Archive for the ‘Open market option’ Category

You do have choices with your pension annuity

Thursday, August 28th, 2008

There are a variety of options available to you with your pension annuity, the income in retirement you buy with your pension fund:
A single-level annuity is the simplest type of pension annuity. It pays out exactly the same amount to an individual (the “annuitant”) every month until the annuitant dies.

A guaranteed annuity pays out an annuity payment each month for at least the length of the guarantee period, even if the annuitant dies before the end of the guarantee period; in which case the guaranteed annuity payments are made into the annuitant’s estate. The maximum guarantee is ten years. Five years is quite common in practice.

With an inflation-linked annuity the annual payments increase by the rate of increase in the Retail Prices Index (RPI) to give payments protection against inflation.

With an escalating annuity the annual payments increase by say 3 or 5 per cent to give the pensioner some protection against inflation and to allow for possible increased income needs as the annuitant ages.

Joint-life or last-survivor annuities pay an agreed annuity payment to an annuitant and the annuitant’s partner while both are alive. Following the death of the annuitant the contract pays either the same amount or an agreed reduced amount each month until the partner dies. The reduction in last-survivor annuities is typically a half to one third.

Investment-linked annuities involve the fund backing the pension annuity being invested in an equity product. The annuitant receives an annuity payment that is related to the performance of the equity market.

An impaired-life annuity pays an increased annuity payment if the annuitant has health problems, such as cancer, chronic asthma, diabetes, heart attack, high blood pressure, kidney failure, multiple sclerosis or stroke.

An enhanced annuity pays a higher annuity payment related to actuarial considerations.

Phased-retirement or staggered-vesting annuities. With these, instead of converting the whole pension fund, withdrawals are scheduled over several years. This is achieved by splitting the fund into many separate segments.

A with-profits annuity links income directly to the performance of the insurance company’s with profits fund. Typically, income is made up of two parts: a minimum starting income and bonuses.

A short-term annuity allows an individual before 75 to use part of a pension fund to buy a fixed-term annuity lasting up to five years. They can choose annuity options in much the same way as basic annuities.

Value-protected annuities pay a lump sum on the death of the annuitant, equivalent to the difference between the original purchase price and total payments made. The lump sum is taxed at 35 per cent. They are only available until aged 75.

With so many choices it is wise to seek out specialist advice when buying your pension annuity.

Buying a pension annuity:consider your options

Wednesday, August 27th, 2008

People approaching retirement, with their pension pot ready to purchase a pension annuity, their retirement income, should be in no doubt that they have a choice of providers when it comes to purchasing an annuity. The message must be far stronger if consumers are to benefit from the highest possible level of retirement income under the Open Market Option.

The Open Market Option gives investors the opportunity to purchase their pension annuity from any annuity provider, regardless of where they have previously invested their pension. All the investor has to do is to find out which provider offers the best annuity rates and options for their circumstances and move their pension pot to that provider.

However, literature from life companies is not clear enough regarding the Open Market Option.  Consumers should be in no doubt that they have a choice of annuity providers and by how much it could increase their retirement income….perhaps up to one-third depending on state of health. 

Pension annuities are complex and consumers need to take advice if they are to receive the best deal.  Factors such as health, or even where the client lives, must be considered as impaired life or postcode annuities can significantly increase income. There are other things to consider, such as death guarantees, inflation increases and widows pensions which will all affect the level of income paid. Only by taking independent financial advice will a person on the point of retirement be sure they are making the right decision and receiving the best available income. This is the service available via this website.

Some thematic work on Open Market Options, recently carried out by the Financial Services Authority, is a step in the right direction, but more needs to be done.

One very strong option would be to force life companies to include open market rates on the quote allowing clients to compare different annuity rates and pension income. At the very least the Open Market Option should be up front and in bold. Some documentation is so unclear it probably wouldn’t be regarded as meeting the Financial Service Authority’s Treating Customers Fairly (TCF) initiative.

A pension annuity is part of a generous UK tax regime

Monday, August 25th, 2008

Generous, Government, tax…not a combination you’d expect. However, pension annuities are an integral part of a generous UK pensions tax regime. On balance it is perhaps therefore not unreasonable for the Government to expect annuitisation of 75% of the fund, i.e. after the 25% tax free cash element.

The benefit of annuitisation at age 65 is relatively small. The chance of dying at age 65 is less than 1%. An annuitant receives a mortality cross subsidy of less than £500 in that first year for putting £50,000 capital at risk. This is not very attractive and does not lead to a significant increase in lifetime income. Most pensioners would rather retain control of their capital.

As you would expect, as people get older so the benefits of fully annuitising grow exponentially and the impact of investment returns diminishes. Let’s delay annuitisation to 85…a male aged 85 deciding to annuitise today with no death benefit, the pension annuity would provide a guaranteed income of around 20% of the capital (healthy). The mortality cross-subsidy overshadows any investment return, so fixed pension annuities with their bond investments increasing, become the optimal solution.

It is not a question of if but when pensioners should fully annuitise; remembering that this is not necessarily when the pension annuity is first purchased. Pensioners need a retirement annuity account which limits the fund at risk in early years but retains mortality cross-subsidy in later years to provide the essential longevity insurance. 

Pension annuities have a central role as part of any retirement income plan and offer the most effective and economic way of maximising lifetime income, with a guarantee.

Pensioners using income drawdown as an alternative to a pension annuity are exposed to a number of risks:

- they risk outliving their capital, or more likely having to reduce their income as they get older

- they are exposed to investment risk such as drawing down income when markets are depressed, which can have a significant impact on overall income levels

- they are exposed to the risk when they decide to purchase a pension annuity

- they expose themselves to ‘mortality drag’ and the risk that mortality improvement assumptions will be strengthened by the time they come to switch to a pension annuity.

Of course these risks can work in a retirees’ favour, but the key point is that only those who can afford to take these risks should do so. Given the lack of adequate pension savings this is unlikely to be a majority. This backs up the point that pension annuities are likely to be the right choice for the majority of people reaching retirement.

Advisers want stronger stance on the open market option

Sunday, August 24th, 2008

The open market option is applicable to retirees with a pension fund to be used to buy a pension annuity. It allows them to shop around for the best annuity rates from all annuity providers in the market. This is best done via a ‘middle man’, an independent financial adviser (IFA).

Results of the Financial Services Authority’s (FSA) thematic work on open market options is a step in the right direction, but the message must be stronger if consumers are to benefit from the highest level of retirement income, their pension annuity income, when they come to retire.

Literature from life companies is unclear regarding the open market option. Consumers should be in no doubt that they have a choice of pension annuity providers and therefore a choice of annuity rates and how much they could increase their retirement income. One option is to force life companies to include open market pension annuity rates on the quote allowing clients to compare differences in income.

The open market opition should be up front and in bold. Some documentation is so unclear it probably doesn’t meet the FSA’s Treating Customers Fairly (TCF) initiative. Factors such as health or even where the client lives (postcode rated pension annuities) must be considered. Impaired life annuities or enhanced annuities can significantly increase income. There are other things to consider such as death guarantees, inflation increases and widows pensions.

Only by taking independent financial advice will a person on the point of retirement be sure they are making the right decision and receiving the best available income. So make sure you take proper advice when purchasing your pension annuity.

A pension annuity open market option fiasco

Sunday, August 24th, 2008

An independent financial adviser (IFA) has launched an attack on Abbey Life for automatically vesting his client into its own pension annuity without the client’s consent. The IFA states that the client has major health problems and approached him after receiving literature urging him to take out a pension annuity with the closed-book provider (not offering or taking in new business) before retirement. While waiting for Abbey Life to accept his client’s letter of authority, the IFA says it became apparent it had vested the plan already but not paid out as the client had not signed any paperwork. The plan was vested on the worst possible terms (allegedly), with no tax-free cash, no widow’s option and the pension annuity income paid annually in arrears.

The IFA states that it is surely about time the Financial Services Authority (FSA) made the open market option for pension annuities the default option at retirement. This client was so confused with all the bits of paper. He was eligible for an enhanced annuity and would have got a far bigger payout elsewhere with much improved annuity rates.

Naturally Abbey Life wanted to defend their position, as Neil Tointon states: ”Many policy terms and conditions make it clear that the policy will be converted to an annuity at normal retirement date if we do not hear from the policyholder to the contrary.”

He would say that, wouldn’t he. The point is, though, that this client has lost out heavily in his pension annuity retirement income because the industry we are in has allowed this to happen, and this does need to change and soon.