There has been a great deal of debate over the last few weeks about buying an annuity at retirement.
Buying an annuity is one of the most important financial decisions many of us ever have to make, and no-one is pretending it is risk-free or easy.
Those who fail to get the best deal for themselves will be worse-off for the whole of their retirement as a result. Many consumers may not realise just how much disparity there is amongst the products on offer
Today, as part of the industry’s commitment to helping people make good choices in retirement we have created a new resource on our website to help people see what a difference shopping around can make to their retirement income.
We have published tables of annuity rates offered by all the ABI’s member companies – who represent around 95% of the annuity market – for 12 varied customer scenarios. It is not a real time comparison website, but instead is meant to simply show people that there are different rates on offer and that their personal circumstances, such as health, can have an impact on the amount of income they receive in retirement. We will regularly update the information and change the scenarios we use.
‘Shop around and get advice’
We want these tables to show people that they have choices, that they shouldn’t automatically stay with their existing provider but instead shop around to see what other deals are available for them.
We also signpost people to other sources of advice and information, including other comparison websites which do offer real time rates such as the Money Advice Service and where to go if they want to contact a professional financial adviser..
Using a pension pot to purchase an annuity gives a guaranteed income for the rest of someone’s life. It insures the saver against outliving their savings and the state against having to pick up the tab.
It is true that there are complex assumptions involved when a provider turns a cash sum into an income for life, and the result is not a straightforward building society account that the saver can dip into at will, but that is precisely the point. It is therefore absolutely crucial that people retiring are helped to exercise their right to a choice so they get the best deal and the right solution as it is a decision they will only get to make once.
One of the assumptions insurers use is the key one of life expectancy, based on the personal circumstances of the person buying an annuity. Sometimes people will live longer than the insurer predicts and sometimes they won’t. All the contributions from all a firm’s annuity customers are pooled and invested to make sure there is money there to guarantee incomes for all customers over their lifetimes.
Those who live longer than the insurer’s predictions will have their retirement funded in part by those who do not. Insurers operate the model that society, and the legislation drawn up by government asks for. It is a system of social insurance which means all those participating share one another’s risk. Insurers work to the model society demands but we are of course always open to debating whether there is a way to make it work better.
‘A challenge for everyone’
Times are undoubtedly tough for savers, but this is a challenge we all have a stake in and it is not something the pensions industry can solve on its own.
The pensions industry cannot change the economic weather – it is not in our gift to increase interest rates or improve the underlying strength of the economy.
And although automatic enrolment is helping people start saving, the pensions industry cannot force people to save more and nor should we. These are choices that people have to make based on what matters most to them and the kind of retirement they want and expect.
What we can do, and are doing, is help people realise that they have a choice at retirement and enable them to exercise that choice in a way that is right for them to get the best deal their retirement savings can buy.
Today is an important step, but perhaps the time has come for a more fundamental review of how solutions to the retirement income challenge can be found in a world of low interest rates and longer lives after work. The industry would be enthusiastic participants in such a debate.