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Could the auto-enrolment principle work for annuities?
Trying to get the most out of your pension pot isn't just about income: it's also about getting the right type of annuity.
by Michelle McGagh on Nov 08, 2012 at 15:25
The introduction of auto-enrolment will see UK workers start saving for a pension by default. But could the government extend auto-enrolment to ensure everyone gets the best deal when they buy an annuity?
Auto-enrolment, which began last month, will see workers not currently saving into a workplace pension put into one automatically. It is the government’s aim to ensure that UK workers are saving for their retirement, and do not become a burden on the state.
This is great news, and means more people will have financial independence in old age. But there is still one hurdle they have to overcome when they retire: how to turn their pension into a decent income.
The majority of people do this by buying an annuity – essentially an insurance contract against living too long. You hand over your pension pot and the insurance company pays out a set income each year based on how much money you have saved and how long it expects you to live.
At the moment annuity rates are low thanks to a 'perfect storm' of low gilt yields, quantitative easing and increased longevity. These problems are compounded by a lack of knowledge about the different types of annuity available, and retirees failing to take advice on which annuity is best for them.
Another concern is that when the retail distribution review (RDR) comes into force next year it could make it more difficult for those with modest pension pots to afford advice.
At an event held by the International Longevity Centre that sought to address this problem, a plan was proposed to develop default annuity options. By introducing default options for annuities, it was argued that those who cannot afford to take advice will not miss out.
Steve Groves, chief executive of Partnership, said annuity ‘safe harbours’ could be introduced where certain pension benefits are automatically given and have to be opted out of, much like auto-enrolment.
How it could work
For example, many married retirees buy an annuity that only pays out in their lifetime because they receive more income, but including a ‘spousal benefit’ on the annuity would mean your spouse is covered in the event of your death.
He also mentioned the underuse of ‘escalating annuities’ that pay out less at the beginning of retirement and more towards the end to take into account the effects of inflation, and also to allow people to pay for care as they get older.
Groves said when the industry spoke about ‘modest incomes’ it meant those with £40,000 or less in their pension, which accounts for 78% of pensioners. He also warned that because of low savings retirees are more concerned about getting the most income, rather than the right annuity.
‘People are failing to get the right shape annuity, they are buying a single life annuity even though they are married,’ he said.
More about this:
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- Don't qualify for auto-enrolment? You can still opt into a pension
- Do you know about the UK pension shake-up?
- Pensions: what you need to know about auto-enrolment
- Force insurers to publish annuity rates, ABI says
- Questions to ask yourself before buying an annuity
- 'Free-falling' annuities set to dive again after gender ruling
- The Lolly guide to annuities and retirement income
- Annuities: you only have one chance, so get it right
- How to buy an annuity
- 'Impaired life' annuities could boost your pension benefits
- Why the 'retail distribution review' is good for you
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