Friday 20 December 2013

Purchasing an annuity

Listen carefully…
Hear a knocking noise?
That’s right – it’s the sound of me banging my head against the desk after reading yet another misleading article from the Telegraph. I really thought things might change, but this was brought to my attention: 
banks0 2683348b Purchasing an annuity, Finance Advice, Wiltshire
Dan Hyde of the Telegraph
As you can see it’s an article from Dan Hyde. Dan is Deputy Personal Finance Editor across the Daily Telegraph, Sunday Telegraph and online. He was named Young Financial Journalist of the Year at the Wincott Awards in 2011. Dan looks like a nice chap with his heart in the right place, such a shame then, that on this occasion he’s talking through his hat.
In the article he makes a comparison between a lifetime annuity and corporate and government bonds. Eh?  He says that money invested into the bonds is likely to do better than money spent on a pension annuity. Eh?  He uses a sum of £100,000 in his calculations. A lifetime annuity is something you usually purchase at retirement, and which provides a guaranteed income for life.
Now, Dan is right in some respects, but the article is misleading in suggesting that you have a choice with your Personal Pension pot whether to choose an annuity or government bonds. If the hypothetical sum is held in a pension then you cannot take it all out  and put it into bonds. You have until age 75 to purchase an annuity using pension funds, but you can’t directly take the funds out in the same way you could, say, an ISA.
A careful reading of the article reveals that Dan quotes the following: “Alan Higham, chief executive of Annuity Direct, said: “If you are coming up to retirement, you really need to consider how much you need certainty of income. If you have other savings, it might not be necessary to buy an annuity at all””.  Brilliant.
But no independent financial adviser worth his salt would ever recommend purchasing a lifetime annuity, or any other pension annuity or pension income product from savings. C’est impossible.  And Higham specifically says that for less secure investments, “other savings” would be used.  Are you confused.com?  I was!
So let’s recap: you can purchase an annuity with your pension pot, the money you’ve saved over time in the scheme (there are other options to lifetime annuities including various forms of drawdown, and various forms of annuities including temporary and impaired).  A Lifetime Annuity provides a certain, guaranteed income. 
On the other hand, you can use your additional savings (ISA’s, cash deposits etc) to invest into any number of bonds. These can often produce a decent return over the long term, but Dan adds, “The bond could be sold earlier, but you might get back less than you paid. You also run the risk of the company going bust, along with your capital”. 
All this makes trying to scare people away from Annuities a bit pointless, and completely disingenuous.
Further, Dan states that he’s made the comparison using “today’s best rates“. Best rates for what? Is he quoting rates for 55 year-olds, 65 year-olds, rates with guaranteed spousal pensions, annuities for impaired lives, or smokers? Is the rate he quotes for index-linked or level annuities? What about temporary annuities, which provide an income for a limited time? It makes a big difference.
By using a trusted and respected independent financial adviser (ahem!) you can be sure that he will use your Open Market Option to find the best retirement product from the most suitable provider to suit your personal circumstances and needs. Rest assured that this will not increase any fees you pay. Having found the very best provider your IFA will complete the paperwork for you and make any switches necessary.
If you have any additional savings, we… I mean HE, will find the best home for them, whether you’re looking for security, growth or both.
OK, I admit it. There is a not-so-subliminal sales message in this. But there’s another message: don’t believe all you read in the newspapers, and definitely don’t make a decision based on a headline written by the unqualified, unauthorised and unregulated. They’re there to sell papers first, inform second (possibly).
Brian Hill
Dan - this one’s for you CII RO4 Syllabus 2013

 

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