Annuities: Should you give up bread today in the hope of jam tomorrow?


iStock_000007120068XSmallIf you are thinking of buying an Annuity soon, yesterday’s Telegraph newspaper should make you sit up and take notice.

The front page story was an interview with Steve Webb, the Pensions Minister, who said he would like to see an Annuity product which would allow pensioners to transfer from one insurer to another, if a better rate was offered.

Mr Webb asked: “Why shouldn’t you be able to change your annuity provider so a few years later somebody else could offer you a bigger pension? Why shouldn’t you be able to shop around?”

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Radical thinking indeed. The idea sounds like the answer to the biggest dilemma people have when they buy an Annuity; “is this the best rate I can get?”

But, in reality the interview leaves many questions unanswered and could lead to a void, where retirees delay taking their pension, hopeful the rules will change in the future, but making themselves worse off; exactly the opposite of Mr Webb’s intention.

First things first though, are Mr Webb’s ideas that radical or indeed workable?

We welcome the spotlight being shone on the retirement market. The focus has been on building up a pension fund for too long, leaving many consumers, in our opinion, disadvantaged when they come to retire and turn their pension pot into an income.

One of the main downsides of buying an Annuity is that it can never be changed if rates rise in the future, or your circumstances change, for example you become ill, which would have meant you qualify for an Enhanced Annuity and therefore a better rate. Steve Webb wants to see an Annuity product which can be transferred from insurer to insurer if a better rate is offered; much like can be done with a mortgage or credit card.

Whilst it will be interesting to see exactly what Mr Webb has in mind, switching from one Annuity provider to another can already be achieved by using a Fixed Term Annuity.

Furthermore, leading industry figures have already questioned whether what Mr Webb is proposing will in practice leave people better off. Adrian Boulding of Legal & General, said: “You can’t have your cake and eat it. We’d be happy to offer annuities that could be traded in and moved elsewhere if interest rates improved, but the rates would be about 25 per cent lower than a conventional annuity.” (Source: Financial Times)

Can Mr Webb’s idea become reality?

Whether this change ever sees the light of day is debatable.

Politicians have a habit of ‘flying kites’ to see the reaction they get. Remember Nick Clegg announcing on the Andrew Marr show that parents of students would be able to use their pensions to help meet the costs of university? That idea was swiftly discredited and kicked into the long grass.

Whilst Steve Webb has developed an excellent reputation and overseen a difficult department well, with success notably in relation to the triple lock, flat rate State Pension and Automatic enrolment, it has already been admitted these ideas are not yet Government policy.

We passionately believe the Annuity and indeed wider retirement market, needs significant reform, there is much wrong which needs to be changed to improve the outcomes for consumers.

Unfortunately, it will be a stretch for these ideas to become policy and then law, all before the election in 17 months’ time. Especially when the results of Financial Conduct Authority’s review of the Annuity market and product development time need to be factored in.

Where does this leave you in you are retiring over the next few months or years?

We have real concerns that his comments will cause confusion and uncertainty amongst people retiring over the coming months.

The thought of being able to buy an Annuity which won’t tie you in to one provider for the rest of your life sounds attractive. But should you delay turning your pension pot into an income in the hope of a new product being available in the future?

To put it another way, should you give up bread today in the hope of jam tomorrow?

If you are finishing work and have sufficient income for your needs, perhaps from the State Pension or a Final Salary scheme, then you should be thinking about the merits of deferral anyway. You can read more about this by clicking here.

But if you need the income from your pension to retire and let’s face it most of us do, what are your options?

Buy an Annuity anyway You might reasonably take the view that the ideas floated by Steve Webb will never actually see the light of day, or that the price of increased flexibility is too large a drop in the starting level of income.

Furthermore, if your pension fund is relatively small, which can make other options unviable, you already qualify for an Enhanced Annuity, or you like the simplicity and guarantees offered by an Annuity, this could be the right choice for you.

Consider a more flexible option There are options, such as a Fixed Term Annuity or Income Drawdown, which will give you an income now, but do not require you to commit to an Annuity purchase now.

Both options have risks attached to them and you should take Independent Financial Advice to confirm they are right for you. But if you need income now and would like to see if Mr Webb’s ideas ever become reality, they are worth considering as they will certainly give you more flexibility than a traditional Annuity.

Should you delay your Annuity purchase?

That’s not a question we can answer here, it depends entirely on your own individual circumstances.

However, what we can say is that greater flexibility, for example by being able to transfer from one Annuity provider to another will come with a cost. This is already the case with a Fixed Term Annuity, where the starting level of income is below that of a traditional Lifetime Annuity.

Mr Webb’s interview will create uncertainty for a period of time, but that shouldn’t stop you taking an income from your pension if you need it.

What is does mean is that advice has never been more important, making the wrong decision now could mean you lose out in years to come if the rules do eventually change.

Our team of Independent Financial Advisers are experienced in developing strategies for clients the length and breadth of the UK to help them meet the cost of paying for care.

If you would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email