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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

Could the auto-enrolment principle work for annuities?

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.

Annuity problems

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.

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5 comments so far. Why not have your say?

Rob Walker

Nov 08, 2012 at 18:08

So every new pensioner goes through a high-tech scanner which determines what he/she will die of, and when, whether he/she still likes her/his spouse enough to include them on the annuity and tests the candidate's propensity to explode when the charges for all this are revealed - yey!

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Christopher Harris

Nov 08, 2012 at 18:39

"Groves said when the industry spoke about ‘modest incomes’ it meant those with £40,000 or less in their pension"

£40k at 5% is £800 p.a. that is certainly modest!

What a nonsense statement

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Tony Peterson

Nov 08, 2012 at 18:58

Auto enrolment. Yet another government-fsi rip off, as all pension saving has been for over a decade.

Those with any brains will opt out.

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Nov 09, 2012 at 10:01

This is bonkers.

The default should be that the money stays in the pension fund, no annuity is bought, and the pension provider then pays as drawdown the maximum allowed under the legislation at the time. The pension provider is happy (because it keeps hold of the money), the pensioner is happy (because he stays in control of the fund and can pass the balance on to his family, less the 55% tax, when he dies) and HMRC are getting either the same or slightly more tax from the pension payments. The pension fund would be fully switchable between providers if investment performance dropped off, so it would keep the providers on their toes.

You would, as now, be allowed to transfer out to a self-select SIPP if you didn't trust the pension providers.

We want less regulation, not more.

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Michael Stevens

Nov 09, 2012 at 16:00

Not a good idear. Many men have spouses wtih a larger pesion than these.

Some have pesions split into two or three diferent incomes, such as With Profit, Annuity Growth Account, and perhaps Income Drawdown

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