20 July 2010

Annuities – The Product you Bought But Never Heard of

At the time of your selected retirement age, insurance companies will send out some information to holders of money purchase pension plans. This gives information on the pension income available from your fund.

Recent rule changes mean that the option of taking your pension money to another pension provider must be stated (the “Open Market Option”). In reality the easy route for most people is just to tick the box and take an income from the same insurance company. That suits the insurance company, since, apart from anything else, they will take a percentage of your fund for the privilege of setting up your pension. What you are actually doing is buying an “annuity”.

An annuity is a financial product like any other but for some reason our regulators do not require any advice at this vital stage of life. As a result, by just ticking the box, many people are getting the second or third best option. Annuities seem to be viewed by the Financial Services Authority as risk-free, but that certainly isn’t the case. It is possible to buy a totally inappropriate annuity – perhaps with no provision for a spouse if the purchaser dies first, or perhaps with no allowance for a reduced life expectancy for someone who has health issues (which could get you a higher income).

Currently, Government more or less forces everyone to take an annuity at some stage (this is under review, but any change may only be useful to the most wealthy pensioners). If they are doing that, then the least the FSA can do is to make sure people know what they are buying and take a conscious decision. Isn’t that what the FSA exists for?!

More on annuities and other retirement income at http://www.primetimefinancial.co.uk/retirement-income-info

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