Annuities: How to avoid “cruel yet common traps”


MousetrapFor many people, turning their pension pot into an income when they retire can be a complex and confusing task.

Most people buy an Annuity, which make the decisions even more challenging because they can never be changed, even if you find you’ve made a terrible mistake, much like a couple recently featured in the Daily Mail:

Their story goes like this:

  • Already near retirement Mr and Mrs Monksfield married in 2000
  • Tragically Mr Monksfield was soon diagnosed with a life threatening illness
  • Despite the illness he decided to buy an Annuity with his £99,000 pension fund
  • The couple were under the impression that the income would continue after Mr Monksfield’s death
  • This turned out not to be the case, as only a 10 year guarantee period was selected and Mr Monksfield died tragically after nine years and 11 months. The income therefore stopped almost immediately after Mr Monksfield’s death

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The full heart rending story can be read by clicking here.

It’s impossible not to feel huge sympathy for Mrs Monksfield, not only has she lost her husband, she has had to sell the family home and been left having to rely on a State Pension along with hand-outs from friends and family.

If you are coming up to retirement the story should teach you some valuable lessons, to make sure you avoid the “cruel yet common traps” the Monksfield fell into.

Trap 1: Consider all options, an Annuity isn’t the only option

If you have an illness, whether it’s relatively minor or more serious, you could get a higher income from an Enhanced Annuity.

However, those people with medical conditions which will severely restrict their life expectancy, should consider other options, especially Income Drawdown, which offers more options to your dependents after your death than an Annuity does.

Trap 2: Take independent advice

When deciding how to turn your pension pot into an income it really does make sense to invest in good quality independent financial advice, from a knowledgeable and experienced IFA.

Using an adviser who represents only one company, going direct to an Annuity provider, buying an Annuity from your current pension provider or using a ‘non-advised’ Annuity broker, simply means you won’t get offered every possible option.

Remember too, if you do go direct, use a tied adviser or a ‘non-advised’ Annuity broker, their services are not free, you’ll still be charged commission and it’s often more than the fee charged by an IFA!

Trap 3: Make sure your adviser fully explains what you are signing up for

The Daily Mail story said: “The adviser recommended a deal with a ten-year guarantee. This, the couple both believed, would pay out for ten years after Mr Monksfield’s death. But, in reality, what it meant was that the pension would pay out for a maximum of ten years if Mr Monksfield died within a decade.”

It’s perhaps easier said than done, but before you agree to buy an Annuity, which remember can never be changed, make sure your adviser has explained fully what you are signing up for, how income will be paid in the future and make sure you are happy it meets your needs now and in the future, especially if your circumstances change.

Trap 4: Select the right options

Mr Monksfield clearly wanted to ensure his wife was financially secure after his death, the story said: “She (Mrs Monksfield) remembers clearly that her husband made it explicit that as he was suffering from amyloidosis — a rare disease affecting tissues and organs throughout the body — he wanted to ensure his wife would be financially secure after he ‘popped off.”

If you want to fully protect your husband or wife in the event of your death, the best way to do this is to add a spouse’s pension to your Annuity from outset. This means if you die before they do a proportion of the income will continue to your spouse.

A guarantee period doesn’t do the same thing and provides no long term protection for your spouse.

Trap 5: If something doesn’t sound right get a second opinion

The Daily Mail article said: “She (Mrs Monksfield) claims that the salesman had said it was not possible to have a joint life annuity because of the couple’s 16 year age gap.

Clearly we don’t know what was and wasn’t said at the meeting, but if something you are told doesn’t sound right don’t be afraid to get a second opinion.

We’ve spoken to clients recently who, if they had used the first Annuity broker they spoken to, would have received a significantly lower income, often because the possibility of an Enhanced Annuity wasn’t fully explored.

Don’t be afraid to check things out with multiple advisers, buying an Annuity is a once in a lifetime decision, it can never be changed.

Trap 6: Talk to your partner

We speak to many would-be retirees who don’t involve their partner in their retirement decisions; this is nearly always a mistake.

Deciding how to turn your pension pot into an income, Annuity, Income Drawdown etc, and then the shape of any solution, is a balancing act between your needs now and those you will have in 10, 20 and even 30 years’ time.

A recent survey from the Prudential has found more than 50% of couples have never discussed retirement planning. It’s a fact of life that women outlive men, often leaving women to cope with the financial decisions made by their husband years previously.

Of course you should take advice, but you both should be involved in that process, after all, two heads are better than one!