According to a former government adviser “The mis-selling of annuities could be at least as big as the mis-selling of payment protection insurance”. Annuities aren’t inherently a bad product but like most mis-sold products they can be the wrong product for the wrong person or bought from the wrong provider with the wrong options.
The first thing to decide is whether an annuity is the correct option for you or if you would be better off with ‘pension drawdown’ where you leave the fund invested and draw from it.
Assuming an annuity is the best to take your income you then need to decide which options you want such as escalation, indexation, guarantee periods, dependants’ pension, the payment interval etc. There is no one right answer for which to include, it comes down your own circumstances.
The problem is that most people still purchase an annuity from the provider they have built up there pension fund with on one of typically four basis that they have quoted on – this mistake can cost thousands over a lifetime. You have a legal right to take your accumulated pension fund and use it to buy an annuity elsewhere; known as your Open Market Option. The difference between the best and the worst annuity you get can be substantial.
Where the rates differ further is in the “enhanced rates” market. Annuity providers assume you are in perfect health and therefore have a longer than average life expectancy. If you have any medical conditions or take medication it is likely that you are in less than perfect health and will therefore have an average or below life expectancy. From an annuity provider’s point of view this is good as the less time you live, the less time they have to pay you! There are a number of providers who will take your medical history into account and tailor a rate based on what they calculate your life expectancy to be. Someone who qualifies for an enhanced rate annuity but instead buys a standard rate annuity has almost definitely lost out.
In conclusion, anyone who purchases an annuity from their existing pension provider without first exploring the options probably hasn’t been mis-sold but they have probably mis-bought.
For more information please contact Nsure Chartered Financial Planners on 01903 821010 or email firstname.lastname@example.org and we will be happy to help.