There’s something fishy going on with annuity sales figures.
New figures published by the Association of British Insurers (ABI) present a rather worrying state of affairs since the Budget in March announced new pension freedom rules, being introduced next April.
Despite the sale of annuities (a financial instrument designed to convert a pension fund into a pension income for life) falling by 42% in the second quarter of the year, the ABI explained that sales by insurance companies have remained broadly level during this time.
It is sales of annuities being purchased through financial advisers, with the benefit of advice, which have fallen sharply since the Budget, as advisers and their clients weigh up the most suitable retirement income option.
Insurance companies however appear to have ploughed on regardless, selling annuities to every retiring customer without as much thought to whether it is the best option.
The ABI claims it is “likely” these statistics are because retiring customers are continuing to take advantage of annuity guarantees attached to their pension plans, which is often a very good reason for buying an annuity from your insurance company.
However, only 12% of annuities sold in 2012 had a guaranteed annuity rate attached, so this explanation doesn’t tell the whole story.
One leading commentator has already described these annuity sales figures as symptomatic of a “huge market failure”. It’s hard to disagree with that view.
Poor health, higher income
Also today was have seen an investigation by The Telegraph suggesting another mis-selling scandal, with people in poor health being sold conventional annuities (which do not pay extra for health or lifestyle conditions) instead of more suitable enhanced annuities.
The paper found that only 7% of retiring insurance company customers who qualify due to poor health are getting access to these enhanced annuities. They explain that insurer Aviva has already repaid some customers who should have received higher annuity incomes due to their medical condition.
Buying an annuity when another retirement income option would be more suitable, or being sold a conventional annuity when your health means you should be paid more with an enhanced annuity; these are both problems stemming from going direct to an insurance company rather than seeking advice at retirement.
An independent financial adviser will consider all of the retirement income options and recommend the most suitable. They will certainly make sure that your health and lifestyle are taken into account when recommending an annuity, so you get the best possible pension income in retirement.
Seek advice
If you go direct to your insurance company and buy an annuity when you retire, you are almost certainly going to miss out on a better annuity rate elsewhere or a more suitable retirement income option, based on your personal circumstances and goals in life.
The new guidance guarantee being introduced by the government next April, and paid for by the financial services sector, isn’t going to do much to stop this from happening. It might raise awareness of the various retirement income options a little, but only independent financial advice can make sure people entering retirement get what is best for them.
Don’t wait for the inevitable findings of the Financial Conduct Authority (FCA) investigation into annuity sales; rather than placing your faith in large companies like insurers and banks (who have a pretty terrible track record when it comes to acting in the best interests of their customers), speak to an independent financial adviser like Informed Choice.
