What type of annuity are you being offered?
It is fair to say that retirees are often not being offered the right annuity. All too often they get an annuity under a ‘one size fits all’ guise, which is clearly wrong. Insurers should provide customers with annuity options according to their marital status, health and need for financial protection. The ‘open market option’ (OMO) is important.
When insurers send customers details of the annuity they can buy, most offer few options. Typically, they quote for single life, even though the retiree may be married, with income level throughout retirement, thereby providing no protection against inflation.
Payments are typically guaranteed for five years, which means that if the purchaser dies early, the estate receives a sum equivalent to five years worth of payments. Most insurers issue these quotes on the basis of a customer either taking maximum tax-free cash, typically 25% of the pension pot, or no tax-free cash at all. Many insurers quote this way.
Some insurers are more customer friendly. Prudential, for example, provides annuity quotes with or without guarantees and also with income either remaining level or escalating at 3% annually. It also quotes both with and without a spouse’s pension.
Really, all insurers should offer the option of an enhanced annuity. Only around 10% of retirees purchase them, even though 40% are eligible.
A number of insurance companies offer customers annuities that pay an enhanced income in recognition of their poor health. Insurers pay more because they expect the annuitant not to live as long. Among those now providing enhanced annuities include Canada Life, Just Retirement, Partnership, LV=, Norwich Union, Prudential, Scottish Widows and Standard Life.
All insurers should make great play of the benefits of shopping around. According to the FSA, 40% of companies fail to spell out properly the benefits of shopping around. The Pensions Advisory Service is uesful here…it gets users to consider all the key annuity issues - such as guarantee periods, protection against the ravages of inflation and financial protection for spouses.
Other insurers, prompted by the FSA, also promise to give greater prominence to OMO. Some will point customers in the direction of both the FSA MoneyMadeClear and The Pensions Advisory Service websites.
