/ Money

Have you been hit by the ‘toxic’ annuity industry?

Cartoon of boy taking money from toxic containers

In your lifetime of personal finance decisions, getting an income to last you from the time you retire until you die is probably the biggest you’ll make. So why do so few of us shop around to get the best deal?

You’ve spent your working life putting money away into a pension, making sacrifices today to give yourself some comfort tomorrow.

And when it comes to buying the product that will give you an income for the rest of your life – called an annuity – you have to make sure you’re getting the best deal.

Why? Because once you’ve bought an annuity, you can’t change your mind. It’s a once in a lifetime choice – and you’ve got to make it count.

People make poor decisions

Unfortunately not many people do make the right decision when picking an annuity. Only 40% of people exercise the open market option – in other words, shop around to see if they can get a better income in exchange for their pension savings.

The uplift of shopping around can sometimes be as high as 50% more income per year than if you just bought an annuity from your existing pension provider.

With annuity rates in a rapid state of decline at the moment, meaning that you have to save even more to get a decent income in your retirement, getting the right annuity is more important than ever.

But it’s not just failure to shop around on the part of the consumer. A new report from the Cass Business School and the National Association of Pension Funds has savaged the annuity industry, calling it a ‘toxic market’. It claims that you are being mistreated by your pension and annuity providers at one of the most important points of your financial life.

Unfair system costing consumers £1 billion

The report slammed annuity providers, stating that consumers faced a number of ‘sharp practices and murky pricing’ that may leave the half a million people retiring every year short changed by up to £1 billion from their total future pension income.

The key findings of the report were:

  • A systemic lack of transparency and understanding about how annuities are priced. In particular, annuities for people with medical conditions who could qualify for a much higher level of pension income (enhanced annuities) were flagged as having opaque pricing structures.
  • Evidence that insurers push annuity rates downwards if you only have small pension savings as they don’t expect you to shop around. They also think that you’re most likely to take the rate that’s offered to you by your pension provider.
  • Better rates are provided to people with bigger pension savings, punishing those with smaller pots who need the biggest uplift.
  • Most people pay commission (usually paid to an adviser) when they buy an annuity. They have to pay this even if they don’t receive any advice as it’s built into the annuity rate.

If you’ve bought an annuity at retirement, what experience have you had? Did you shop around or do you think you’ve been shortchanged?


While for most financial products there are firms who will rebate their commission this doesnt seem the case for annuities .
Or have I just not be looking hard enough ?

My wife got a 28% uplift for half a dozen phone calls. [Depressingly of course they think she has less time alive – we hope to prove them wrong.] We chose Better Annuity (Bill Burrows) though Annuity Direct were very similar. Both very helpful and responsive. Commison paid by Pension Fund provider so theoretically no impact on annuity; but someone has to pay! Hargreaves Lansdown seem to get a huge commision but small print that says they provide no advice (and therefore no comeback). All seem to cover same providers. One health questionnaire seemed to reach them all. Both BA and AD (although having different commissions and AD offering to fix the fee) provided identical quotes from same provider MGM Annuity; HL did not offer MGM and offered much lower annuity rate. Shows it pays to shop around. MGM Annuity so far brilliant.

I lost approx £500 during the time it took to get the annuity details sorted and arranged. One day it went up the next right down in value! This was last August and took until October 2011.
Beware the tax office would not take my written notice that 25% was tax free, nor that I had deferred my small annual pension for a year 2012 to take. They immediately put me on a higher tax code saying I now owed over £300 as was over the age allowance ( not the case), but they would not say how they came to the increase of over £24,000. They sent me a notice showing my income but no mention of the 25% tax free amount or the deferred annuity which they must have added in this year to make the amount over the £24,000 limit. HMRC had already informed my pension provider of a new tax code before I could get my Annuity provider to write to them and inform that 25% was tax free and annuity deferred. Case of ‘guilty until you prove innocent’. I am still trying to get my pension provider to revert my tax code (which Hmrc has changed with me but not it seems informed my pension). Also their time in responding to my phone call was 44 minutes holding on ‘for my call to be answered – which cost me, plus recorded delivery, photo copies, stress etc etc. all for a few pounds extra £700 p,a. Not worth saving for the annuity all those years. Better save with an ISA.

Couldn’t agree more with your final sentence.
I refuse to deal with companies that have tried to rip me off, and my list grows every year.
But why do companies do it? They definitely lose business by doing it, but maybe not as much loss as they gain by ripping off as many as possible.

Jude I sympathise with your situation, your tax code being twisted up and that you have to sort it, but I couldn’t disagree more with the last statement. Better save with an ISA? That’s a bit daft as the rate is never going to be as good. And the comment about it not being worth £700 PA? Would you happily be paid £700 for the work you’ve done? I’m sure you would. Now multiply that by x years which you’ll receive the £700 and you’ve got yourself a reasonable reason to put the work in.
If you wrote to the company listing your ‘griefs’ I’m sure you’d be compensated, but please leave them for the company. We’ve all been on hold and sent in photo-copies etc etc – You’re getting £700 PA for a few months of letters and calls – result!

As a retired IFA (Independent Financial Adviser) I always told clients that ‘shopping around’ just prior to their retirement was essential in order to obtain the best deal according to their aims & objectives for the future & their circumstances, both monetary, personal & healthwise.
Those various matters were always discussed at length in the ‘Fact Find’ to elicit their answers to those questions, which helped me to suggest which of the many options open was best for them.
Arranging a pension annuity without professional help is a minefield, because once selected & taken it’s not like a job because ONCE YOUV’E TAKEN IT YOU’RE LOCKED IN FOR GOOD.