People looking at taking retirement benefits who believe they do not have the choice of either defer...
People looking at taking retirement benefits who believe they do not have the choice of either deferring taking pension income or looking at an investment-linked annuity arrangement are likely to sit opposite you resolutely grim-faced.
This is not surprising. We are all aware of what may have happened to their pension fund in the three years leading up to their retirement. But this has been compounded by a reduction in the top annuity rates available on the open market of more than 20% in the past two years.
These reductions are not about falling investment returns or improved mortality over that two-year period. They are about insurers reassessing the risks and therefore the costs of the guarantees within annuities, resulting in a re-basing of prices.
The husband and wife, both aged 65, who sat opposite me recently have pensions with Axa Sun Life, whose annuity rates are pretty much in the middle of the top 20 pension providers.
The couple were looking at various ways of achieving joint provision. The funds were not large and they therefore wanted to look at level income rates.
Although they both had pensions, her fund was approximately half the value of his. Therefore, to achieve a good balance of provision throughout their expected retirement lifetime, we looked at a mixture of joint life and single life annuities, with the single life annuities guaranteed for as long as possible, currently 10 years.
Although the figures were generally disappointing, as it is clear even the more curious customers have not kept pace with the falling value of annuity income, what was more startling was the percentage improvement in rate offered by the top joint life rate as compared with the single life rates. In each case, Axa's own rate appeared around 10th in the table of top rates.
Single life male rates could be improved by 8%-11%, depending on the amount we chose to invest. Similarly, single life female rates could be improved by 9%-13%.
However, the joint life rates for these two 65-year-olds could be improved by 15%-18% on exercising the open market option (OMO). This wider spread among joint life rates is not with us all the time but is certainly an important factor at present.
This 65-year-old couple proved yet again that, even in the most miserable circumstances for taking a conventional pension annuity, the open market option is of vital importance, as is obtaining the best open market rate for whatever is the chosen structure of the annuity. Not only was the improvement substantially different between joint and single life, the companies concerned were also different.
Stuart Bayliss, director, Annuity Direct
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