There is no doubt that guaranteed annuity rates have proved to be of great value to many who without them would have found themselves with a pension of roughly half as much using current normal market rates.
It must be said it is many years now since any provider has issued a policy with a GAR. The removal of such contracts from the market followed a realisation that the cost of guarantees was much higher than first thought.
There is no doubt the policy wording makes it clear that the pension must be taken at the pre-selected retirement date if the GAR is to apply.
Since the removal of such guarantees we have seen many changes in regulatory requirements attaching to all aspects of financial services, not insignificantly the requirement to treat customers fairly.
Here I pose a question. How fair can it be, however you look at it, that a policyholder can, for example, be entitled to receive £10,000 a year on his or her 60th birthday and only £5,000 a year if it is requested shortly afterwards?
Let us consider how remaining policyholders might be worse off if Scottish Widows, a company that has been criticised over GARs, paid a GAR at any time after the selected retirement date. Here I struggle to identify any detriment.
It seems to me remaining policyholders are more likely than not to be better off. A GAR at age 60 of 10 per cent on a fund of £100,000 produces £10,000 a year. If at age 60 years and one month it produces £5,000 a year, the benefit to insurers is obvious.
It is my view, looking back, that the use of GARs has been an expensive mistake made by many insurers. It would be unfortunate if the cost of that mistake was transferred from those who made it to those in retirement who relied on the promised return when the policy was purchased.
John Middlebrook
IFA,
JT Middlebrook,
Liverpool
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