someone’s lifetime pension income by spending some time at retirement stage and understanding what is available.”
The ability to buy your annuity from any pension firm is provided by the open market option (OMO).
But 60 per cent of annuity buyers don’t shop around for a better deal, eight in ten of whom could get a better deal if they did so, according to the FCA.
It now wants firms to show on their annuity quote how it compares to others available on the open market.
“Possibly it is inertia or fear of financial products that makes most take what they are offered at retirement stage,” said Tory. “However, I suspect it is more a lack of knowledge of the options available.
“This addition to a quote could be what is needed to highlight some of the poor deals on offer.”
Worst hit are those entitled to enhanced annuities, which pay out higher incomes to people with medical conditions and certain lifestyle characteristics, such as smoking.
The FCA has asked firms to review annuity sales dating back to 2008 to identify customers with medical conditions who have missed out on the potential for higher rates through enhanced annuities.
Those who do buy enhanced annuities can boost their retirement income significantly, according to Andrew Tully, pension technical director at MGM Advantage.
A 65-year old with a £50,000 pension pot would get an annual income from a standard annuity of £2,536, at current prices, or £3,298 if he qualified for and bought an enhanced annuity, MGM’s figures show.
“Unfortunately the vast majority of people buying from their holding pension provider do not benefit from these higher rates, and there is typically a 30 per cent gap between standard and enhanced annuity rates,” said Tully.
“Given up to 60 per cent of people can benefit from a higher income from an enhanced annuity, this affects a huge number of retirees and equates to a significant difference in income over a typical retirement.”
Those who qualify for an enhanced annuity are far less likely to buy one if they fail to shop around. Just 5 per cent of those who buy from their existing pension provider take an enhanced annuity, compared with 50 per cent of those who buy on the open market.
But the changes taking effect in April could result in even fewer people getting the most suitable deal for their pension pot.
“Having access is a good thing but can detract from the fact that, fundamentally, pensions are saved to provide an income for life The only sure way of knowing what this will be is through the purchase of an annuity,” said Tory.
In some cases an annuity may be best used for just part of the pension pot, with the remainder invested or taken as cash, she pointed out.
“For people who are low risk, income dependent and have a small pension pot an annuity may well be the best option and by shopping around and making it the best it can possibly be is no bad thing.”
Act fast if you want to buy the new Pensioner Bonds…
The government’s new Pensioner Bonds are expected to fly off the shelves when they launch next month after the Chancellor confirmed the rates on the products.
The NS&I bonds will be available over one- and three-year terms to people aged 65 and over.
The one-year term will pay 2.8 per cent while the three-year issue will pay 4 per cent a year, the rates that were trailed when the bonds were first announced in the Budget in March. The returns are significantly above the best deals currently available in the cash savings market.
The maximum investment will be £10,000 and savers will be able to take out one of each term, allowing them to deposit £20,000 in total, but the interest will be paid net of basic tax.
But with a total funding limit of £10 billion, the bonds are likely to be on sale for only for a brief period, warned Rachel Springall, finance expert at Moneyfacts.co.uk.
“These deals are likely to be taken up very quickly, so register for the newsletter and keeping an eye out for the launch date is vital so savers don’t miss out,” she said.
“On the downside, the fact that these bonds don’t offer a monthly interest option will be disappointing to those looking to supplement their income.”
The date of issue has yet to be confirmed.
For more information, visit http://www.nsandi.com/savings
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