Annuity Rip off
Headlines this week of ‘ Pensioners being burgled by insurers on annuities’ and ‘ Avoid a pension annuity rip off’ don’t give annuities a good name. For what they are an annuity is simple and guaranteed and that is what they are designed for, they pay out a guaranteed income until the day you die. Where lies the ‘rip off’ is the charges and rate you get from the annuity.
Charges, this is one thing I have mentioned a few times on this blog, go online and you will find many companies offering annuities on a non-advised basis and you will find these ‘call centres’ will be taking between 4 and 5% commission from your pension pot. These sorts of figures are large and if you did your homework you will find you can pay less and get full financial Advice, why not get full advice if its cheaper.
Although to be fair to these non-advised companies they have to be competitive so if they charge too much and the rate isn’t as good elsewhere then you won’t use them. Some industry knowledge, these big firms have higher commission rates with certain providers and if you speak to them and pressure them they should be able to discount the commission to give you more income but they may not so always worth asking.
Advice or non-advice, many clients will come to me and say can you beat this rate and when I ask about whether they have thought of drawdown, fixed term annuities etc they will say they just want the best annuity rate and that is it. Well this is fine and I will do my best to get a competitive quote but I find many of these sorts of clients need to understand what else they can do and many do not. Some clients, not all but some when they have found out about what else is out there they decide on something different so advice was invaluable to them.
Rate and longevity, ultimately we are living longer so rates are going to go down because of that and that is just the way it is, insurance companies have to pay out for longer so they offer lower rates. On average it takes 20 yrs to get your money back from an annuity, not great.
The articles also refer to the fact that an annuity is not always the best product, this is why advice is so necessary if you take out a single life annuity and die after 4 yrs your spouse will get nothing. It may get you slightly more but is it worth it, a client of mine recently only asked for single life quotes as they needed more money and wife was happy with that but after going in to his wife’s details we found she smoked and therefore a joint life at 100% spouses benefit was only a small cost of the pension. They ended up doing drawdown in the end as they didn’t need tax free cash and wanted to maximise income, they hadn’t heard of drawdown until I spoke to them, again the value of advice.
Always seek advice from a retirement expert when looking at your retirement planning.