One of the more valuable roles an independent financial adviser (IFA) can play is in helping retiring clients get the best annuity rates and therefore the best retirement income. It is a process which requires careful consideration because the decisions you make now can literally dictate your standard of living for the rest of your life. Yet the few advisers who secure a sound reputation for offering great pension annuity advice can find themselves with a pretty lucrative and growing client base.
There are things an IFA should do, though. They should never assume clients know about the open market option (OMO), and, regardless of efforts by both the Financial Services Authority (FSA) and the Association of British Insurers (ABI), it is still estimated that around 60% of over-55s still don’t realise they can take their annuity income with someone other than their current pension plan provider.
IFA’s should assume that every client has a health condition until it is proven otherwise. An enhanced annuity or impaired life annuity is often viewed as a niche market but it isn’t. Around 40% of annuitants have ill health or lifestyle condition that could make them eligible for an enhanced rate. And these increased rates really can make a difference.
IFA’s should be determined to ensure that clients fully disclose all health conditions. Interestingly, annuities are perhaps the only financial contract available where suffering from ill health can work to your advantage. Most people are used to ‘keeping quiet’ about bad health or poor lifestyle choices when it comes to arranging various forms of insurance, but this is one financial situation where it really can pay to stress your frailties and weaknesses.
You need to look beyond the headline rate of income. The various wake-up packs that insurers are now obliged to send out to retiring consumers are actually obliged to show a range of annuity rates including both single life and joint life, and with escalation. This is useful information but inevitably means that the single-life contract looks by far the most attractive option available, and on a level basis. Here, IFA’s should take the time to work with you to balance immediate income needs on a sensible footing against the potential benefits of electing for escalation and/or spouse’s benefits. The different permutations can seem pretty confusing but it is well worth taking the time to understand the options and their ramifications properly.
With interest rates at horrendously historic lows and pension annuity rates well off their mid-2008 levels, you may be tempted to hold off making your purchase in the hope that income levels will possibly improve. But simple mathematics shows that delay rarely pays off. Say that a 65-year old male were to defer his purchase just one year and his pension fund increases by, say, 6% in the interim. Calculations suggest it would take him 10 years to recover the income he lost out on over that period. Moreover, if his pension fund experiences no increase in its value during that period, it would take something like 33 years to recover the lost income. So, rather than delaying, you could be better off seeking out the very best rates available on the open market here and now.
