It seems that each governing party that comes to power likes to make its own stamp on the pension and investment marketplaces, particularly the pension industry which has seen radical changes over the last decade, with simplification being the latest.
Options for the consumer at retirement have also significantly changed with the introduction of drawdown facilities set against the previous traditional annuity options.
One might therefore be forgiven for anticipating similar sweeping changes in the annuity world, and a move from this more traditional market to the other vesting mechanisms have already been noted.
Whilst the annuity market has seen little change to date, the success of the variable annuities in the USA and Japan may well be emulated in the UK, adding to this product’s consistent usage in retirement planning.
Current high-level statistics are difficult to track down, however the primary annuity sales providers continue to report strong figures.
By way of example, annuity sales increased dramatically over the decade up to 2002 from a figure of £2.45bn to £8.55bn.
Although legislation no longer compels the purchase of an annuity when a consumer takes their retirement fund, the guarantees associated with an annuity purchase for those entering retirement is likely to continue as an item high on the priorities list.
Annuities have become more expensive for companies to offer as life expectancy increases and, as such, it has become increasingly important for advisers to consider the rate differences between providers and other medically related enhancements that might apply to many consumers.
The difference between best and worst conventional annuity providers’ rates can easily be as much as 18% and, given that nationally, 14% of the population over age 60 are smokers [i], enhanced annuity quotations become very relevant.
Traditional annuities are highly commoditised in much the same way as the basic term assurance market but the adviser community has been slower to accept the opportunities that exist in the non standard market than in the protection marketplace.
In 2006, around two-thirds of people bought a conventional annuity with their existing pension provider. That is, approximately 240,000 retirees who could have missed out on higher annuity rates by not utilising their Open Market Option.
In general, individuals that qualify for impaired life rates have a significantly reduced life expectancy (usually less than five years to live), resulting in significant increases to the annuity income.
It is quite possible that a smoker or sufferer of diabetes’ annuity buying power might be increased by a factor of 30%.
Indeed, Just Retirement states that six in 10 annuity purchasers might be entitled to some form of enhancement on standard rates.
So, although there are opportunities for people approaching retirement to maximise their retirement benefits (with the assistance of a good adviser), it will be interesting to see what improvements the Government proposes in this area.
Graham Coxell is business and commercial development director at Capita Financial Services.
This views expressed in this article are those of its author and do not necessarily represent those of IFAonline or any other Incisive Media affiliated publication.IFAonline
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