Annuity window exposes pitfalls for pensioners

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CALLS are mounting for savers to be given more help with their pensions at retirement after insurers published figures exposing the raw deal many get from annuities.

People who fail to take advice or shop around for their annuity are settling for retirement incomes nearly a third lower in some cases than they could receive from the best deals, according to the “annuity window” launched by the Association of British Insurers (ABI) last week.

The figures underline the urgent need for reform of the market, experts say, with some warning that retirees will continue to be shortchanged unless annuity advice is made compulsory.

Annuities are used by the vast majority of people at retirement to convert their pension savings into a regular income. The income paid by annuities has plunged by almost 30 per cent since 2009, Axa Life Europe estimates, due largely to the effects of quantitative easing.

The ABI’s new service supplies example quotes for a dozen customer profiles and marks the first time all its members have disclosed their annuity rates. Some, particularly the least competitive providers and insurers running closed pension funds, have until now refused to do so. However, the rates are updated only every two months and the tool excludes non-ABI members, among them some of the most competitive providers.

Otto Thoresen, director general of the ABI, said: “The industry is determined to do all it can to help people make the right decision to secure the best possible pension.”

But the new rate tables underline the risks retirees take if they don’t shop around for their annuity. The best conventional annuity pays out 31 per cent more than the worst, equating to a difference of more than £1,400 a year in retirement for a £100,000 pension fund.

The gap between the best and worst rates is up to 46 per cent for enhanced annuities (available to those with ill health or certain lifestyle characteristics, such as smoking).

Experts welcomed the greater transparency from insurers, but warned that savers need more help at retirement.

Malcolm McLean, consultant at Barnett Waddingham, said: “Whilst publication of these tables is helpful and a step forward in some respects, they also serve to illustrate the extent of the problem facing would-be annuitants in securing the best deal.”

Carl Melvin, certified and chartered financial planner at Affluent Financial Planning in Paisley, claimed that without up-to-date information and the inclusion of all providers there was “no point” in the ABI publishing the rates.

“The cynic in me views this as a measure to increase business for ABI members rather than a genuine attempt to help consumers achieve best value annuity purchase,” he said.

“We all know that poor value annuities bought by unadvised consumers result in bigger profits for insurance companies rather than better value for consumers.”

Melvin hit out at the ABI for failing to promote the value of taking advice when buying an annuity. Its example rates page states that “if you use a shopping around service or a financial adviser they will search the market for the best deal for your particular needs, 
but this service will be subject to a fee”.

But Melvin said: “That suggests taking advice will cost you money, therefore putting off consumers who fear being charged big fees for advice.”

He warned that savers buying an annuity without advice are falling for a false economy. While the ABI tool focuses on price, retirees also have to consider factors including the ­timing of purchase, the type 
of annuity and inflation protection.

“When you take lifestyle issues into account and the availability of enhanced annuities, it becomes more complex. Good knowledge is worth its weight in gold as poor knowledge or no knowledge can result in you buying the wrong thing,” said Melvin.

Not only that, but for most people annuity purchase is a one-off event, with no way back if the wrong option is taken.

“You can’t take your annuity back for a refund or exchange unlike an item from, say, B&Q,” said Melvin.

“As for value, would you pay a fee of, say, £1,000 if your annuity income would be increased by £40 or £50 a month? Of course you would, as you would enjoy much more income over the remainder of your lifetime.”