Income Annuities - The Pitfalls and Benefits

Buying income annuities with your pension pot is one of the those times that you need to make sure you research your options before making your final choice.

Why?

From April 2015 there are new rules on how you can use your pension pot.

Under the old rules once you made your choice you couln't change it and that choice  determined your retirement income for the rest of your life.

Under the new rules  you will not be forced to buy an Annuity and you will have the opportunity  to choose how you use your money in other ways. But don't get carried away I can't stress how important it is that everyone needs to take financial advice to determine the best choice to suit your own circumstances.

In the past few years there have been thousands of baby boomers who have locked themselves into poor deals because they've failed to take the proper advice.

During 2014 there were approximately 400,000 baby boomers that  looked to convert their pension pot into income annuities which would give them a taxable income.

However even under the new pension rules it still may be the right choice to purchase an income annuity for some retirees.

Pension experts reported that many retirees failed to obtain the best possible income  which can vary across the market place by as much as 20% simply because they didn't realise that they have choices and they're not obliged to accept the quote offered by the pension provider.

Imagine finding out later that had you gone out to the market place to compare policies you could have secured upto an extra 20% on your retirement income.  Over the rest of your lifetime that could mean you  missing out on thousands of pounds.


The three common obstacles retirees lose out

  • They receive a deluge of confusing information when they reach retirement age.
  • They are unaware that they can buy income annuities elsewhere rather than accept the one offered by their pension provider.
  • They fail to take advice as to which product is going to be the best for their own personal circumstances.


Don't be one of the two fifths of annuity buyers  that take the quote offered by their existing pension provider without seeking advice  simply
because they are overwhelmed with information.  This can lead to serious, costly and irreversible mistakes.

It seems that many retirees fail to seek advice because they feel they haven't saved enough and that people will think they're stupid because
they don't understand the terminology or they feel they will get ripped off.

Many retirees don't realise that this is the one time that declaring certain health conditions, both past and present, could possibly enhance the income you receive from income annuities  i.e.

  • if you've been diagnosed with a medical condition that could seriously shorten your life,
  • if you've been a heavy smoker or suffer poor health,
  • if you've had a previous heart condition,
  • If you've been diagnosed with a terminal illness.



The different types of Income Annuities available?

There are several different types of income annuities and your choice of the correct one to suit your personal circumstances will make a difference to the retirement income you will receive.

The main choices  of income annuities are:-

Single-Life Annuities -  provide fixed regular payments for the rest of your life.  This means that the payments will remain the same throughout your life until you die when all payments stop.

Joint Life Annuities - are for people who wish to provide an income after they die for any dependants, such as a wife, husband, partner or even a child.  This is likely to lower the amount of income you will receive while you're alive but after your death it guarantees an income will continue to support any spouse or dependant for the rest of their life.

Annuities with Guarantee Periods -  will pay out to  a spouse or dependant only for a fixed period after your death.

Escalating Annuities  - are inflation proof policies that either increase by a fixed sum each year or it may be index-linked.  These income payments will inevitably start at a much lower level.

Enhanced or Impaired Annuities - pay more to those with poor health or certain medical conditions.

Fixed Term Annuities - unlike lifetime annuities, these provide an income for a set number of years after which you then have the option to choose what you would like to do with the sum left over.

Investment Linked Annuities - are more risky because they are linked to the stock market and payments are variable.  That means that they could go up or down depending on the performance of the underlying investments.


What can happen without the right advice

A Case Study  By Johanna Gornitzki, Financial Mail On Sunday

PUBLISHED: 22:05, 1 June 2013 | UPDATED: 12:57, 3 June 2013


When Keith Beattie retired in 2007, he had built up an impressive pension pot worth £280,000. He bought a single-life annuity from insurance giant Aviva that would pay income only for as long as he lived.

If he died before his wife Liz, which was likely as his health was poor and she was much younger, she would get nothing.

None of this was clear until Keith’s death in 2009 at the  age of 63. By then Aviva had paid just 20 months  of income totalling less  than £20,000.

Liz, 51, says: ‘When Keith died, the payments simply stopped and that was it. Aviva kept the rest. I wasn’t even sent a “sorry for your loss” letter.’

Liz, from Farnham, Surrey, who works as an IT training manager, sought the help of complaints handling firm The Compensation Provider to try to have some of the money returned. That process has taken several years but has not been successful.

Liz says: ‘Aviva was happy to offer Keith a single annuity despite knowing that he was married.’

She also says that Keith, who at the time of buying the annuity knew that he was seriously ill, should have qualified for a higher than usual rate based on his poor health. Aviva should have spelled this out to him, she says.

Instead, Keith ended up with a conventional annuity paying less. Liz says: ‘When he said he didn’t want to discuss his health, instead of finding that odd they did not ask further questions.’

Liz’s complaint, which went to the Financial Ombudsman Service, eventually failed because Keith had agreed to the policy.

Make sure  this doesn't happen to you by taking the right advice.



There is help and advice available if you know where to go!

There are comparison websites that compare income annuities and other insurance products if you feel confident enough to use them.

However the best place to start is a site that's been set up by the Government.  It's free, independent and it can guide you through the options buying an annuity to suit your personal circumstances.  https://www.moneyadviceservice.org.uk/en/categories/retirement

Another useful website has been launched by the Pension Income Choice Association, a group of pension providers and advisers who have come together to ensure that people make the right retirement income choices.  It has details on more than 1,000 advisory firms. https://www.pick-a.org/

Help in finding an Independent Financial Advisor can also be found at http://www.unbiased.co.uk/




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