The pension revolution rolls on. Next year more than five million retired people will be able to enjoy the new ‘pension freedoms’ and cash in their annuity.
I imagine the daytime TV ads are in the pipeline already, showing cheery pensioners completing the Daily Telegraph crossword in their new conservatory, or heading off into the sunset on a luxury cruise.
It’s not hard to see why many pensioners might be looking forward to this opportunity. Not because they want to waste their hard-earned savings on fripperies, but because many will be unhappy with the annuity they were forced to buy at retirement.
Until recently most people bought an annuity with their pension pot when they retired, which paid them an income for life.
But these annuities have looked pretty poor value for money in recent years, as increased life expectancy and rock-bottom interest rates have caused annuity rates to plunge.
To make matters worse, most simply took the standard annuity deal offered by their pension provider, rather than shopping around for the better-priced options. I think it’s fair to say that some insurers took advantage of this inertia, and felt no urge to offer even vaguely competitive rates.
And of course, annuities have been spectacularly inflexible products. There has been no opportunity previously to switch providers if your circumstances changed, or if you found a more competitive deal.
So will these new rules give pensioners the chance to secure a better deal? Unfortunately, for the vast majority of pensioners I think the answer will be a resounding no.
The reality for most people is that these new ‘freedoms’ simply give insurance companies the chance to short-change them for a second time.
This is an initiative that promises much, but will deliver little to most retired people. Those that sell their annuities run the risk of being seriously worse off as a result – even on policies that were pretty dire value to start with.
Most people see annuities as an investment product: you hand over your pension pot and get a fixed income in return, say 5 per cent a year.
So if you had £100,000 to start with and have taken £5,000 a year for five years you might quite reasonably expect to sell your annuity for around £75,000 (the original capital, minus the income taken). Perhaps you’d accept a bit less once the inevitable fees for advisers and insurers have been taken into account.
But this isn’t how the insurer buying your annuity will value it. To put it bluntly they couldn’t give a stuff what your pension pot was originally worth – all they are interested in is how long you’re likely to live.
Insurers won’t simply cancel these contracts. They will either collect this £5,000 a year, or look to sell it on, to pension funds or other investors. To determine what this income stream is worth they’ll need to know how long it’s likely to last.
This means anyone selling an annuity will have to undergo a comprehensive medical, and will be obliged to list all previous ailments, illnesses and medication.
The poorer your health, the less this annuity will be worth. And of course the older you are, the poorer your health is likely to be. Even minor ailments could potentially wipe thousands of pounds off the value of your annuity. Insurers are going to err on the side of caution: if there’s a good chance you won’t survive another 10 years, you may not get even five times the annual income.
All this beggars the question why insurers didn’t insist on the same medical checks when selling these annuities in the first place.
Those in poor health can get a much higher income from their pension pot if they buy an ‘enhanced’ annuity, to reflect the fact they’re not likely to be drawing this income for as long. This doesn’t just apply to those who’ve had a previous cancer diagnosis or heart condition. Even common conditions, like taking pills for slightly raised blood pressure, could boost annuity payouts.
But – and it’s a big but – only if you had the foresight to tell your annuity provider about it. Many insurance companies didn’t routinely ask for medical details or offer these ‘enhanced’ options.
It might have been mentioned in the small print, but it was generally up to customers to volunteer this information and seek out a company that would take it into account.
Customers are right to feel aggrieved that an insurer who sold them an annuity without asking for this information can now insist it won’t buy the same policy back without knowing these ‘relevant facts’. This feels like one of those ‘heads I win, tails you lose’ scenarios that seem all too common in the worlds of insurance and investment.
And, just to rub it in, I’m told it will be the customers selling the annuity – not the insurer buying it – who will pay for these medical examination.
The only silver lining in all this is that there may finally be a proper investigation into the potential mis-selling of such annuities. There have been rumblings about this for years.
The main problem has been that, to date, those who bought shockingly poor value annuities rarely realised it. Now they just might.
It’s time a spotlight was shone on the firms that have made fat profits from poor value annuities and have paid lip service to treating customers fairly.
Emma Simon is a freelance consumer journalist and former Personal Finance Editor at The Sunday Telegraph
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