Monthly Archives: December 2008

A cold and frosty end to 2008

What a year it’s been. Certainly one to forget. We’ve had stockmarket turmoil around the world, the end of Woolworth’s, job losses, falling interest rates, falling annuity rates. Then we get freezing fog today to round it all off.

You’ve probably seen a drop in the value of your pension fund this year. You might have even delayed your retirement and put off buying that pension annuity. The value of your building society savings won’t be what they were.

Then we had the problems of the Northern Rock and the Bradford and Bingley. Who’d have thought it?

No, it’s not been the best of years. Hopefully, you’ve still got your health. That’s really what matters as we move towards 2009. Then there’s the issue of studying your pension options for your impending retirement.

Are you planning to buy a pension annuity during 2009?

Putting it another way; are you planning to retire during 2009 and considering a pension annuity as a vehicle to provide your valuable retirement income? If the answer to this is ‘yes’, start looking at your options now and ask yourself some questions:

Do you want to spend your reduced pension fund on a pension annuity?

Might you be better off by not committing to an annuity just yet, perhaps by opting for a contract such as income drawdown instead?

If you are going to go for an annuity, are you sure you can find the best annuity rates for your circumstances?

Are you sure you know enough about what is available to you? Have you sought advice?

There are more questions, I am sure, but the main thing is that you give yourself time and get a specialist working alongside you. The right choice of retirement income could be worth a lot to you in your years in retirement.

Still no result for Equitable Life annuity holders

It is now nearly ten years since newspapers first reported Equitable Life’s refusal to honour guaranteed annuity rates that had been sold to some of its 1.5m savers. In this period, this without-profits fund has cut bonuses and imposed exit penalties on leavers, while policyholder numbers have dropped to 500,000.

And, in 2008, the Government broke a series of promises regarding compensation payments. Chancellor Alistair Darling even told the House of Commons on October 8 that the  Government would report on Equitable Life ‘shortly’.

By the time of the debate about the Queen’s Speech on December 3, even Gordon Brown seemed to be ashamed of the apparently endless delays over this matter. He promised to respond to the Parliamentary Ombudsman’s report before Christmas. Another deadline missed!

Sadly, about 30,000 Equitable Life policyholders have died since the House of Lords effectively closed this company down.

Surely, we should soon be hearing some good news about compensation for the surviving unfortunate annuity holders and their families.


Pension annuity rules and the EU

Leading pension annuity providers are calling for a rethink of sweeping new EU solvency rules that could force them to hold billions of pounds of extra capital and make them cut annuity payouts to pensioners.

One annuity provider has calculated that under Solvency II, new European rules, due by 2012, (aiming to match the capital insurers hold much more closely to the financial risks they actually face), it would have to hold 20% more capital to back pension annuities. Potentially, this could equate to a 20% reduction in pension payouts for the owners of annuity contracts.

Companies that are writers of pension annuity contracts hold corporate bonds so that they can meet the pension payments promised. However, the recent financial turmoil has driven down the prices of many corporate bonds, highlighting the problems for annuity providers.

If we have extreme market movements, life assurers’ capital could fall very quickly to the level where regulators begin to intervene, for example by potentially preventing them from writing new business.

Some experts state that Solvency II needs to be rigorously reviewed. It needs to ensure that it not only provides an accurate picture of a company’s trading performance for analysts and the market at large, but that the guidelines are actually flexible enough to withstand changing stockmarket conditions, such as those we are witnessing.

Mark Wood, of Paternoster, which takes on the assets and liabilities of mature occupational pension schemes, has called for pension annuities to be excluded from the Solvency II framework. A ‘logical solution’, he stated.

Prudential, another leading annuity writer in the UK, is also known to be concerned about the direction of Solvency II.

What might 2009 hold for pensions and annuities

For all matters of personal finance 2009 is not expected to be an easy year. It is very likely that when it comes to the subject of pensions and annuities that there will be cuts in contributions and scaled-back pension schemes.

2008 can be seen as the year that stockmarkets around the world hit the buffers, and 2009 is going to be the year when the real economy we live with day to day finally realises it has run off the cliff edge  and starts falling. 

The financial services, construction and retail sectors have all suffered sharp reversals recently, resulting in a contracting economy and job losses. We now have to go through the very slow process of de-leveraging, paying off debts and adjusting to the new reality. 

As to pension provision, expect to see declining pension contributions; employers announcing pension scheme restructuring to reduce costs; and more people delaying retirement or to retiring on a lower annuity income than they had been planning for.

Unfortunately, it is likely that pensions annuities rates are going to keep heading down throughout 2009.

We might with any luck see some movement from the government regarding how pension benefits are paid out from age 75, i.e. a change in the requirement to buy a pension annuity by that age.

2009 could therefore be a very difficult year financially, and there will be many facing redundancy. However, people will still want to retire and on the best terms available to them, and there will still be some pension options in the market which will be worth taking up.

Don’t just plump for a single life pension annuity

Well, not if you are married, anyway. If you have received annuity quotes from your existing pension provider they will have quoted you on a single life pension annuity basis, basically because they don’t know if you are married or not.

If you do happen to have a spouse you need to explore beyond this single life annuity quote. Why? To provide for your spouse in the event of your untimely premature death.

How does this work? Well, if you take out a single life pension annuity and die before your spouse he/she gets nothing. The annuity effectively dies with you. There are two avenues to explore. First, a guaranteed period can be built into annuities, meaning that should you die in that period, typically 5 to 10 years, the annuity is still paid out for the balance of the period.

Secondly, and perhaps a better option because of longevity, is for a spouses benefit to be built in to the annuity contract. Then, if you die first, the spouse you leave behind would receive ongoing annuity payments around half to two-thirds of what you received, depending on the choice you make at the outset.

The catch? Choosing either of the above will reduce the amount of annuity payments you receive initially, moreso in the second scenario. The benefits? You are planning to take care of your spouse in the event of your early death. If nothing else, that should be worth a few brownie points.

And, don’t forget the issue of ill health. This can lead to greatly increased enhanced annuity rates.

Just how much can you get from a pension annuity?

A longer version: how much annuity income might you be able to get by spending your pension fund via the open market option (OMO)? This is the option you have at retirement to move your pension fund from the company you have saved with to another annuity provider to get better annuity rates for your circumstances.

Let us assume there are six different sets of annuity rates out there; A, B, C, D, E, and F. Precise figures don’t really matter. The thing is, though, you could be entitled to any of them. A being the lowest, and F being the highest. Confused? Let me explain….

Firstly, we’ll assume you are using the OMO. ‘A’ could be the lowest rates available when shopping around for a pension annuity.

‘B’ could be the annuity rates available from your current pension provider, possibly slightly higher.

‘C’ could be the annuity rates available if you are a regular smoker.

‘D’ could be the rates available if you have a mild form of ill health, a mild medical condition which could shorten your life expectancy.

Then we have ‘E’, which represents enhanced annuity rates if you have a more serious medical condition that could shorten your life expectancy even more.

And then we have ‘F’. ‘F’ represents a very serious medical condition or conditions that could have a really damaging effect on how long you might live. This puts you into the impaired life category.

From an annuity providers point of view the less time you are expected to live in retirement the more they reckon they can pay you each year until you do die. Because they pay out on these annuities for a reduced period of time.

So, there is a range. ‘A’ could be the lowest annuity rate on offer to you, and ‘F’ could be the highest. It depends on your circumstances, and you could fit in anywhere between ‘A’ and ‘F’. The thing is, though, the gap between the lowest and highest could be substantial. The highest could be 80% more than the lowest for example. In figures, this could mean the difference between an annual annuity income of £3000 per year and £5400 per year. A huge figure.

You really do need to find out where you fit between ‘A’ and ‘F’. Take advice, find out. It could really boost your retirement income.

Pension transfer service launched for annuities

A new pension transfer service is being launched for annuities by leading ecommerce standards body Origo, in conjunction with 16 UK annuity providers. This to speed up service levels for customers.

It is being called Options, and it is an open market pensions transfer service designed to speed up transfers being made utilising the open market option (OMO) and immediately vesting personal pension (IVPP) transfers between provider firms. This will basically allow the process for the customer to receive the best pension annuities rates to be made easier and cut out delays.

The receiving annuity provider loads an application onto the service, and then notification is sent to the ceding pension provider to begin the customer data and fund transfer process. This process will be carried out electronically, using newly configured standardised processes. Once the transfer is complete, the receiving provider will then set up the pension annuity and start payment.

This move is welcomed, and whilst advisers will have no direct interface with Options initially, the system will ensure that forms are completed fully and accurately. To support the proposition, there is an initial target of a 30 day turn around from receipt of an annuity application. This is believed to be  not only realistic but should reduce over time.

You think it’s all over…..well it isn’t

Well, Christmas might be over for another year, but the retirement plans you are considering are just starting. And it’s best to plan ahead. So, if you are going to retire in 2009 start looking at information about annuities now. Get to know what pension options you have available to you.

With the ongoing stockmarket turmoil and falling interest rates (leading to reducung annuity rates) is a pension annuity the right contract for you, or might income drawdown be better where you don’t have to commit to spending your reduced pension fund?

The thing is, if you are looking at this annuity website for annuity quotes it means you are considering what’s best for your retirement income. Whenever you are to retire next year get a specialist adviser on side now. It could prove to be a very wise move.

Ther are a miriad of options available which could prove better for you than a pension annuity, even with the best annuity rates, and things are changing quickly to reflect the shift in requirements of today’s retirees. A lot of detail can be found on this annuity website, but you will be much better off talking through your full circumstances with an adviser from Origen. You could even offer them a mince pie if you’ve any left.

Some frightening statistics about pensions and annuities

We have a very complicated British pension system. Just look at some horrifying statistics:

Only pensioners in Latvia, Spain and Cyprus are statistically more likely to fall into poverty than those pensioners in the UK;

2.5 million older people in the UK now live on less than 60% of the average national income;

Up to 9 million people working today have no other pension provision than the means-tested state pension of around £124 a week;

The average pension fund a UK employee builds up in the most common kind of private-sector personal pension scheme is only £25,000, which will give a single man of 65 an annual annuities income of just £1,960;

Even if you save up a whole lot more in your pension fund, £100,000, that will currently buy you, at 65, an annual pension annuity income of only £4,500;

Over the last 30-odd years, because wages are always slightly ahead of inflation, the actual value of Britain’s basic state pension has plunged by maybe around 50%;

In the year to from October 2007, we paid a total of £6.7bn into our pension funds, but they are worth £157bn less because of the stockmarket crash than they were before;

Once we’ve finally extracted our pension pot, we are obliged to use it to buy a pension annuity (a monthly income for life). We do that, naturally, from an insurer, which costs us a fee and, with interest rates falling (leading to lower pensions annuities) and life expectancies rising, ensures we can expect less and less for our money;

5 million people lost around £13bn in the private pensions mis-selling scandal;

The basic state pension in the UK is only 31% of average working pay (the lowest in Europe).

There’s probably more, but, hey, it’s Christmas.

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