From Special Report: At Retirement - May 2012
The quiet revolution
Those who follow the annuity market know that today the best rates are only provided by as few as four or five insurers and proper use of the OMO is a rare find
When I was younger, the Readers Digest used to offer prizewinners a choice of an immediate lump-sum or income for life. The actuarial value of the income for life was about five times the value of the lump-sum, but I understand that more than 90 per cent of winners opted for the lump-sum. People usually underestimate their life expectancy by as much as 30 per cent, and so higher income now looks better than higher future income.
I once asked at a conference why the ABI allowed those members who do not want annuity business to offer it at all.
Sadly most people know someone who died within two or three years of retiring, but comparatively few people knew Henry Allingham. Henry died in 2009, having received his state pension for 48 years and instalments of an annuity purchased at age 60 for 53 years.
The government is talking of introducing legislation to deal with small pots, which do not qualify for trivial commutation, and a number of providers have suggested ways in which they could handle these profitably – frequently by completely ignoring the options available to their policyholders. Certainly it is difficult for most IFAs to cover costs on an annuity with a purchase price below £30,000. But we have recently seen the emergence of a number of mechanised services which are able to provide the best rates for a variety of different annuity shapes, and these need to be encouraged.
A real innovation would be for the ABI to require their members to issue a simple statement to maturing policyholders along the following lines:
“Your policy is due to mature in six months and the estimated maturity value is £XX,000. While we are able to offer you an annuity with this money our rates are likely to be lower than you can get elsewhere.
“We therefore believe you should contact the XYZ annuity service who will be able to quote you the best rate available for your circumstances. Please note that if you are a smoker or have a medical condition you will qualify for a higher pension and XYZ will enable you to get more income every year for the rest of your life.”
In the past, companies such as Allied Dunbar/Zurich and Skandia referred maturing policyholders to a leading annuity provider, in recognition that their rates were uncompetitive. I understand that they received some sort of payment from the annuity provider in return for the introduction, and I can see no reason why the XYZ annuity service should not pay some sort of introducer’s fee to providers. At the end of the day the policyholder would get advice and a better rate and that is what we all want to see.