New annuity code to help pensioners

A new code of conduct to help people who buy an annuity shop around for the best deal comes into force on 1 March. We look at what this means for retirees.
 
When you reach retirement age, it is highly likely that you will use your pension pot to buy an annuity.

An annuity is the investment vehicle which converts your funds into an income guaranteed for the rest of your life.

As this is a once-in-a-lifetime decision, it's very important that you get it right.

The good news is, under a new code of conduct, it should get easier to get an annuity with the best rates and most suitable terms for your particular needs.

What's the new code all about?

The new code, which has been drawn up by the Association of British Insurers (ABI), is designed to encourage people to shop around for their retirement income.

At present, many people simply sign up to the annuity offered by their existing pension provider without seeing what other rates are available elsewhere.

But firms must now make it clear to pension savers that they have the option to shop around, using what is known as the "open market option".

What does this mean for consumers?
Shopping around for the best possible rates is particularly important right now because annuity rates are falling.

In fact, figures from retirement income specialist MGM Advantage suggest average rates have plummeted by 20 per cent in the last four years.

"The ABI's code brings some enormous benefits to the 400,000 people who buy an annuity every year," says Richard Baddon, insurance partner at Deloitte.

"Rates can vary between providers by up to 20 per cent, and as consumers can buy an annuity only once, it is crucial they get it right."

What else is in the code?

As well as reminding people they should shop around, the code states that insurers will also have to publish their rates.

This should give consumers more insight into the market, and make it easier for them to spot an uncompetitive deal.

Providers will no longer be allowed to include annuity application forms in the information packs they send out shortly before retirement.

This should encourage people to shop around.

What about enhanced annuities?

In addition, the code will also force insurers to inform consumers about enhanced annuity options.

Enhanced rates apply to individuals who have a health condition that could affect their life expectancy.

These health conditions range from being overweight, or smoking, right up to serious illnesses.

Enhanced annuities pay out more, in some cases up to 50 per cent more, because the annuity provider is essentially calculating that you will not live as long as healthier individuals.

"By shopping around, getting advice, and making sure they disclose any medical conditions, consumers can secure the highest rates," says John Wilkinson from Nationwide.

"They can also shape their own annuity to include spouse benefits or guarantees, making the most of their pension pots in retirement."

Does the code go far enough?

While pension experts have welcomed the move, they say there is still some way to go.

"The code is a big step forward, but there is more to be done," says Tom McPhail from financial adviser Hargreaves Lansdown.

He points out that the code does not cover all pensions, in particular many workplace and auto-enrolment schemes.

"Ultimately we want a system where every consumer is able to shop around for the best possible retirement income solution, with access to the right information and advice, and to do so without any unnecessary delays or costs."

Richard Williams from The Annuity Bureau adds that there is still a lot of work to be done in educating consumers.

"This is needed to ensure people are fully aware of the options available, and to persuade consumers that the time they spend during the annuity purchase process will be time well spent," he says.

Plan carefully for retirement

In the meantime, it is vital that those approaching retirement age plan their choices properly to make the most of pensions savings and other assets.

If in doubt, seek professional advice from an annuity adviser or broker. You can also visit the Confused.com annuities comparison service.

source: confused.com

Is 2013 the worst time in history to retire?

Retirees taking an annuity at today's prices face some of the worst rates ever. So if you are about to take your pension, is there any way to escape the downward annuity-rate spiral?

Is now the worst time ever to retire?











This rather drastic description may apply, to some extent at least, if you are among the thousands of people who have to buy an annuity this year.

Annuities are the insurance products used to turn someone’s pension savings into a guaranteed monthly income for the rest of their life.

Rock Bottom

But a combination of economic and political factors has resulted in annuity rates falling to record low levels.

Matthew Renier, director of retirement specialist Retire Right, says: "Taking an annuity at today's prices is one of the worst times in history to have to do so."

The payouts on annuities are linked to interest rates and yields on government bonds, or gilts.

The company which sells you an annuity will take your pension money and invest it in order to pay you the income you have been guaranteed.

But if it can't get a very good rate of return on its investment, this will be reflected in the rate you are offered.

No end in Sight

But since the credit crunch, interest rates and gilt yields in the UK and around the world have slumped.

No recovery is expected for a few years at least.

Renier adds: "Low interest rates have forced annuity rates down for a number of years now, and they fell by around 10 per cent in the last three months of 2012 alone.

"And while there was a slight increase in January, low annuity rates are here to stay."

So if you are about to take your pension, is there any way for you to escape the downward annuity-rate spiral?

Here are your options:

Keep Working and Save More

If you are due to retire and take your pension in the next few months, there is always the option of carrying on working and trying to build up a larger fund.

This means you wouldn’t have to buy an annuity now, and it would mean you'll probably have more money when you do so.

Also, the older you are when you buy an annuity, the better rate you'll get, as the seller will expect to have to make payments for a shorter period of time.

There are downsides, however. Firstly, you may not want to carry on working.


And while employers can no longer force staff to leave because of their age, you can be forcibly retired if your age means you can no longer carry out your duties.

Secondly, there is no guarantee that annuity rates will be any better in a year or two's time.

And your pension fund could also drop in value during this period if stock markets perform badly.

Go for the drawdown option

If you have a decent amount of pension saved up, you could consider income drawdown.

This involves leaving your pension invested in shares and other assets in the hope that they continue to grow, while taking a regular income from it.

But this approach has its risks. Again, stock-market volatility could lead to falls in the size of your holding.

And unlike an annuity, your income is in no way guaranteed.

Drawdown is not something that should be entered into lightly.

If your pension is all you have to fund your retirement, and if it is not particularly large, there is a chance that drawdown will not be the right option for you.

Bite the bullet and buy now

Annuity rates might be bad at the moment, but they could be even worse in a year or two's time.

If you delay your purchase, you risk getting an even worse return when you do come to buy.

And you will have missed out on the annuity income you would have received in the interim.

But there are a number of ways you can boost your annuity income, whenever you decide to buy.

One of the simplest is to shop around before you buy.

You can get an annuity from any company, not just the firm which runs your pension, and rates can vary significantly.

Also look at the type of annuity you buy.

If you have any health problems, let the seller know as this could entitle you to a higher-rate enhanced annuity based on lower life expectancy.

source: confused.com