The Financial Conduct Authority's (FCA) thematic review into annuity purchases has shone the spotlight firmly on people rolling over into the holding provider's own annuity.
Not benefiting
from higher rates
The FCA evidence shows annuities have provided good value when people have used the open market option to shop around and are receiving a higher income through enhanced annuities, which take into account health and lifestyle. 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% gap between standard and enhanced annuity rates. Given up to 60% of people could potentially 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.
More complicated choices at retirement
Unfortunately, the changes coming in April do not automatically mean better outcomes, as the choices at retirement will become a whole lot more complicated. The guidance guarantee will help some people, but given the likely low initial take-up, a second line of defence is needed. This will minimise the number of people who end up being sold solutions that do not meet their needs or pay out significantly less than the competitive deals available in the open market.
Not shopping around
On a conservative basis, the true cost of people not shopping around for their annuity income is around 30%. A 65-year-old could receive an income of £2,536 a year with a standard annuity today, or £3,298 a year with an enhanced annuity, from a purchase price of £50,000. Over retirement, the difference in income is £16,002, or 30%. This income gap between standard and enhanced rates has been relatively consistent over time and makes a huge difference in the income available over a typical retirement.
Source data:
Annuity rates are based on analysis of data supplied by Investment Life and Pensions Moneyfacts to Advantage (30 November 2014). The analysis looked at level annuities without a guarantee. Income levels are based on a pension pot of £50,000 and a retirement age of 65. All rates are on a gender-neutral basis. To create total retirement income figures, MGM multiplied annual annuity income by 21 years in the case of a male aged 65 at retirement. Enhanced rate figures are from a sample of smoker rates and enhanced rates based on health conditions.
INFORMATION IS BASED ON OUR
CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
