The value of guaranteed annuity rates

Phil Loney

The affable , cricket loving chief executive of Royal London- Phil Loney- has written to Ros Altmann thus;-

Dear Ros

Congratulations on your Maiden Speech. It is pleasing to hear such a positive advocate for pensions. I was particular pleased to hear you stress the importance of the role of Pension Wise.

You will be aware that Royal London has been calling for a new advice regime for mass market customers for some time. The pressing need for this service has not abated and I know that you have expressed considerable sympathy with this view point before entering Parliament. However the commencement of “Pensions Freedoms” in April has highlighted another area of potential consumer detriment and one that needs to be addressed urgently.

Thousands of people are affected by this issue, both customers of Royal London and across the wider market. In order to highlight the problem, and garner support for our proposed solution, I am publishing this letter on our website and briefing the media.

Significant numbers of customers in the over 55 age group have pension savings that have guaranteed annuity rates (GARs) attached to them. These guaranteed rates mean that the annuity income the pension would generate far outweighs the rates that currently prevail in the open market. A GAR producing annual income of 11% of the fund is not uncommon and this compares extremely favourably with prevailing market rates of around 4%.

Legislation passed only this year requires savers with safeguarded benefits such as GARs of over £30,000 to seek the advice of an FCA authorised adviser if they intend to cash in their fund as they are entitled to do under the Pension Freedoms. Cashing in the pension fund means the valuable guaranteed annuity rate is foregone so it is not a transaction that should be undertaken lightly. Clearly it was the intention of the legislation to safeguard savers with GARs by requiring them to seek the advice of a qualified adviser.

Two months into the new pensions regime it is very clear that this policy to safeguard savers with GARs is a failure. Savers with fairly modest pension savings, marginally over the £30,000 threshold, are deeply frustrated that their pension provider requires them to seek advice from a qualified adviser before accessing their own money. Providers are accused of creating barriers to prevent customers exercising their rights under Pension Freedoms.

Advisers, the lynchpin of the new legislation, are reluctant to engage with modest savers finding the limited scope of advice on GARs an uncommercial proposition. Others that might be disposed to assist modest savers are put off by the prospect of subsequent regulatory sanction when savers come to understand the value of the guarantees they have given up.

The situation that savers with GARs currently find themselves in is deeply unsatisfactory and risks bringing all parts of the pensions industry and the Freedoms themselves into disrepute.

We propose a simple and straightforward solution to the current impasse.   Government has created the Pension Wise service to provide readily-available guidance free of charge for those approaching retirement. Pension Wise and the Pensions Advisory Service which is its chief delivery mechanism has an excellent reputation for impartiality and technical expertise in all aspects of pensions and retirement planning. The existing legislation requiring savers with GARs over the £30,000 threshold to seek advice from an FCA authorised adviser should be relaxed as a matter of urgency. There is no reason why the Pension Wise service should not be able to provide necessary guidance on GARs enabling savers to take a considered and informed view of their retirement provision.

I realise that enabling Pension Wise to provide guidance in this area will require a change to legislation and the FCA rulebook. It will also require a change in provider procedures if they are required to provide Pension Wise with details of a customer’s GAR. However these changes are relatively small and would address a significant problem in short order.

Let me be clear, we fundamentally believe that there is an important role for qualified advisers to play in the wider retirement planning market. Advisers provide clients with more complex needs a holistic view of their requirements. However casting authorised advisers in the role of gate-keeper to the savings for everyone with a GAR creates a situation that is unworkable for providers, advisers and customers alike. Pension Wise provides a simple solution to this problem.

We do not, however, believe that this solution should be extended to those with DB pensions. The complexity of these schemes and the nature of the guarantees that apply can only be assessed and communicated by a professional adviser with the appropriate level of qualification.

Yours sincerely,

Phil Loney

Group Chief Executive

Now I have to admit to being ignorant of the plight of these GAR-ites. I am one myself, having paid some AVCs when at Eagle Star, my friendly ex-employee Zurich is forever writing me letters suggesting I convert to a more modern policy without these guaranteed annuity rates, offers that I politely turn down.

For every £10 I have saved, my Eagle Star AVCs pay me £1pa for the rest of my life. For every £25 I saved, the new contract would pay me £1pa. I prefer an exchange rate of 1 for 10.

Being of weak mind, I wanted to test my views with my friend David St Cyr , a Barbadian actuarial colleague. This was David’s response

Based on Phil L’s own annuity rates (difference between 11% and 4%) , asking someone to cash in potentially circa 2/3rds the value of their entitlement just on the back of guidance (rather than advice) does not sit well with me.

[if !supportLists]       [endif]So for example someone with a £35k pot with an 11% GAR will get an annuity of circa £320 per month.  Go elsewhere in the market and one would need circa £96k to produce same income (without a GAR).  Does this not imply potentially giving up £61k (£96 – £35) benefit value if cashing in?

Even at these modest fund levels the amount “in play” is quite substantial!

Would guidance explore the various alternatives to achieving the members’ objectives (as IFA advice would)?

Do not think there would be any redress to TPAS if member subsequently complained.

Not sure RL should be the one lobbying here anyway.  Surely there is a conflict of interest in that making it easier for people to cash in their GARs means taking RL off the hook for these same GARs?

I think there would be more legs in a lobby for changes that would allow for a more proportional cost/fee structure for the IFA advice market for funds at the lower end.

I think if more focus was placed on the amounts potentially lost by members cashing in their funds with GARs then members would then see the IFA requirement as a must (great value for money!) rather than a barrier!

Well quite! But maybe David and I are missing the point. I suspect that most IFAs are embarrassed to charge a minimum fee of say £500 to point out the bleeding obvious. By the time they’ve done all the regulatory paraphernalia and issued a report, the bill might be £1,000 and the advice…

Don’t be a muppet – stick with what you’ve got, it’s worth 250% more than the cash equivalent.

The client wouldn’t be happy, the adviser would be stuck with a bad debt and Phil’s no closer to getting the toxic guarantee off his books.

How much better to employ Pensions Wise, or at least the bit of Pension Wise that knows what it is talking about on complex pension issues – TPAS.

Michelle “Crackers” Cracknell, the CEO of TPAS is also an actuary- and a jolly good one. She would have no difficulty establishing the guidance for the likes of me, were I to come to her bearing my GARs.

I cannot advise you Henry, you have two courses of action , cash in your GARs and be a total muppet or keep them and be 250% better off. It is entirely your decision which course of action to take.

This guidance will of course cost nothing, it being a State-sponsored service. Armed with these fine words, I could go to another provider and tell them I have taken guidance, insist on being a muppet and want to take a transfer (to a drawdown policy) or just cash out.

I suspect that there are insistent muppets out there who will do this, making Phil happy and the muppet happy and not bothering the IFA who has better things to do – like work out how to deal with DB transfers.

Muppets will be muppets and we all have the right to make substantial donations to insurance companies (like giving back our right to a GAR). Pension Wise is, in this instance, being asked to act as a split condom, offering protection while assisting gestation.

And before anyone comes at me with complicated case histories involving when you can take AVCs according to scheme rules, the distortions created by GARs on more important decisions like the taking of main scheme benefits- I know! I’ve been there- it is tricky.

But in the final analysis , the decision is an easy one. Either you want to be a muppet or you don’t and we must let muppets be muppets!


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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13 Responses to The value of guaranteed annuity rates

  1. Quite honestly is there any value in these vague ‘guarantees’ that pension providers write into their schemes and then try to ‘hide behind them’! In the end these provisions are only as good as the viability of the pension providers companies that have run into trouble in recent years such as Equitable Life and many DB pensions schemes none of which have real protection under current government legislation and certainly not from failures due to government misfeasance! I had a ‘so called guarantee’ to be indexed at 3% per annum from my DB pension provider but once the scheme became ‘in-deficit’ there was no protection offered by government rules to protect my income and certainly not via the Financial Assistance Scheme! I am afraid we are still suffering from the fog of the last century (‘glass and mirror’) here one minute – gone the next ‘a confidence spivs paradise’!
    No end in sight for a suffering 21st Century pensioner

  2. ifaleicester says:

    Excellent insight Henry, however I would the following comments:

    1) Even if informed of the potential downsides of their actions people seem to have a remarkable ability to complain after the event, e.g. Annuity Mis-selling where apparently nobody read about the OMO, or realised that not shopping around might mean you got a bad deal, or that taking a single life annuity didn’t protect your spouse.

    Given the above I believe that they should pay for, and get, financial advice. Otherwise they are getting a free role of the dice, effectively paid for by everyone else, including advice clients that have to, in part, to pick up the bill by way of higher product costs due to the future compensation costs.

    2) Guidance will never fully consider the alternatives for a client.

    For example, I had a client with a valuable GAR but it was on a single life basis payable annually in arrears.

    Would Pensionwise have explained:

    That the client could arrange a life assurance policy to protect his spouse in the event of the client’s early death.

    That the cost of this cover could be paid for from the ‘extra’ income that the GAR provided above and beyond an OMO.

    That due to the high GAR, it would be better to use a credit card to cover the first year’s expenditure. Then use the part of the first annual GAR payment to repay the credit card and give an income to cover the second year. Thereafter he would double the income (effectively paid annually in advance) than a OMO would have given him.

    There is too much focus on the costs of advice rather than the benefits of that advice. To use your figures, does advice cost £1,000 or save clients £65,000 net?

  3. Phil Loney says:

    Just for clarity gentlemen the main reason that Royal London is lobbying for these changes is that the current advice based approach is so clearly not working. Many advisers will not touch this kind of advice for fear of the liability or customers are so incensed at paying £1000 – £2000 for advice that the value of what they are giving up is lost in the resulting heat. I think that a free service from TPAS focused on this subject might actually lead to higher customer utilisation of their GARs.

    David’s argument that Royal London has some form of dubious conflict of interest here is a bit odd. We are a mutual so any capital released by lower take up of the GAR option still belongs to customers and flows back to them via our profit sharing mechanic.

    I completely agree with ifaleicster on the value of holistic retirement advice. Long may it prosper, but this isn’t what the current law requiring regulated financial advice on GAR pots over £30k is driving.

  4. Bill says:

    I agree anyone that has guaranteed annuity rate needs the correct and the best advice based on their personal circumstances. Yes everyone can sacrifice that benefit for a lump sum but we all are fully aware when ”
    PPI ” has been exusted … The next complaint might be ”
    Did we give clients the best advice “. A client is an individual and their circumstance need to be taken into consideration and not just now but also in the future. A client approaches a advisor for advise and all advisor should understand their individual circumstances and not take orders. ( just cause a client wants it does not mean it is right for them ). A client might want it all but would you advise that ?

  5. Ruth Gilbert says:

    Phil identifies a genuine problem that needs a more pragmatic solution than the current arrangements. But before we even get to people ringing up for their cash and being fobbed off to someone else, let’s think about the annual communications insurers are issuing.

    Surely it should not even be permissible to annually invite swapping a GAR for a modern deal that reduces your annuity income by 60%. Let’s swap that for a nice infographic style 1-pager muppet-graph from Ms Cracknell’s team showing the disparity between GAR benefits compared to other available options.
    …Where the cash-in muppet index = 0 for the small minority who:
    know they are not likely to see the year out,
    are going to lose £10ks of equity in their house due to re-possession for the sake of not being able to pay the mortgage pending an orderly sale at full market value
    supply your own example
    And the same thing can be sent to would-be encashers, who can get their cash by signing a copy of said muppet -graph.
    Or am I being a muppet?

  6. henry tapper says:


    News that insurers are not offering buy-out terms on GARs came as a shock to one senior actuary of my acquaintance.

    I think you hit the nail on the head when you focus on the communications issues.

  7. Phil Loney says:

    It would be odd and arguably very unfair for insurers to offer buy out terms on Guaranteed Annuity Options. The annuity rate available under these policies is an option that can be taken at a particular point in time. By choosing not to take the option, because they want access to their cash earlier, the customer allows the option to lapse and therefore it has no value. To price the annuity as if the option still had value would be to the detriment of other with profit pension customers in the same fund who do not benefit from a GAO. It is important to remember that GAOs are typically ( not exclusively ) built into with profit products from the 1970s and 1980s, so the main impact of increasing the valuation for GAO cases is smaller pension pots for other customers in the with profits fund, as it is the customers who own all ( 0/100 ) or most ( 0/90 ) of the assets in these funds.

    It is hard to see that the implementation of the pension freedoms are a pretext for changing the pricing of the option. After all nobody has had their GAO removed – it is still available in all cases. Customers simply have more options. It is absolutely imperative that the value of GAOs is clearly communicated to customers and I have to say that a lot of good work to establish and reach a high bar for this is taking place across the industry. I hope that a service from TPAS will take the heat out of the current regulatory mess and actually lead to customers focusing on the value of the option that they are giving up rather than focusing on “Insurers and advisers are conspiring to deny me my pension freedoms “.

    To those actuaries on the Occupational side who are keen to know more about this, your interest is welcome. Can I suggest that you talk to the with profit actuaries in any of the main life offices with GARs in their funds. They have had direct and regulated responsibility for these fairness issues for some time.



  8. henry tapper says:

    I don’t think that many people were sold GAO (R)s as an option. Why should a GAR be exercisable only on a certain date?

    It seems the kind of restrictive practice that the Pension Freedoms and the Legacy Review were designed to do away with.

    I can see this being a thorny point not just for your executive Phil , but for Philip Green and your IGC, who may take a different view to the status of the guarantee than your executive.

    • Phil Loney says:

      Actually Henry I think your own experience is clouding your judgement. I would suggest :
      1. The reason that GAOs are tied to a particular date is that the notion of an identified retirement date was prevalent when these products were sold, as evidenced by the retirement ages built into DB schemes of the same era.
      2. I don’t think there is any evidence that the pension freedoms are designed to retrospectively rewrite existing pensions policies. Especially if this is to be at the cost of the majority whoso not have access to these options.
      3. Fairness on with profit GAOs has been overseen by independent with profit committees for years, assisted by with profit actuaries. It is hard to see why anyone would automatically assume they have got it wrong.
      4. The remit of IGCs is around legacy workplace pensions. GAOs will mainly be prevalent on individual pension plans sold in the 1970s and 1980s.

  9. Ruth Gilbert says:

    But what about “exit profit”, or as we protection folk like to say “lapse profit” …or is that the next sure insurance thing to go?

  10. Chris Wrightson says:

    Being somebody who actually works for Pension Wise, I must say I find it rather insulting to be considered part of TPAS that doesn’t know what they’re talking about (having worked in pensions for twenty years! ).We have an extremely experienced team. You’ll be pleased to know that GAR”s are covered in our appointments.

    • Phil Loney says:

      All the evidence that I see suggests that the Pensions Wise team are doing a great job with very high satisfaction levels from customers. No doubt this reflects the professionalism of the team and your long experience Chris. We just need to get more customers talking to you ahead of exercising their freedoms.

      • Chris Wrightson says:

        Thanks Phil, that’s a nice comment. I totally agree that more people need to be made aware of Pension Wise and the impartial confidential guidance we provide. We still suggest that regulated financial advice should be sought but at least we’re explaining things in English. Are IFA ‘s worried about getting it wrong over the reforms or is that there are too many potential clients with small pots who aren’t worth the time of day? Somebody with a small pot that has a GAR isn’t necessarily being a muppet for cashing it in if they need the money to pay off debts etc. It’s a case of making people aware that the State Pension can’t support them fully in retirement and they need to know how they are going to support themselves after cashing in their pot. However, it’s refreshing how many people have a realistic plan.

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