Pensioners must shop around to get best annuity

September 2, 2009

huntStephen Hunt is managing director of Rockingham Retirement. The opinions expressed are his own. –

If we keep going the way we are, disaster looms for millions of over-60’s in the United Kingdom.

The same way that a comment about having licked the boom-bust cycle was not only totally wrong but rather crass and irresponsible. The same is true about having beaten inflation.

Yes, we may be in a period of very low inflation — even deflation — but to think that inflation is not going to return at some point in the future I think is as flawed as believing we have beaten the boom-bust cycle. Coupled with a government policy of printing money, inflation is as inevitable as the Tories getting back into power. And if inflation comes back on the Tories’ new watch they can always blame Labour.

You have to remember that with so much debt in the UK and the U.S., global inflation won’t do respective governments any harm in the long run as far as their debt is concerned.

Let’s consider the facts. We have a hugely aging population. The baby boomers are all approaching retirement and the ratio of pensioners to workers will reduce significantly, putting a huge financial burden on those in employment. So don’t expect too much of an income in retirement from the state on the government’s pay as you go system.

So what about private incomes? Well, largely due to Mr Brown, many final salary schemes have now converted to money purchase. Now, in a final-salary scheme most had index-linked income, which is rapidly becoming a thing of the past. Many have now switched to what are called defined-contribution schemes or money purchase, which means the person retiring has to buy an annuity. “What’s the problem with that?” I hear you ask. Let me give you a list:

1.  Most people (65 percent of annuity sales) do not shop around when they retire, taking the default annuity, which costs the UK annuity buyer a billion pounds a year.
2.  Those who do shop around often get poor advice and are not given the best annuity for them.
3.  Those who do take out an annuity are committing themselves to probably a 20-year plus product that is totally irrevocable. It’s like taking out a 20-year mortgage that is fixed for those 20 years regardless of any changes in circumstances — even not having a house anymore.
4.  If you or your partner dies with an annuity, the insurance company profit.

I could go on.

I do find it incredible that someone can save hard their entire working life, make sacrifices while in work to have a better quality of life in retirement and then just throw it all away when they retire.

The following is fictitious but has happened to thousands, possibly tens of thousands of people in the last 10 years:

Mr Brown has saved all his life and has a pension fund of £100,000. Putting this in perspective, his house is worth £200,000. He takes an annuity from his current provider at retirement paying him £7,700 a year set up on a level single life basis with a five-year guarantee.

One of life’s luxuries for Mr Brown was that he did enjoy a smoke.  Unfortunately this meant he only lived for six years in retirement.

His wife was very disappointed. Ten years ago when Mrs. Brown wanted to start taking a winter holiday, Mr Brown said no, they had to save for their retirement. Mrs Brown made just as big a sacrifice to save as Mr Brown did. What’s more when Sally Brown, their daughter, wanted a new Amstrad 1640 PC, the answer was no; it was important to save for retirement. Sally also made sacrifices for her dad’s £100,000 fund.

When Mr. Brown died after six years he had received just £46,200 in payments. His wife and daughter received nothing, zip, not one penny.  Why? Because Mr Brown took the default annuity from his current provider. So who gets the remaining £53,800? His insurance company.

This is not just a story, this has happened — and happened to thousands of people. At Rockingham Retirement we believe it is wrong and something should be done about it.

For starters every person going into retirement should be forced to shop around; even bad advice is better than no advice. For those who say there is not the capacity of advice for everyone to shop around, this is total rubbish — and even if it were true, does it make it right?

You retire once in a lifetime and if you do not get it right it could be the biggest mistake you will ever make, not only for those taking the income but their partners, their children, their grandchildren and whoever else is important in their lives.

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