Delving into the murky world of annuities

Tony Hazell

Tony Hazell

Annuities are under attack in a similar fashion as endowments were a few years ago.

At that time financial advisers and product providers refused to admit there was a problem because they were making so much money from the status quo.

Financial advisers can pick up a commission from an annuity sale on a pension they sold decades ago, even if they do nothing.

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Many firms make staggering profit margins by selling annuities. Published ones are around 18 per cent but some are believed to be much higher.

Legal & General recently reported higher profits from annuity sales and it is consistently one of the top payers. Just consider what others are making.

Ros Altmann, formerly a pension adviser to Tony Blair, says this is the biggest financial gamble someone will take in their lives.

Annuities are still seen as the default option for providing a retirement income. But every time you as a financial adviser recommend one or someone buys one, you and they are taking a stab in the dark.

Neither of you knows how long they will live. You do not know what inflation will be. You do not know whether they will outlive their spouse. At best you can hazard a guess and hope.

What you do know for sure is that current pricing means the odds are stacked heavily in favour of the insurance company.

A 65 year old buying an annuity would need to live to be 90 to get decent value from it, Ms Altmann has calculated.

Yet the average 65-year-old man can expect to live to less than 87, according to estimates by the department for work and pensions.

The pay-out odds are similar to those offered by slot machines at casinos in Las Vegas. Yet anyone who pumped all their pension into one of those would be condemned as barking mad.

Politicians seem content to do nothing. I suspect this is because 99.99 per cent of MPs have made no effort to understand them because they will not have to buy one themselves.

The FCA’s review has already highlighted an overwhelming desire among consumer groups for changes, such as compulsory shopping around and better consumer information.

The same research highlights the desire of some in the industry to maintain the status quo.

At the end of the day I wonder whether this is an area the Office of Fair Trading should take a look at.

Because this is a market that is working against the consumer where the profits are high, the charges are hidden and reform is desperately needed.


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