Did you know that when you buy an annuity you can change your mind?
Well neither did I. I thought that once you handed your money over to an insurer that it was it, an income for life with no second chances if you wanted your capital back, wanted to re-broke your annuity if annuity rates rose or if your health deteriorated.
On all counts I was wrong and I’m pondering why I have been under labouring under such an illusion.
It turns out that there are such things as “Fixed term annuities” which are renewable convertible products. That means that every three or five years you can re-establish the rate of your annuity based on the rates available at the time and these might be a lot more favourable to you – if interest rates move up or your life expectancy decreases.
I have found all about this by meeting David Slater, doyen of annuity salesmen and Founder of Retirement Line – Britain’s largest annuity broker.
Like Fixed Rate Annuities, Retirement Line is a well kept secret, you’ll find them if you google annuities but you’ll have trouble finding them on a map, their offices are tucked away at the back of an industrial estate in Fletton – home of the Fletton brick – somewhere outside Peterborough.
Retirement Line doesn’t bang any drum, they just get on with help people turn pension pots into pension income – my kind of company. Their literature is full of useful information on the types of annuity you can buy, including a helpful tariff of improvements in your annuity rates depending on the life-threatening ailment you’ve been diagnosed with. They are nothing if not straight talking.
With Trust Pilot scores above 9.9, they are clearly a well-loved secret too.
So why is all this so little talked about?
“When people are asked what they want in retirement – they describe an annuity”
This is a favourite line of Kevin Wesbroom who’s company- Aon – surveyed individual customers and found that 62% assumed, aspired to and anticipated getting an annuity stream from their pension savings.
Pace John Quinlivan and all my friends who tell me that annuities do not provide the shape of income that matches people’s in retirement spending patterns, people like the certainty that their money lasts as long as they do.
Until , that is, they see the rate at which they are converting their savings into a lifetime income.
Why are annuity rates so low at the moment?
Annuity rates are so low, for the same reason that mortgage rates are so low, it’s because for the past 10 years we have been recovering from a financial crisis that nearly wiped out our banks and brought this country to the brink of catastrophe.
Ever since 2009, fiscal policy in this country has been to depress interest rates by flooding the market with Government issued money that has kept both interest rates and gilt yields on the floor. Interest rates and gilt yields drive annuity rates – which is why annuity rates are so low.
Taking a bet that interest rates will stay this low for the next 35 years, which is what a healthy person does when buying an annuity at 60 – is a big bet. It’s speculative. It’s actually very risky, because if interest and inflation rates do go up, the level of income you’ve locked into today, will – in real terms – fall behind the cost of living.
Why I like the new fixed term annuity market.
The fixed term annuity reduces the risk of timing your annuity purchase so that you can look forward to giving yourself a pay-rise if circumstances move in your favour, or renewing what you’ve got – if they don’t.
Fixed rate annuities put you back in control – they effectively give you freedom from a pension rate for life.
I wouldn’t go so far as to say they give you the freedom you get from drawdown, but they give you certainty that you don’t get from an invested product from drawdown (or even CDC).
For people who feel queasy about the possibility that they will have to cut back their income from pension drawdown because of being invested in the markets, fixed rate annuities look a good bet. Similarly for disgustingly healthy people who can’t get an enhancement on their annuity rate – but fear for their future health- fixed rate annuities are a good idea.
You can find out more about fixed term annuities from Retirement Line or by going to the Money and Pension Service website which contains a fuller explanation. (Thanks to Brian Gannon and his comment on this – for alerting me)
Why I like the new enhanced annuity market
Enhanced annuities are something that everyone should explore, when you buy one is the one time in your life you can tell people how horribly unhealthy your lifestyle really is- though your body has got to prove it.
I don’t suppose that many people like to admit their fear of dying too early , but this is the one time when it pays to be honest!
A skilful annuity broker is on your side, helping you to get the best rate – within the underwriting limits of enhanced annuity providers. Nobody should buy an annuity without exploring whether they can get an enhancement – and most people can. The fact is that if you don’t ask – you won’t get. Annuity brokers ask – that’s their job.
Why I like an invested annuity market
In recent times, the annuity market has improved for consumers because of relaxation of rules governing the assets that insurers can buy to back up the annuity promise.
Nowadays, your annuity may be backed not just by gilts but by lifetime mortgages – often issued with the money you’ve handed over from your pension pot. Lifetime mortgages – aka equity release – enable people who have insufficient pension savings to swap the equity in their house for a lifetime income. They do so with your money, the insurer is simply the intermediary – in a very real sense you are helping your neighbour out.
I hope that annuities will become more transparent so that people who sell their pension pots to insurers in return for an income for life, can see what happens to the money after it has gone.
Why should your money – the money you’ve saved, not be put to good use – why shouldn’t it have social purpose and be a force for good? In short – why shouldn’t the principles that underly all good investments – not apply to annuities. ESG should apply to annuities- annuities should be invested with social purpose and have a positive societal impact.
Above all, annuities should be invested rather than just being sunk into Government debt.
There’s risk – risk in everything – that’s how the light gets in
Of course there are risks attached to the new type of annuity. The further we move away from the risk free backing product – gilts, the more risk there is that the insurer will have insufficient assets backing the annuity. But insurers have reserves to meet such shortfalls and are subject to the rigid solvency rules applied by the Prudential Regulatory Authority. We have not had an insurance company go bust (thought the Equitable Life came close). In insurance companies we trust.
Allowing insurance companies to take more risk is a good thing, not only does it mean they can invest in real things – (L&G want annuities to be backed by the income from house they build to sort the housing crisis), but it means that we get better rates and there is more competition as insurers become more innovative.
Why I like Retirement Line
For a consumer like you and me to take advantage of this innovation , we need a trusted broker. I think Retirement Line are trusted – so does Trust Pilot – and the fact that they are Britain’s largest annuity broker suggests that a lot of other people do too.
Business model Most annuity brokers suffered when Pension Freedoms arrived, so did Retirement Line. Slater had to lay staff off and had to change the name of his business (which was called Annuity Line). But he now talks of Osborne’s Freedoms as him manna from heaven, they gave his business the opportunity to become market leader -an opportunity he’s taken.
Trusted; Retirement Line not only knows the market but to a large extent it makes the market. It is vital that we can trust the market makers and people trust Retirement Line.
Governance; This is particularly important in a closed market like annuity broking, where we know so little. If it is a “best kept secret” market – it needs to be properly governed.
Competition There are only a small number of annuity providers out there, but they aren’t “me too”. They genuinely compete for your business and that means you have choice both in the type of annuity you buy, and in the rate on offer (both for standard and enhanced annuities).
Expertise;This is a highly specialised area of finance and it pays to have an expert on your side. I get the feeling that is what Retirement Line do.
Transparency;Of course all this costs, even though Retirement Line are stuck out in the sticks, their people tell me they are well paid and David Slater drives a smart Merc. This is a business that takes money from providers for doing the work for you and – in the case of fixed annuities, can do so every few years! It’s in their and your interests to stay in touch but don’t think that all this help comes for free.
Value for money; But this is where I am happy to employ an intermediary as there is no way that I could do the job that Retirement Line does, nor get the rates that they do. We have to trust these guys to give Value for Money, but – having visited them twice in the past five years -once before April 2014 and once after, I see remarkable consistency in the way this business is run.
Pension income specialists; So if you are making retirement choices right now- get in touch with Retirement Line. I hope that AgeWage and Retirement Line will be able to work together in future – an AgeWage is a pension income – which is what David Slater and his 70 staff – aim to give you – to the max.