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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

Fixed-term annuities could leave pensioners in a fix, warns insurer

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.

You can learn more about pensions and annuities in our special guides.

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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4 comments so far. Why not have your say?

Maverick

May 14, 2012 at 14:45

When Solvency II does begin to bite, annuities will have priced themselves out of the market.. Everyone will have to learn how to manage his (or her) own SIPP and ISA. Don't assume someone is going to do it for you.

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Anonymous 1 needed this 'off the record'

May 14, 2012 at 19:21

I saved a SIPP for my old age -

Yes MANAGE your SIPP within GOVERNMENT limits:

Max annual take = Guilts, or maybe less than you could make in interest on an instant access savings account. so the government can take 55% (tax) of the capital you were not allowed to have as pension income.

Problem is, if you have 'saved' in a pension fund, you are now trapped within the government control!

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Rob Walker

May 14, 2012 at 21:13

Fixed term seems a good plan to me. Shove all your money into a 10-year annuity, live like a lord whilst you've still got your marbles and the lavatory bits work, then wait until the gourmet meals, fags and booze take their toll, then get the state to pay for your nursing care 'cos you're broke.

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Patrick wilmot

Aug 31, 2012 at 15:29

You may have health problems later on or your spouse has died, in which case an annuity taken at outset with no enhancement for an impaired life and with spouse'e provsion could be detrimental.

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