Independent financial advisers (IFA’s) are said to be lagging behind when it comes to advice about retirement options and buying an annuity. A recent study by Just Retirement has shown one in three IFAs had written fewer than ten annuity cases in the last twelve months. Difficult statistic to comprehend when the annuity market is predicted to be worth £20bn by the year 2012. 

These are challenging times for those people approaching retirement and seeking an ongoing reliable, safe, income stream. With interest rates, annuity rates and investment options all looking a bit lacklustre in the low base rate climate we are witnessing, the traditional life and pensions business models are certainly being stretched somewhat to satisfy the needs of today’s older generation.

The retirement options around today may well be far more complicated, but IFA’s should not be shying away from this. Now is the time for them to stand up and be counted as a vital cog in helping retirees assess all the options available, especially when you take into account that the over-50′s  now own a massive 80% of the UK’s wealth and far from them wanting to ‘retire’; this new so-called ‘third-age’ category are ditching their pipe and slippers in favour of a much more positive outlook on the next phase of their active life.

Longevity is one of the most important considerations when looking at the retirement options available for providing pension income. The current life expectancy for a male of 65 is 21 years and a female 23 years. These changes in life expectancy will have an inevitable impact on the ongoing ability of providers to maintain pension annuity rates at their current levels.

Many clients heading for retirement these days demand much more control over their retirement funds and need a much broader scope of advice on the opportunities open to them to maximise growth potential in order to be in a good position to leave funds behind to their dependants.

So what retirement options are available to spritely retirees? The conventional fixed rate annuity was the only option for many, many, years, then came income drawdown (now called unsecured pension), and in recent times we saw the introduction of the new “Third Way” and “Variable Annuity” type retirement options. All of these bring an array of different product designs and complexity to the growing retirement market. Indeed, this development of a wider choice of flexible retirement products is good for the industry and the retirement market in general, but clearly still somewhere short of offering the amount of freedom some retirees want.

This all means that IFA’s need to have a more specialist knowledge of a wider and more diversified retirement product range than ever before, as a tailored combination of different products might well be the solution to many clients’ needs. It is no longer just about getting annuity quotes and finding the best annuity rates.

This really is a prime opportunity for IFA’s to show their worth in an increasingly difficult and changing environment, and to see their clients off into the sunset of a happy time in retirement. More than anything, bringing innovation to advice is critical. It’s obviously important to recognise the wider choice of retirement products now available have quite a role to play in good retirement planning. It’s not just about annuities anymore!

I’ve been doing a great deal of work on this subject lately, details of which will be on this website shortly, about the range of annuity rates that might be available to you.

First, you have to understand the ‘camps’ they fall into, which actually makes it easier when you start looking for annuity quotes. We have standard annuity rates for those retirees who are considered healthy and of average height and weight. In addition we have enhanced annuity rates for those with medical conditions or for those taking regular medication.

On top of these we also have impaired life annuity rates for those with serious medical conditions, and a much shorter life expectancy as a result. And then we have rates for smokers. Yes, enhanced annuity rates do apply to individuals classed as regular smokers.

Treing to put these into some form of order, or ranking isn’t easy, but it’s fair to say that standard annuity rates are probably the lowest, but even then there can be differences of around 30% between the best and the worst. Next come smokers, who probably get 10-12% more than standard rates.

After this we have enhanced annuity rates, and this is where it gets difficult. These rates vary enormously depending on the severity of the medical condition (mild or more serious), and the type of medication being taken. Lastly, the highest rates are likely to be payable to an individual with a serious life threatening medical condition, and therefore qualifying for an impaired life annuity.

Confusing? Possibly. That’s why it’s best to take specialist advice when looking to source your annuity quotes. Getting the choice wrong can be a costly mistake.

Just how much cash, tax-free cash, that is, can you take from your pension fund before you go looking for the best annuity rates? Let’s take the example of a 60 year old male who would like to take lump sum from his personal pension plan of around £36,000 How much can he take?

The simple, straightforward answer from Des Hamilton, technical director with the Pensions Advisory Service, is that you can take a maximum of 25% as a tax-free lump sum. So, if the pension fund is £36,000, you can take up to £9,000 in cash but the remaining £27,000 must be used to purchase an annuity to provide an income for the rest of your life. For this man aged 60 the annual annuity income will not be great.

However, that remaining £27,000 can actually buy a variety of different incomes, as there are big variances in the annuity quotes from various providers, and it really does pay to shop around, to get the best annuity rates available. Believe it or not, the difference between the best and worst annuity rates can be substantial, maybe as much as 30-40%. And, don’t forget, this is for the rest of your life.

This is the point. When you do come to convert your personal pension into a pension annuity it is important to remember you do have the right to look beyond what you might be offered by the company you have been saving your pension fund with. This facility is known as the open market option (OMO). If you don’t exercise this option, you could reduce your retirement income by a significant amount each and every week, and, when you’ve made your choice you cannot go back later and change to a company that would have paid a greater annuity income at the outset.

There are concerns out there about retirement in general, but also in respect of the annuity rates on offer. Many of the people who had the foresight to set up a pension scheme in their early working lives are getting a surprise when they come to retirement because their annuity income is not as large as they expected. This could be because they have not had their pension arrangements reviewed on a regular basis, and this is very important as individual circumstances do change and in recent years in particular the pension legislation has changed considerably.

A pension arrangement has two main stages; the first is what is known as the accumulation stage which is when the contributions are being made into a pension fund, and these contributions should be reviewed on certain events, say, marriage, children or divorce. The contributions are invested into mainly stockmarket investments. The stockmarket is naturally affected by the credit crunch and is currently very low.

Regular reviews would help to preserve the value of pension funds. Reviews are important at any time but really important within five years of retirement age. During this period the investment strategy  should be changed on a phased basis to lower any inherent risk which is then not so subject to the fluctuations of the stockmarket. Two years ago, stockmarkets were much higher, and this phasing would have helped preserve the value of pension funds and there would have been a larger pot available with which to buy an annuity.

The second stage of a pension arrangement is decumulation, actual retirement, when instead of paying in money, you are taking out the benefits. The post war year “baby boomer” generation everyone talks about is now coming up to retirement and this could unfortunately very well be the worst time for so many people to come to retire, not only because of the low stockmarket values, but also because of the fact that pension annuity rates are low.

Some clients are being advised by their advisers that they defer their annuity purchase and their retirement plans for a few years if possible to give the markets time to recover, but this is not always a possibility and besides people do not always really want to work on past the age of 65. But, if you are about to retire all is not lost, the actual pension annuity does not have to be taken from the pension company that provided the contract that the contributions were paid into. It is possible to shop around for the better annuity quotes utilising the open market option (OMO).

In addition, if you have ill health issues, even for such common things as, say, high blood pressure and/or high cholesterol, or if you are a regular smoker, often a significantly greater annuity income can be obtained. Enhanced annuity rate increases of up to 40% have been obtained for people with more serious illnesses.

There are retirement options other than just taking an annuity which may be even more appropriate for you, especially if you have a larger pension fund of, say, £100,000 or more. This type of contract allows you to take an income whilst leaving the remainder of your pension fund invested, hopefully with the prospect of an increase in its value over time.

People are no longer old when they reach age 65 and more and more of them want to lead an active retirement. In fact, on average, they will live at least another 20 years and that average age is increasing all the time. The decisions you make regarding your retirement options will affect the rest of your life and, indeed, the quality of your retirement.

We appear to now have a ‘high cost of retirement’, with all retirement options being involved. The falling gilt yields we have been witnessing are effectively meaning less money for many individuals  approaching retirement, and that includes the annuity market and the income drawdown market.

This fall in gilt yields is having an impact on those entering income drawdown arrangements and those looking to buy an annuity. In respect of the former experts are suggesting that investors might begin to feel a bit like the walls are closing in on them with regard to their chosen retirement option. According to Alliance Trust’s ongoing study of age-related inflation, those people over the age of 75 face an inflation rate which is much higher these days than the official rate. This age group has benefited somewhat from the decline in gas and electricity prices, but still they face an inflation rate which is 53% more than the official headline rate and 75% more than the inflation rates facing both the under 30′s and 30-49 year olds.

Shona Dobbie, their head of research, states that they are concerned that the real inflation rate facing the two oldest age groups is that much higher than the official rate of inflation, and much higher than the inflation rate which is facing the other age groups. The elderly are simply not benefitting in the same way with falling prices as the young. All this is having an effect on the ongoing value of income from most retirement options.

The Share Centre have commented that both inflation and deflation are really impostors, and we should approach them both with care. Inflation is the catalyst whereby borrowers steal from the lenders, they suggest, and deflation is the catalyst whereby lenders steal from the borrowers. Which is the one feared most? Probably deflation, as it discourages people taking risks and postpones consumption. But inflation is really a scourge on prudence, they say, and it can cause great damage to the weakest people in society, including the old.

So, if you have been caught out in an income drawdown plan, our sympathies. What about the latter point above, buying an annuity and looking for the best annuity quotes. Unfortunately, annuity rates are also effected by the fall in gilt prices. Maybe, just maybe, there is some light at the end of the tunnel, especially as the government has just started some upward move in gilt yields, by buying up £220bn of gilts.