Monthly Archives: February 2012

What about an annuity clearing house

The UK Government is facing fresh demands to bring about an industry-wide annuity clearing house as part of radical new proposals to make shopping around using the open market option at retirement compulsory. The Association of British Insurers (ABI) is currently working through various details of a new so-called shopping around code of conduct for insurance companies designed to greatly increase take-up of the open market option by raising customer awareness through much improved communication and processes.

Centre for Policy Studies’ (CPS) Michael Johnson says that insurance companies should develop a new annuity clearing house system within which all insurance companies (the annuity providers) would participate. Under his proposals, a standardised form would be sent to the annuity clearing house, via the pension fund administrator, around three months prior to retirement detailing any health and lifestyle issues and the type of annuity actually required. Insurance companies would then bid for business on a daily basis.

Johnson states that this process should introduce what he calls pricing tension and, with all transaction prices being revealed at the end of the day, the transparency that is at the moment lacking, meaning that individuals would then have the correct information they require to choose the right annuity which best suits their requirements. He went on to say that if the financial services industry doesn’t establish an operative annuity clearing house within the next two years, the coalition should facilitate a national annuity support and broking  service.

Johnson says that smaller pension funds should be packaged together ahead of bidding to encourage stronger bids from insurance companies, by giving them a package of smaller pension funds to bid for, rather than lots of individual ones. He says the annuity clearing house system would also create a properly tailored market for enhanced annuities.

Enhanced annuities pay higher retirement incomes to those indivuduals who have certain health or lifestyle issues, and could offer annuity rates up to 40% higher. The more serious the medical condition(s), the higher the annuity rates and the higher the retirement income. Unfortunately, at the moment, not enough people are aware of enhanced annuities and the benefits they bring – hence the need for change in the important at-retirement market.

Pressure on pension annuity rates

With the ongoing downward pressure on pension annuity rates, MGM Advantage reveals that an extra £86bn is needed for a comfortable retirement. It claims that if people shop around utilising their open market option effectively they can increase their vital retirement income by up to 50%. The average retired individual feels they need an extra £140 each week, or about £7,300 a year, to be financially comfortable in their retirement, recent data from MGM Advantage shows. For the retireed population as a whole, this equates to about £86bn extra each year.

Aston Goodey, director at MGM Advantage, stated that financially these are difficult times for the retired population, and that ongoing  inflation has increased the everyday cost of living, while returns on people’s savings have fallen due to the effect of historical low interest rates. He went on to say that this environment makes it even more crucial that individuals take the appropriate steps to ensure they maximise the retirement income they get from their pension fund and claim any benefits to which they might be entitled.

Aston added that with the continued pressure on pension annuity rates, people should be shopping around using their open market option to ensure they get the best product and the best annuity rate possible, with many people being unaware they might qualify for enhanced annuity rates due to underlying medical problems, such as perhaps high cholesterol, high blood pressure, or asthma.

MGM Advantage has published a useful checklist of things for people to think about when making important decisions about their retirement. It has urged retirees to claim all state benefits they might be entitled to, claiming data suggests this group are actually missing out on as much as £5bn a year in unclaimed pension credit, various housing and council tax benefits, as well as attendance allowance and disability living allowances.

MGM urges people to shop around for better pension annuity rates at retirement and not to simply accept the pension annuity rate offered by their existing pension provider. It also highlighted to retirees that they should check any old savings accounts which they might have lost touch with and to check if they have any old national savings accounts or premium bonds, and to check in case there are any unclaimed prizes.

What exactly are pension annuities

Pension annuities are basically products by which you can protect your lifestyle after you’ve retired, no matter how long you might live. Pension annuities converts a lump sum of money, which is usually a hard saved retirement fund or pension lump sum, into an ongoing regular secure retirement income that will be paid for the rest of your life, no matter how long you might live for – statistically you’re expected to live for around 22 years in retirement, health permitting.

The income received from pension annuities is taxable and the amount of income that you get each and every year will depend on the size of your pension fund. It will also vary according to the annuity rates the annuity company or annuities provider actually offers, your gender, your age, your health, your lifestyle, and the type of annuity that you choose. If you have certain medical or lifestyle conditions, for example, you’ll be better off with an enhanced annuity, which pays higher annuity rates.

We can help you get the best annuity rates available. If you are lucky enough to have had a with profits pensions fund, and you choose one of the better annuity providers, you could be pleasantly surprised at how much retirement income you could benefit from.

With pension annuities you are allowed to take up to 25% of your pension fund as a tax-free cash lump sum and put this into a pension annuity if you want to. You can then usually convert the remainder of your pension fund into an annuity for your retirement income.

Many people opt for a conventional annuity or a level annuity. These give you a regular secure income that stays the same each and every year; it will not rise with ongoing inflation. Several other options are worth considering to protect you from the ever rising cost of living. Pension annuities that give some of the best rates also include increasing annuities – these annuities can provide an income that rises each and ever year, linked to the RPI, or they can rise by a set percentage each year. Then there are guaranteed annuities – these annuities continue to pay an annuity income for a selected period to someone that you nominate, if you were to die prematurely after retiring.

Next, we have joint-life annuities – these give your partner some or all of your continuing annuity income if they outlive you. Last but not least, we have investment-linked annuities – these allow you to take an income, but your pension fund bears the risks of being invested.

Make sure you shop around for the best annuity rates. It can make quite a difference to your retirement income.

Drawdown instead of a pension annuity

Income drawdown is a much vaunted and popular alternative to buying a pension annuity. It allows you to draw a regular and variable income from your pension fund while the pension fund remains invested. There are actually two versions of this – one is capped drawdown and the other is flexible drawdown. If you select capped drawdown as your preferred option at retirement, you can take some of your hard earned pension fund as a tax-free cash lump sum, as you can if you purchase a pension annuity.

Flexible drawdown will enable  you to draw an income in excess of the 100% GAD (government set) limit. However, in order to do this you must first meet a Minimum Income Requirement (called MIR) of £20,000 per annum. This £20,000 MIR may only be taken into consideration if it’s from the following various sources: your basic state pension, your additional state pension, other scheme pension income, as well as income from a pension annuity or annuities. Other types of state benefits, any drawdown income, any purchased life annuity income and any investment income you might have do not count towards the MIR.

If you select capped drawdown instead of a pension annuity as your preferred option at retirement, we’ve already mentioned that you can take part of your pension fund as a tax-free cash lump sum. The maximum amount you can take as tax-free cash is 25% of your pension fund value (unless you happen to have a protected pre-6 April 2006 tax-free cash entitlement in excess of this 25% figure). You are then able to take a regular income from the remaining pension fund (which stays invested). The income you take can be between the maximum level permissible and zero, and this income is naturally subject to income tax. The remaining part of your invested fund continues to enjoy the favourable tax treatment offered by pension schemes.

It should be noted that capped drawdown and flexible drawdown arrangements are not for everybody. Most people still buy a pension annuity to provide them with their retirement income. However, if you have a larger pension fund at your disposal and you understand the risks involved then one of these arrangements might be right for you.

Annuity rates and gender discrimination

With less than twelve months before the ECJ rules on gender discrimination and annuity rates come into being, there is still some confusion as to how insurance companies should respond, according to various specialists. Insurance industry dispute resolution lawyers Clyde & Co believe there is a risk that various insurance contracts could unravel if insurance companies were to interpret the new ruling in the wrong way. Gerry Quirk, a partner at lawyers Clyde & Co, suggests that the uncertainty lies in what should be thought of as a new contract.

In the Budget 2011, Osborne suggested that the EU Commission and HM Treasury are currently providing differing and conflicting guidance around this important matter. The EC has issued fresh guidelines stating that a new contract actually includes any amendment to the terms or conditions of a previously existing contract in addition to a renewal of a contract; but that a tacit renewal is in fact not a new contract.

However, the various issues of contract law are determined on a national basis, and not on a Europe-wide basis. Here in the UK, HM Treasury has stated in its consultation on the UK response to the gender discrimination ruling that the question will be a matter for UK law to consider - which might not be in accord with the Commission’s view. Indeed, to a certain extent insurance companies are stuck somewhere between a rock and a hard place, stated Quirk, adding that a conservative approach to the issue reduces the risk of challenge but will have an impact on contract pricing and, potentially, general competitiveness.

The Commission has outlined some guidance on when it considers gender might still be taken into account in calculating prices. However, Clyde & Co have noted that there is no court ruling on these important issues and the position is still not actually free from doubt.

When it comes to annuity rates, currently women get offered lower annuity rates than men because they’re expected to live longer. These new gender pricing rules might well reduce annuity rates across the board, and they’ll certainly be much lower for men than the current position. We won’t know until much nearer the implementation of these new rules the effect they’ll have on annuity rates. If you’ve a chance, buy your annuity before the year end.

Adviser charging for annuities

Pension industry figures have raised various concerns over HMRC’s stance on adviser charging on annuities. Problems with how annuities advisers will collect their fee from an annuity purchase after the retail distribution review (RDR) comes into place have appeared because of the overall tax treatment of pensions. This difference of opinion has created a round of representations from IFAs and annuity providers to HMRC, Tom McPhail, of Hargreaves Lansdown, said.

The difficulty arises when a customer wishes to purchase an annuity from a different company to the one they initially saved with, using the open market option. Annuity advisers have assumed that, when a customer selects adviser charging to pay for their annuity purchase, the existing pension provider would release the customer’s tax-free lump sum (PCLS), before transferring the remaining pension fund to the annuity provider. At this stage, it had been anticipated that the annuity provider would pay the annuity adviser’s fee to the IFA before investing the rest of the fund into the customer’s annuity.

However, HMRC has highlighted issues with this model, believing that the annuities adviser charge should be taken proportionally from the customer’s entire pension fund, McPhail said. In this scenario, a proportion of the annuity adviser’s charge would have to be taken from the tax free lump sum, paid out by the first company, and the rest of the charge taken from the balance, paid out by the second company, causing a series of difficulties, McPhail went on to state, adding that the first company probably would not want to cooperate fully because they do not have the systems to take part of the annuity adviser’s charge from the tax free lump sum.

The first company would also be unlikely to want to actually bear the cost of a transaction they are not handling; i.e. the purchase of an annuity with another company. McPhail added that if HMRC will not think again, it may lead to advisers telling customers to buy their annuities via execution-only annuity services as paying an adviser charge in this way would be too complicated and expensive. 

This is precisely one of the reasons RDR should be put off for a further period.We are only 9 months away from its implementation and all the implications and consequences have not been properly assessed. RDR should not be implemented fully until all the ramifications have been looked at. It’s time the Government actually got a grip on things and realise that RDR is probably going to cause more problems for customers than it’s going to solve.

MP wants NEST style annuity provider

MP wants to see a NEST-style annuity provider. David Mowat has demanded that the government creates a national low-cost annuity provider to help protect retirees from poor retirement incomes. He presented a list of five proposals to attempt to reform the annuity market during a recent Commons debate. Mowatt said that pensioners are currently unable to understand all the different types of pension annuities on the market, do not realise they can utilise the open market option, and are dissuaded from using the open market option by their existing pension providers.

This means many retirees buy pension annuities which are unsuitable for them, suggests Mowatt. He stated that the government should establish a nationalised annuity provider, through which pensioners could invest directly in Treasury bonds, and that this nationalised annuity provider would be the sort of organisation that was a hallmark for both fairness as well as best practice. He went on to state that the government should consider establishing an equivalent of the National Employment Savings Trust (NEST), specialising in providing low cost annuities. He also said the government should actually enforce the open market option via legislation to stimulate competition and customer awareness in the annuity market.

Radically, he suggests that the government should think about making it illegal for the organisation that administers the pension saving regime to also provide a pension annuity, and this way we would get new entrants to the at-retirement market which are likely to be smaller and hungrier, and possibly more efficient.

Mowatt suggests that the government should at least establish a rule whereby any annuity sold must actually be signed off by an IFA to ensure annuity companies don’t rip off the pensioner. The MP went on to say that the government should insist the pension industry creates a few simple categories for pension annuities to improve their transparency, taking exception to the number of annuities available. 

Work and pensions minister Mr. Grayling said his department fully supports retirees’ engagement with the open market option. He pointed to the work the Department of Work and Pensions and the Treasury has carried out with the ABI and the NAPF to improve transparency in the sometimes complex pensions industry. Grayling also pointed to the ABI’s recently proposed code of conduct that would prevent insurance companies (the annuity provider) from including their own rates in pre-retirement wake-up packs for customers approaching their retirement.

Pension annuities sector growing

Those approaching retirement, potentially looking at annuities for their retirement income, is the fastest-growing sector of our population. The sector has tremendous influence on our society as a whole. However, we could do with understanding more about its diversity, and its various hopes and fears for retirement. To understand this sector better MGM Advantage commissioned some research which illustrates how they live their lives. Issues included how much wealth they have, do they have an understanding of retirement products and the various risks, how healthy they might be, and how they spend their leisure time. In addition, they wanted to find out more their emotions about retirement.

MGM Advantage, a leading provider of pension annuities for those with health or lifestyle issues, decided to use psychology to break down this sector into different types or groups, with varying characteristics, which could help them get a better understanding of how each person approaches their retirement. The research was conducted recently online by Research Plus between 7th October and 17th October 2011 with 2086 UK adults taking part aged 55 years and over - 1261 were actually retired and 825 weren’t.

The proportion of older people in the UK is growing. People who make up this sector do not believe that the UK society in general treats retired people well. Interestingly, though, around  36% of them undertake to carry out some charitable or voluntary work. Lack of money and deteriorating health are their two biggest concerns, but they also face emotional and health pressures, as well as financial pressures. The majority in this sector try to maintain their living standards in retirement, but financially it’s a struggle, and they have to be careful with their budgeting.

How can we help this sector? These people need help in preparing for their retirement but also in securing a decent retirement income from an array of different retirement products and options – interestingly, 72% were unaware that various medical conditions could entitle them to a higher pension income through enhanced annuity rates. Shopping around using the open market option for the best retirement income product is really important – but a significant 31% had not even heard about the open market option and the ability to look around for better pension annuities.

If you’re approaching your retirement, call one of our advisers, and they’ll discuss the various pension annuities that might suit you.

Just Retirement’s fixed term annuity

If you want greater control and flexibility from an annuity you could consider Just Retirement’s recently launched fixed term annuity contract. It is designed to do just that; give you more flexibility and greater control in your retirement. It is available through advisers, and the contract is a type of drawdown arrangement that provides you with a guaranteed income (within government pre-set limits) for a term you select, from a minimum of 3 years up to a maximum term of 15 years.

You will receive at the end of the initial term a Guaranteed Maturity Amount (GMA) to invest in another pension plan of your choosing providing you survive until the end of your initial selected term.  The level of regular income you can buy with your GMA is not guaranteed and could be more or less than the amount you received from your fixed term annuity.

Your GMA is not affected by ongoing investment performance risk and you know what you’re going to get at the outset. This gives you the ability to adjust your retirement planning needs at the end of the initial Plan term to take account of future changes in your circumstances: you might be fit and healthy now, but what if you were to fall ill later on in your retirement? If this happens, you may qualify enhanced annuity rates. You might get divorced in later life, married (or remarried) or your spouse/civil partner may die prematurely. If so, you might want to amend your retirement benefits to match your new situation. Then there’s your retirement income requirements. These might change later in your retirement.

Your selected level of annuity income might be restricted during the term to ensure that it remains within government limits. Your circumstances might change after your income payments have commenced, but you cannot change the level of annuity income selected. The higher the level of annuity income you select at outset, the lower the GMA will be.

This fixed term annuity allows you to approach your retirement in a series of stages, rather than you having to make a once and for all decision on the day you retire. It also has a quite innovative conversion feature, which is available if you take out the option called Plan Protection at the outset, which allows you to convert your plan to an enhanced annuity before your initial fixed term comes to an end, providing you qualify – on the grounds of your health or lifestyle.

We can get you the best annuity rates

Look no further. We can get you the best annuity rates. Annuity rates are based on numerous factors, and it’s important you get the best annuity rates for your individual circumstances. If you have various medical conditions or lifestyle conditions you could be eligible for up to 40% more annuity income. If you’re considered to be fit and healthy the annuity rates you’ll be offered by different insurance companies can vary by around 20%. We can get you the best annuity rates available by comparing annuity quotes from all companies.

That’s not all. If you’ve saved into more than one pension plan we can help you put your various plans together to get you the best deal. All annuity quotes are free, and there’s no obligation. Should flexibility with your important retirement planning be something you desire, we can advise you of the various different retirement options available from across the market. However, should you decide to buy an annuity it’s important you get the best annuity rates, as this can make a huge difference to the amount of retirement income you get. There will be a substantial difference in the amount of retirement income available to you from different companies.

It’s extremely unlikely you’ll get the best annuity rates from your pension company. Annuities pay a guaranteed regular income for the rest of your life, and they’re provided by insurance companies, but not all offer competitive annuity rates. In fact, very few do. Many people buy an annuity because they offer you security and peace of mind – you know you’re going to get a guaranteed regular income for life. Mind you, you can’t change your mind and alter an annuity once it’s been set up. Other products do offer more choice and flexibility.

There aren’t many annuity companies offering competitive annuity rates. Most are household name insurers, but there are also a few other companies who tend to specialise in enhanced annuity rates, competing for your annuity if you have certain medical conditions or lifestyle conditions. We’ll compare annuity quotes from all these annuity companies to find you the best deal.

So what are you waiting for. Contact one of our advisers today and discover just how much additional retirement income we can get for you.

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