What does a pension annuity mean?
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Pension annuities remain a popular option, especially for Britons who are looking for a guaranteed, set income to sustain them once they depart from the workforce. An annuity essentially allows Britons to swap their pension saving for a fixed stream of payments, intended to be an income which will last until a person eventually passes away. Pension drawdown, where a pot remains invested, is increasing in popularity, but annuities still remain suitable for some individuals.
However, there are concerns about this method of pension management, as a new briefing note has shown the potential problems which are arising with the matter.
The ‘Shopping around for annuities: The changing market’ note published today by the Pensions Policy Institute (PPI) has focused on key findings surrounding the purchase of annuities.
How much a person will receive through an annuity is determined by the rate the annuity provider offers, but many people are failing to “shop around” to find out the options which are available to them.
Taking action to find out which provider offers the best annuity can increase a person’s income and financial security throughout their retirement.
Indeed, the report found that in 2019, up to £130million of yearly annuity income could have been “lost” by a failure to act.
In more personal terms, people could gain an extra £7,000 per £100,000 in their pension pot in the course of their retirement by shopping around.
A failure to achieve the highest possible rate from an annuity could have a particularly negative effect on a person’s standard of living in retirement – and thus their ability to achieve later life goals they may have otherwise had in mind.
This is particularly the case, the briefing note added, for those people depending on their annuity as their only source of income other than the state pension.
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Mark Ormston, Director of Propositions at Retirement Line, supporting the note, said: “In recent years, approximately half of all lifetime annuity customers have potentially missed out on higher annuity income.
“This means lower income for the remainder of their lives, having a direct financial impact throughout later life.
“This additional income could also have provided the flexibility to improve the protection of the annuity, by adding a partner to the policy, guarantee periods or capital protection.
“There are no second chances with a lifetime annuity. It is so important for those considering a lifetime annuity to make sure all their relevant health and lifestyle information has been accurately collected and that they have ‘shopped around’ for the highest annuity income available.
“The annuity market is expected to grow in the future and, as a result, this is not an issue that will simply go away. The annuity market must aim to meet customers’ needs, delivering clear and accurate communications throughout the customer pension income journey.
“Above all else, they must ensure customers have easy access to the highest annuity income available to them.”
Nick Flynn, director of retirement income at Canada Life which also supported the note, highlighted that the annuity market is worth £4billion annually, but customers are still not getting value for money.
He added: “Despite the introduction of pension freedoms and information prompts, the situation appears to be getting worse. People don’t know what they don’t know, and it isn’t simply about securing the best deal, it is equally important to buy the right shape annuity. Without professional assistance or advice, this is at best difficult.
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“The PPI is right to shine the spotlight back on the market and start a debate. Just as the furlough scheme winds up, many thousands of over 55s will be considering their working futures. Many may find it hard to return to the workplace and seek the security of replacing their salary in retirement.
“An annuity is the only guarantee in town, so it’s important anyone considering their retirement options seeks guidance and advice to make the right decisions for their circumstances.”
For those who are making decisions about their pension, the Government-backed PensionWise service is available, alongside MoneyHelper.
Some individuals may also wish to seek financial advice before making a choice about their pension route.
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