While many people still think, mistakenly, that an annuity is their only source of a retirement income, the bad news about these largely discredited products keeps coming.
In what one newspaper termed “the biggest annuity swizz”, it has emerged that insurers are making millions of pounds of extra profit by bouncing savers into pensions designed for “super-healthy” people who can be expected to live – and thus continue to draw an income – into their 90s.
The longer you are expected to live, of course, the less income you get from an annuity. Those with lower life expectancies, such as smokers, heavy drinkers, or people with pre-existing health problems, qualify for higher, or enhanced, monthly payments.
Surveys have shown that 60 per cent of those saving for a pension should qualify for the higher rate thanks to the extensive list of health and lifestyle factors that insurers should take into account, but don’t.
Despite this, it seems that nearly 70 per cent are being sold policies designed for the hale and healthy.
The annuities sector is now coming under the microscope of the financial regulators after a series of exposes relating to the high profits it makes on the back of low payouts.
That review should also focus on what many regard as the biggest drawback to annuities – worse even then the poor value for money they offer – which is the monolithic inflexibility that locks you into the rate at which you buy for the rest of your life.
One insurer, Phoenix, was reported recently to be chipping away at the structure by offering to turn small monthly payments – and by small it means as little as £1 a month – into a one-off lump sum.
The suspicion, of course, is that Phoenix is ridding itself of such minuscule business because administration costs are higher than the gains.
But it shows that at least there is some scope for flexibility – when it suits the insurers.
A major element of our work here at The Whitehall Partnership is showing clients how they can make more from their pension savings by utilising strategies such as income drawdown and phased retirement.
These are topics on which I have written previously in this blog, but it is important, I think, to repeat the message that there are more ways of funding your retirement than the discredited annuity.
Income drawdown, otherwise known as an unsecured pension, generally allows retirees to take a tax-free lump sum from their savings while leaving the rest invested, but this option carries additional risk. A phased retirement plan similarly enables capital to be divided into segments, each of which can be converted into income as and when required. Additionally, both options may be combined to offer retirees more flexibility.
Schemes such as these offer the flexibility denied by annuities but should only be undertaken with the help of an independent financial adviser with advanced qualifications in retirement planning and the management of inheritance tax.
The Whitehall Partnership prides itself on helping our clients to enjoy their well earned retirement by steering them clear of the pitfalls of poor financial planning as well as the excessively high fees and other rip-offs that, sadly, have become an all too familiar hallmark of certain practitioners in the financial services industry.
You feel you need advice on how to management your own retirement, call us today on 0845 43 49 250 and a arrange a free initial consultation at a time and location that suits you.