This article is taken from Merryn Somerset Webb’s free weekly personal finance email, MoneySense. Click here to sign up now: MoneySense
There is something odd about the way people finance their retirement. Take equity release. I don’t have anything in particular against the principle but I don’t quite see why it makes sense to spend your whole life paying off a mortgage only to take it out again – usually at a much higher rate – as soon as you retire.
Then there is the way most people approach annuities. Having shoveled any money that hasn’t disappeared into their children’s mouths or their mortgages into their pensions for 40-odd years, a huge number of us then chuck a large percentage of that carefully saved money away the second we reach retirement age.
How? By not shopping around for an annuity (this is when you give a pension company all your money, and they then pay you an annual income until you die). The vast majority of savers, points out Annie Shaw in the Independent, fail to spend even a couple of hours looking for a provider that will offer them good value for money. They’ll spend a hour on comparison sites trying to get the best value on car insurance, and the same wandering from John Lewis to Argos to check on the prices of a new Flymo, but when it comes to the product that defines the income they will have throughout their old age “they simply sign the papers sent by the life assurer with which they have saved and buy their annuity from the same provider.”
This is insane. You are obliged when you reach retirement age to hand over the majority of your pension money in exchange for an annuity but you are certainly not obliged to buy your annuity from the same company that ran your pension. And you probably shouldn’t.
Annuities offer absolutely shocking value at the best of times. Take the example of a 65-year-old non-smoking woman retiring right now with a £100,000 pension pot. The average annuity on offer to her, if she wants her payment to rise with the Retail Price Index during her retirement (i.e. she doesn’t want to starve to death just because inflation is on the up) is about £350 a month.
This article is taken from Merryn Somerset Webb’s free weekly personal finance email, MoneySense. Click here to sign up now: MoneySense
The average life span of women is about 85 these days, so let’s assume that she lives that long. How much money will she get in real terms (adjusted for inflation) over the remainder of her life time? The answer is a pathetic £84,000. Yup. She’s handed over £100,000 and 20 years later she’ll have clawed back £16,000 less. Even to get out evens she’s going to have to live to 90.
Given this you might as well go for the best deal possible from all the bad deals on offer. The best for our 65-year-old non-smoker is £365 (Canada Life) and the worst £323 (AXA). That’s a 13% difference, something that would make a real difference to her life style. The average difference between best and worst in most scenarios is about 10%, but Hargreaves Lansdown reckons it is often a good 25%. When it comes to annuities, inertia really costs.
You can search for the best annuity deals at www.fsa.gov.uk/tables but you should also do a little research first to make sure that you get one that suits. Note for example, that it is possible to buy annuities that only pay out for the length of your life, but you can also buy those that continue to pay out to your spouse after you die (these tend to pay a lower annual income as the providers expect to have to pay them for longer).
But according to Age Concern, around three quarters of the annuities arranged for married men provide no income at all for their widows after their death: they are leaving their partners in the lurch later for the sake of a higher income while they are alive. The final advice from this week’s Moneysense therefore goes to the nation’s wives: either sort your own pension arrangements out sharpish (see www.loveisnotenough.co.uk for more on this) or make very sure your husband doesn’t sign those annuity papers before you see them.