One of the major attractions of buying an Annuity is the guaranteed income that it provides.
Indeed when it comes to converting your pension pot into an income an Annuity is often seen as the simple and risk free option.
But just how strong is your Annuity provider and what happens if they go bust?
Let’s start by looking at the financial strength of the main Annuity providers.
There are three main rating’s houses for Annuity providers:
- Standard & Poor’s
We looked into the financial strength of the major Annuity providers. The following table shows how the major providers are currently ranked:
[table id=1476 /]
Financial ratings correct as at 4th April 2014.
When deciding which Annuity to buy, most people select the company which gives them the highest level of income. The level of income is clearly important, after all what is an Annuity for?
However, we would also suggest that some consideration is given to the financial strength of the company you choose to hand over your pension fund to in return for an Annuity.
You should note that the ratings shown above are as they currently stand and they could well change. Each Annuity provider will be able to give you their latest financial strength rating, indeed we as retirement planning experts can get this information for you.
What happens if my Annuity provider goes bust?
Of course we have no reason to think that any of the UK’s Annuity providers will go bust indeed legislation such as Solvency II is designed to help prevent such meltdowns, However, what does happen in the unlikely event that your Annuity provider goes bust?
Well the glib answer given by many advisers a few years ago goes something along the lines of “You don’t need to worry, the book will be bought by another Annuity provider”, this may indeed be the case but it comes from a time when the Financial Services Compensation Scheme (FSCS) limits were just another thing to be tested on an exam paper and were not really needed in real life.
How things change!
Whilst in practice a bankrupt Annuity provider may be taken over by a competitor this is far from guaranteed, consider a situation where an Annuity provider goes bust because the Annuity rates it has offered has been too generous, would a competitor want to take on such a liability? The FSCS is therefore crucial in such circumstances.
The FSCS is the compensation fund of last resort for customers of authorised financial services firms which have become insolvent or have ceased to trade. In such circumstances the FSCS would firstly try and find a solution which would allow income to continue, however if this was not possible compensation would be paid.
The FSCS has various categories and an Annuity is classed as being Long Term Assurance. This means that the level of protection is unlimited and would provide 90% of the claim amount. The claim would be based on the value of the Annuity and should include any benefits chosen, such as spouse’s pension, guarantees, indexation etc.
Our final thought
To the best of our knowledge no firm authorised by the Financial Conduct Authority has ever defaulted on Annuity payments, however it pays to be aware of all the facts and to know “what happens if”.
When you are buying your Annuity take into account the relative financial strength of the providers who offer you the best quote; the Annuity rate is not the only factor you should consider.
BBC’s Crimewatch used to end with the phrase “Don’t have nightmares” and we would suggest the same applies to Annuities, but it can often pay to look more closely.