Money news, advice and predictions for savers and spenders.
By Jeremy Gates
If you're getting ready to buy an annuity to provide for your pension, it could pay big dividends to shop around for the best option.
And if you take the first offer you get, you could be missing out on a much better deal.
Every year, nearly half a million workers use the pension pots saved through their working lives to buy the annuity which will provide a regular income for their old age.
These are workers in defined contribution (DC) schemes. The same hurdle does not await employees in superior defined benefits (DB) schemes, where the pension payout is dictated by years of service and final salary.
Not long before they finish work, DC pensioners get a quotation from their insurance company - typically a level annuity, to pay the same monthly amount as long as it lasts - and many won't research the matter any further.
"It's amazing how many people take the first offer they get," says Peter O'Sullivan at Tenon Financial Services, which launched an Annuity Desk in July.
"Accepting a low figure or taking the wrong option could cost you and perhaps your partner dearly in the long-term."
However, in the past couple of years, there have been strenuous efforts - in which the Association of British Insurers has played its part - to persuade pensioners to do more homework before a pension is agreed.
Companies such as Tenon and financial advisor Hargreaves Lansdown have websites showing likely payments on specific sums from various providers, on different types of annuity.
"On a £100,000 lump sum, after deducting the 25% lump sum which clients take tax-free, a level annuity pays about £6,900 per year at 65," says Hargreaves Lansdown pensions analyst Laith Khalaf.
"Link an annuity to the Retail Price Index, to guard against future inflation, and the figure drops to £4,300 per year.
"No wonder most people take the risk and choose the higher figure upfront. They hope rises in the state pension will give some protection against inflation after they stop work."
Anybody starting a pension today does so in uncertain economic times, and with little idea of what the future holds: they are also dealing with giant insurers squeezed by the global financial crisis and hardly likely to be over-generous with pension payouts.
Pensioners, many of whom are on the breadline, are losing out on vital income by effectively being kept in the dark about their retirement funds, according to Bob Bullivant, head of specialist retirement planning advisor Annuity Direct.
"Ultimately, the wider economy also loses out on very substantial sums," he says.
"If pensioners always got the best income that they could, millions more would be released into the economy, and the Treasury's tax take would substantially increase."
Based on cases handled in 2009, Bullivant claims his company got clients a retirement income 20% higher than the figure they were initially offered.
It does this by exercising the customer's right to use the Open Market Option (OMO) - taking pension pots to various insurers to get their best offer. Barely a third of DB pensioners bother to do the same.
"Taking the average increase in income our clients gained this year, post-war baby boomers entering retirement could be losing more than £60 million a year," Bullivant says.
"Over the next five years, the volume of money from pension funds going into the annuity market is set to increase substantially, and the Government needs to do more to ensure long-term savers search the whole of the market before choosing an annuity."
Like other specialist advisors, Annuity Direct's website offers various quotations. But clients who want a more thorough search can look at the entire market, rather than a selected pool of providers.
"Every saver must ask key questions," insists Bullivant.
"Is there a guaranteed rate for the annuity? Is there a penalty if they take the money now? Is there a date in the policy on which something favourable might happen?
"One client deferred taking a pension by six months, because that delay added an extra £40,000 to a £200,000 fund. That will make a significant difference to monthly income for the rest of his life."
Saga Group has also launched a new initiative to give pensioners a better deal, by linking with Legal & General to promise annuities "close to" the best on the market.
Finding the best pension isn't only a matter of getting the highest figure.
Details of the pension must be negotiated too.
While level annuities pay the same amount until death, guaranteed annuities, running for up to 10 years, pay income to dependent relatives if the pension holder dies within that period.
Many pensioners like to make provision for their partners, and the reduction in the initial payout to cover this may be small.
A 65-year-old man qualifying for a level annuity of £6,888 per year on a £100,000 lump sum would see this reduced to £6,197 to ensure a 50% pension for his wife, now 62, after his death.
Escalating annuities pay a larger sum to compensate for inflation, but the price of this guarantee is a significantly lower payout at the start.
Anybody with serious health problems should pursue the possibility of an impaired annuity, which gives a higher income on the assumption of lower life expectancy. Smokers, diabetics, the obese and those suffering from heart problems may all qualify for higher payments.
A pension payment can also be affected by where you live. The development of postcode annuities among the big insurers gives higher payouts to inhabitants of those areas with lower life expectancy, particularly inner-cities areas in places such as Glasgow.
Although the Financial Services Authority has set down guidelines to encourage savers to shop around, Bullivant thinks the decision by some big pension providers to set up direct annuity sales operations will still see some people failing to do the necessary research.
If pensioners use a specialist advisor to find the best possible deal, the advisor is usually paid by the annuity provider. It is invariably more tax-efficient to pay this way than out of taxed income.
Meanwhile, anybody over 50 keen to draw a private pension soon must act fast - or face a long wait for the money.
From April, the earliest age both men and women can claim a private pension rises from 50 to 55.
Anybody born after April 6, 1960 will not be able to take their pension until after April 6, 2015 if they haven't claimed it by April 2010.
:: Information: The FSA guide to comparing annuities is online at moneymadeclear.fsa.gov.uk. See also an excellent, easy-to-understand guide to annuities in the November 2009 issue of Which? Money. Pensions Advisory Service (0845 601 2923 and www.thepensionsadvisoryservice.org.uk).
Specific firms include: Annuity Direct (0500 506 575 and www.annuitydirect.co.uk); Tenon Financial Services (01256 370 370 and www.tenongroup.com/financialservices); Saga (01303 771 111 and www.saga.co.uk); Hargreaves Lansdown (0117 980 9940 and www.h-l.co.uk).
Poundnotes
:: Times are getting even harder for savers - Andrew Hagger at Moneynet.co.uk reckons only one in five variable rate accounts is giving savers a real return on their money, now the consumer price index has edged back up to 1.5%. Basic-rate taxpayers need at least 1.875% to ensure they are not losing money - and few are getting that.
"Don't let savings languish in a sub-standard account. Move your emergency fund to an account offering a 12-month bonus and switch when the bonus falls away," Hagger says.
At the moment, he tips accounts with National Savings and Investments (NS&I) at 3.95% for one year, a two-year AA account at 4.35%, and Skipton Building's Society offer of 5.35% for those prepared to leave their money alone for five years.
Close Brothers is launching new two, three and five-year fixed-rate accounts paying 4.20%, 4.65% and 4.65% on minimum £10,000 investments. The offer, which opened on November 16, is for a limited period, with interest paid annually and at maturity.
Close Brothers Premium Gold enquiries: 020 7392 1772 and www.closesaving.co.uk.
:: Demand for fixed-rate loans is still falling, down to barely 26% in October compared with a recent peak of 83% in June, says leading mortgage broker John Charcol.
"With the outlook for interest rates little-changed over the last month, an even higher proportion of borrowers chose a variable rate mortgage, in most cases a tracker," says John Charcol's Drew Wotherspoon.
"Even if longer-term fixed rates don't get much cheaper than those currently available at just under 5%, there seems a good prospect that borrowers on a variable rate will be able to benefit from rates more than 2% lower for the time being."
John Charcol enquiries: 0800 718191 and www.charcol.co.uk.
:: The average annual cost of motoring has soared to £2,338, reckons Sainsbury's Finance, and that's 11% up on 2007. The most significant cost this year is insurance, up by nearly 13% since 2008 and 23% since 2007, followed by road tax - which has rocketed by 22% in the past two years.
Sainsbury's Finance (0800 0320 000 and www.sainsburysfinance.co.uk).
:: Ole! No wonder Banco Santander is blowing its own trumpet to celebrate the five-year anniversary of its takeover of Abbey.
Anybody holding 100 shares over that period has enjoyed dividend payments of £165.07, while the price of the shares has soared from £6.43 to £10.37.
These impressive figures leave me writing in pain. Five years ago, all the scare stories about problems of getting dividends from foreign companies persuaded me to sell my Abbey shares, while I hung on to HBOS and Lloyds TSB.
:: High-five savers:
Phone No Rate Account Period Deposit Interest paid
Skipton BS 0845 717 1777 5.35% (F) Fixed Rate Bond 30/11/14 £500 Yly
Yorkshire BS 0845 1200 840 5.30% (F) Fixed Rate Bond 28/02/15 (T) £100 Yly
Investec Bank 0845 366 6333 3.36% High 5 Three Month (P) £25,000 Yly
West Bromwich BS via branch 3.32% Branch Bonus 2 Instant £100 Yly
Citibank www.citibank.co.uk 3.30% Flexible Saver 6 Instant £1 Mly
:: Top-five borrowers:
Phone No Rate Period Max% Adv Fee Incentive
HSBC (Rem) 0800 494999 2.99% discounted for two years 75% nil Yes
First Direct (Rem) 0845 610 0100 2.99% variable for term 60% none Yes
ING Direct (UK) 0845 603 8888 3.09% for term 75% £695 Yes
Co-operative Bank 0800 633 5286 3.24% to 31/01/13 75% £995 Yes
The One Account 0845 610 1060 3.75% for term 75% none Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
