Consumers still giving up guarantees

Consumers still giving up guarantees

More than half of all pensions with guaranteed annuity rates (GARs) are still being forfeited, according to new statistics.

In a data bulletin published in February, the FCA determined that 53 per cent of GARs were relinquished between April and September 2016.

The figure, while elevated, represents a steady decline from previous quarters, with 61 per cent giving up GARs during January to March 2016, 63 per cent between October to December 2016 and 68 per cent from July to September 2015.

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Scott Gallacher, chartered financial planner at Rowley Turton, described the data as concerning. 

He said it would be useful if the regulator were to disclose how many people are forfeiting GARs due to a lack of advice, as opposed to making an informed decision.

He said: “Obviously with interest rates so low at the moment, GARs are even more valuable. In my time advising, I have only seen only two GARs knowingly given up.”

GARs were attached to a number of pension plans during the 1980s and 1990s when interest rates were higher. 

Therefore, these guarantees generally far exceed today’s rates, especially after plummeting in recent years due to prolonged low interest rates and increased longevity.

Jonothan McColgan, chartered financial planner at Combined Financial Strategies, suggested that the regulator’s data fails to paint a full picture, as GARs are usually only available on a single life basis with no indexation and limited death benefits.

He said: “You might be able to get a better income, but if you’ve still got a mortgage round your neck would it not be better to pay that off and save the family that corresponding income for everyone’s life rather than just yours?”

Mr McColgan agreed with Mr Gallacher that it would beneficial if the regulator included the reasons why GARs are being relinquished: “A GAR is still a high annuity rate, but it doesn’t necessarily mean it’s the right thing to do. We’ve got pension freedoms for a reason and that’s to give people more control and choice.”

Further data included in the release by the FCA detailed the breakdown of retirement income activity over the six months to September 2016. 

Annuity transactions accounted for around 14 per cent, full cash withdrawals roughly 55 per cent, new drawdown policies about 27 per cent and partial UFPLS 3 per cent.

About two-thirds of drawdown investors took advice, but this fell to about 35-40 per cent for the other categories, the regulator said.

craig.rickman@ft.com