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‘Rip-off’ annuities: the complex products for pension savers explained

Annuities are widely seen as a complex ‘rip-off,’ as their returns hover above historic lows and the government revokes a rule forcing people to buy them upon retirement.

‘Rip-off’ annuities: the complex products for pension savers explained

Annuities are widely seen as a complex ‘rip-off,’ as their returns hover above historic lows and the government revokes a rule forcing people to buy them upon retirement.

The products function somewhat like life insurance policies in reverse: you pay out a large lump sum from your pension pot, and a company gives you a regular income in exchange until you die.

Citywire readers approaching retirement or already retired admit to ‘dithering’ as to whether to buy annuities, citing frustration with the current rates. And analysts are divided over the rates’ general direction.

Earlier this year, annuity rates dropped to a historic trough, below the 6% mark; back in 1990, they were at 15%.

But rates have experienced a slight bounce of late: according to wealth manager Hargreaves Lansdown, a £100,000 pension fund will now buy a 65-year-old man an annuity of £6,514, compared with £6,291 just over a month ago.

Citywire reader Chris Gough, 59, says he takes a ‘very dim’ view of annuities, pointing out that you can get interest of 4% on some bonds, which don’t require you to hand over a lump sum for ever.

‘With an annuity, you could in theory die the day after taking it and get nothing,’ warns Gough, who lives near Wolverhampton and works part-time. ‘I know you can have a 5-year guarantee, but that does not give even half the invested sum.’

He was referring to a type of annuity that guarantees payments for a minimum period, say five or ten years, even if you die before that period ends. Other products offer increases at a fixed rate, e.g. 3% per year, or in line with the annual change in the retail price index, a measure of inflation.

There are also products known as ‘enhanced annuities,’ which are normally available for regular smokers – but can also benefit people who are overweight – and offer a higher income.

‘A complex maze’

Another reader wrote in a Citywire forum that annuities are ‘such a complex maze that it is no surprise that people stick rigidly to something they know (be it property, cash under the mattress, gold or something else).’

From April next year, retirees will be given a lot more choice on the matter, after the Treasury announced today that people will no longer be forced to buy an annuity at 75 – as most people are under current legislation.

Analysts believe, however, that the new rules are likely to affect the rich only and that the majority of retirees still opt to buy annuities.

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18 comments so far. Why not have your say?

J Bewey

Dec 09, 2010 at 17:04

The annuity is not the rip off; it is the insurance companies that you gave your contributions to that 'rip' you off. Returns are no better than long term interest rates, yet when you die they keep the 'pot'. Try to place your pension with another provider and you would think you were stealing their money. For a month now I have been trying to get my pension fund out of AVIVA via the tax free lump sum and transfer of the fund to an annuity trust scheme. I have had excuses and promises - the latest one that it would be in my bank today - but nothing happens. When I get back through to them they come up with excuses such as they have had to recalculate it. Obviously the staff do not know how to operate such a 'complex' computer programme or the batteries in their calculators have gone flat. I have spent over three hours on numerous calls and paperwork so far and the clock is running. They can expect a vigorous claim for compensation. Santander may be the worst bank but AVIVA are the worst Insurance Company!

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Dec 09, 2010 at 17:24

There is no rule that you have to buy an annuity at age 75. That was abolished in 2006.

What unscrupulous IFAs still refer to as the compulsion to buy an annuity at 75 is the rule that you have to start drawing your pension at age 75. There is an enormous difference.

What I fully intend to do is to use pension drawdown from my SIPP till I die. That way the growth in my fund (and it has averaged 7% a year for the past 4 years, including the recession) belongs to me, and not to a faceless insurance company. There is also a good chance that the Government will repeal the Inheritance Tax legislation on pensions, so that I can leave my "pot" to my daughters when I die. OK, my estate may have to pay 55% tax, but that's rather better than the current 82%.

I would NEVER buy an annuity, just because if I die the next day the insurance company keeps all the money. Sure, I understand about spreading risk, and I may live to 115, but if my pension grows at 7% a year compound I'll still have enough to live on.

Flora Rose (splendid name!) works for the Association of British Insurers. Of course she will say annuities are the most appropriate product for the vast majority of consumers.

Perhaps I ought to start the Anti-Annuity Alliance . . . . . .

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Peter O'Hara

Dec 09, 2010 at 19:07

I agree with both previous comments. I recently got a quote for an annnuity out of curiosity. For a Pension Pot of 85K at the age of 56 the best income would be around 4k p.a. with no annual increase. If I lived for 20yrs my 4K wouldn't even pay the gas bill ! Keep control of your money is my advice. I'll take my chances with income drawdown; my SIPP's returned 12% p.a. over the last 4 years despite the stockmarket crash.

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Dec 10, 2010 at 09:28

Chris Gough really needs educating before being quoted. Capital protected annuities?

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chris hart

Dec 10, 2010 at 09:43

I took control of my pensions investments 4 years ago. Up an average of 40% thanks to a punt in China. I am now coming out of UK and Europe and going into South America and Africa. High risk but as the others have said at least I have control over my own financial destiny.

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antony obrien

Dec 10, 2010 at 09:56

but Peter, your life expectancy is 26 years

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Dec 10, 2010 at 10:31

Annuities are expensive because insurers have to price in sales commission, profits and costs of regulatory capital. They also have no economies of scale and so are priced very poorly. So I have a cunning plan. The Government needs to borrow huge amounts of money - let them offer a more realistically-priced alternative to private sector annuities. There would have to be a clear promise of future returns to avoid political meddling but it wouldn't be too expensive to build and run. No default risk, no sales commissions and huge potential economies of scale

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Martin Drew

Dec 10, 2010 at 11:12

I agree it is complicated, so complicated that I can't be bothered to even think about it. I get my state pension, and income from other investments that I have made and I still work and draw a small income from the business and so I have left my pension fund sitting there and hope that by the time I have to buy an annuity I will either be dead or one of my nephews or nieces will have worked out what needs to be done!

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Ivor Nestegg

Dec 10, 2010 at 11:20

So the ABI's Rose says

"Annuities are unquestionably by far the most appropriate product for the vast majority of consumers."

Well of course she would - she is trying to sell them!

Maverick says

"Perhaps I ought to start the Anti-Annuity Alliance"

You can sign me up as a Founder Member if you do.

Meanwhile, Anthony O' Brien sems to think that 4k p.a. in return for 85k up front is good value on the grounds that

"Peter, your life expectancy is 26 years"

Unless I have misunderstood something, it will be at lmore than 21 years before Peter evens gets his money back - far less any kind of return on it while the Insurance Co. will have had the use of this money for all this time.

Ever heard of DCF Anthony?

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Dec 10, 2010 at 11:33

For those of us in our late 60's yet to decide but cannot generate the £20,000 a year to have unlimited access to our fund we can still draw down the equivalent of an annuity rate available at the time. which I understand is what is meant by the cap. This will give me as much as an annuity would generate and I still have the capital to pass on to my kids , given a reasonable annual ncrease in the fund. the issue for me is the risk of dilution but I believe the benefits outweigh the risks...Well done Mr Cameron but maybe if the annual income was say £10,000 you had to guarantee many more folks would benefit

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antony obrien

Dec 10, 2010 at 11:33

you probably mean TCF and yes ive heard of it. calm down Ivor or you wont need any pension planning.

Annuities were good, they are now awful theres no argument there but half of all people get more out of an annuity than they put in, they also get peace of mind. if you have a 50k pot and are not financially savvy then they still have some value.

Please dont think your circumstances are everybodys

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David Lewis

Dec 10, 2010 at 11:39

Surely there is nothing wrong with the concept of annuities. It is the actuaries and people who calculate the returns. Like insurance it used to be about pooled risk, so that tney won on some and lost on some and made a reasonable return. Now its about factoring in all the risk on any single policy and so the profits for the company are higher and the returns for the policy holder are pathetic. Instead of buying annuities wouldn't we be better off buying shares in the providers?

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Dec 10, 2010 at 12:34

Variable annuities are the way forward;

- A guaranteed income for life

- Full access to the fund which remains invested

- The ability to lock in growth for income purposes

- Guaranteed death benefits

Most portfolios should have an element invested in a VA if not the whole pot

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Ivor Nestegg

Dec 10, 2010 at 13:58


Since you obviously don't seem to have heard of it DCF is a technique for measuring the sum of a series of cash flows over a period of time and a 21 year pay back wouild be a very poor investment.

And please don't be so patronising in future.

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antony obrien

Dec 10, 2010 at 16:07

ditto Mr engine. and no ive never heard of it, sounds like efficient markets theory. ie bollo k c

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Dec 11, 2010 at 21:09

I read the pologists for the inurers about profits. With even a modicum of ability, low, it is possible to invest the amount received and make a hansome profit.

Old expression, most apt, money for old rope,

Rather than trying to protect the insurer, good taxpayer, they, the govt, are elected to protect the people and there is an incestuous relationship between the banks and insurers, both lend money they get from their 'clients' and both make up precepts before the 'policy' begins to profit, the more the precepts, the more profits.

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Dec 12, 2010 at 21:19


My spouse and I will soon be required to make the age 75 decisions on our small SIPP's. Our income was from property and did not count as net relevent income to allow pension contributions and we have only been permitted to make the £3,600.00 SIPP contribution for a few years. We have financial assets sufficient for our needs and the plan is to to tag on for a few more years and reduce these to the inheritence tax threshold.

We have other small pensions but not £20K. We will never need state assistance.

We have fundamental objections to taking an annuity and are unlikely to receive value because of the low capital amounts.

The plan was to take the 25% lump sum and the permitted income, transfer the first pot to the surviving spouse under the dependancy rules, and accept the final tax charge with good grace. The £20k income rule appears to close this option.


It is probably appropiate at this stage to recall the parable of the farmer who filled his barns and was called to account before he enjoyed the benefit.

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Dec 12, 2010 at 21:36

Further to my earlier comment, I forgot to mention that I have read the comment by katie,11:33. Pension rules are complicated. Does the scheme allow some income from the pension pot or does the absence of £20k income force an annuity?

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