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Fixed-term annuities could leave pensioners in a fix, warns insurer
Legal & General has warned the City regulator about the risks of temporary 'fixed term annuities', which are growing in popularity due to low lifetime annuity rates.
by Michelle McGagh on May 14, 2012 at 11:38
Legal & General, the life insurance company, has urged pensioners delaying the purchase of a lifetime annuity to be wary of relying on the temporary solution offered by ‘fixed term annuities’.
Fixed term annuities have become increasingly popular with new retirees as they offer a fixed income for a set amount of time, usually five or 10 years, which means pensioners do not have to commit to a certain level of income for the rest of their lifetime.
As the income being offered by conventional annuities has fallen sharply, fixed term annuities have increased in popularity.
By taking out a fixed term annuity, pensioners are effectively betting that annuity rates will be more attractive at the end of the fixed period.
However, Legal & General has warned the Financial Services Authority (FSA), the financial regulator, that the risks of fixed term annuities are not fully explained to consumers, who could find themselves worse off when the fixed term ends.
John Pollock, L&G group executive director of protection and annuities, said annuities were ‘an insurance against the risk of living longer than you think’ and the use of annuities that do not provide a lifetime income created a level of risk.
‘My belief is that [fixed term annuities] are an additional risk and I’m not sure [the risk] is going to be explained,’ he said.
‘We won’t do it [offer fixed term annuities]. We have seen there is an increased market and more people recommending this product, but we won’t.’
Pollock's main concerns are the impact of new European regulations, known as Solvency II, to make insurers hold more capital and other measures that will equalise annuity rates between men and women.
When both of these changes are implemented at the end of the year they will ‘make pricing less certain’ and could drive down annuity rates even further. This means those who are hoping rates will be higher in future could be disappointed.
Pollock also said government tax changes could affect annuities in future, ruining the financial plans of those who take out fixed term annuities.
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