Mar 9 2017

How can clients find the best annuity for them?

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How can clients find the best annuity for them?

There are many reasons why an annuity appeals to some people more than others, but pensioners will often favour annuities because they are not willing to take the risks associated with investing in the stockmarket through income drawdown.

A common mistake made by those who opt for an annuity is failure to shop around and seek advice on the best product for them.

While the concept behind an annuity is fairly straightforward – the person hands over their pension pot and from then on receives an income for the rest of their lives – there are some complexities and variations, particularly if the retiree suffers from ill health.

Annuities in the conventional sense, once established cannot be altered and therefore making a mistake at outset could prove costly in the future.Simon Bashorun

Simon Bashorun, financial planning team leader, Investec Wealth & Investment, says: “While annuities may seem straightforward on the surface, there are a multitude of options that can be built in at outset, including benefits for the surviving spouse, indexation and guaranteed payment periods to name a few.

“Even once these options have been understood, finding the provider offering the best rate in the market can be a challenge, particularly when what an individual might feel is a relatively minor health condition could secure a significantly higher annuity rate from a provider specialising in enhanced annuities.”

He acknowledges there are online comparison tools available to those approaching retirement but recommends seeking appropriate professional advice.

“Annuities in the conventional sense, once established, cannot be altered and therefore making a mistake at outset could prove costly in the future,” he adds.

Assessing the market

Kim Lerche-Thomsen, chief executive of Primetime Retirement, agrees clients must assess the entirety of the market in order to find the optimum annuity choice and notes a good independent financial adviser should do this for them. 

“This includes fixed-term annuities that are ideal for those who want to keep their options open, with potential benefits such as higher rates if their health deteriorates or if interest rates do eventually rise,” he advises. 

“Enhanced annuities should definitely be considered by advisers if their clients are already suffering from poor health. I strongly believe annuity rate tables should also include rates of fixed-term products alongside them, so fixed rates can be included in the conversation.”

Also important is that clients choosing an annuity should be informed of the ‘cooling off’ period they are allowed, according to Jinesh Patel, vice-president of investment consulting at Redington.

“Picking an annuity with the most attractive rates is clearly important – clients should be encouraged to shop around for the best deal – but they should also be made aware of the cooling off period that usually lasts for up 30 days before payment is made. This prevents clients from making a decision, or worse, being intimidated into a decision that isn’t right for them,” he suggests.

Some firms in the annuity space may have failed to encourage their existing pension customers to shop around, so their clients end up simply buying an annuity with them without considering their options.

The FCA reveals in the third quarter of 2016, among those buying annuities 58 per cent were using their existing provider.

We know not enough people shop around for their annuity, and not only miss out on the best rate but also the right shape annuity for their personal circumstances. The situation has actually got worse since the introduction of the pension freedoms.Andrew Tully

Prudential is one of a number of companies requested by the regulator to review all non-advised annuity sales to existing pension customers since 2008 over concerns its customers were not given enough information about enhanced annuities over standard annuities.

“We know not enough people shop around for their annuity, and not only miss out on the best rate but also the right shape annuity for their personal circumstances. The situation has actually got worse since the introduction of the pension freedoms,” points out Andrew Tully, pensions technical director at Retirement Advantage.

“But just because it is something that’s been happening for a while doesn’t mean it’s acceptable.”

As Mr Tully notes: “The FCA recognises this and so from September it will force providers to include an annuity comparator when they provide information to people approaching retirement.”

He believes this is a step in the right direction but points to a “major flaw” in the proposal as it will only compare standard rates and won’t include enhanced rates. 

“An individual getting information showing a small monetary benefit of shopping around may decide it isn’t worthwhile, not knowing that due to health conditions the gain could have been much larger. This is a flaw which needs to be fixed if we are serious about helping more people get the best deal,” Mr Tully says.

Andrew Pennie, head of pathways at Intelligent Pensions, concurs: “Use of enhanced annuities through medical and lifestyle underwriting is also underused, with far fewer people obtaining an enhanced rate than would actually qualify for one.

“There are websites which can compare annuity rates but with new contracts, such as annuities written under drawdown rules, it is always best to seek specialist advice to ensure all options are considered and the best solution found.”

More money, more risk-taking?

Many people make the assumption that annuities are more suitable for those with smaller pension pots, while retirees with a much larger amount saved for their pension are likely to benefit from taking income drawdown in retirement.

Stephen Lowe, Just’s group communications director, acknowledges this assumption does hold true sometimes, “partly driven by the fact that if you’re sat down with an adviser you’ll get good advice, and perhaps people with lesser wealth don’t see an adviser, therefore perhaps don’t get access to the same quality advice”.

But he adds: “People who have a lot of money may still be people who don’t want to put a load of it at risk. Their capacity for loss, what they can afford to lose is much higher but they may still have inherent beliefs that say, I don’t want to gamble with my money. 

“It’s not quite as straightforward an answer as wealth is highly correlated with risk taking.”

Whatever the final decision, it is crucial that the client takes their time and doesn’t rush into anything.Jinesh Patel

It is also typically the case people tend to underestimate how long they are going to live. Facing up to this fact will help retirees make the choice between an annuity and income drawdown in the first place.

As Mr Patel notes, it is important for clients to consider their own individual circumstances.

“This can be really daunting and unpleasant – it’s facing up to your own mortality in all but name – but really asking themselves the right questions can sometimes lead to better rates than they would otherwise have got. For instance, if they have a serious health condition, this can lead to a more generous rate of annuity,” he explains.

Mr Patel continues: “Whatever the final decision, it is crucial that the client takes their time and doesn’t rush into anything.

"There is myriad information out there, whether that’s through services such as Pension Wise, helpful case workers at the Citizens Advice Bureau or even close family and friends in similar circumstances who may have already gone through the process. 

“In more complex cases, it could be worth enlisting the help of a financial adviser – at the very least, they will be able to help you shape any pre-conceived ideas into a sensible plan of action.”

eleanor.duncan@ft.com