/ Money

Are pension savers doomed to a lousy deal?

Three eggs in a nest

The Association of British Insurers’ decision to publish annuity rates from more than 20 firms is welcome news, but the pension industry needs to do more so that consumers get a fair deal.

Annuities have had a tough time lately, with falling rates leading some to conclude that pension savers are doomed to a lousy deal, no matter what they do. To some extent that’s true, but the current climate makes it more important than ever to get the best offer you can.

The Association of British Insurers (ABI), to which most annuity providers belong, has made this easier by publishing comparative rates online. And the simple truth that the ABI’s table lays bare is that someone in good health can be as much as 31% a year better off as a result of shopping around and moving from a poor rate to a good one.

Comparative annuity rates available online

Astonishingly, less than a third of those buying an annuity currently switch providers – suggesting that thousands settle for second (or third) best, accepting a lower retirement income than necessary.

It’s also important to get the right sort of annuity. Less than half of those people who have financially dependent partners buy joint-life annuities, leaving their other half needlessly exposed. And only 16% of those eligible for an enhanced annuity actually end up buying one, missing out on a potential 47% boost to their income.

For all the ABI’s good intentions – and a new code of conduct stating that providers ‘must not sell any product by relying on the customer’s inertia and ignorance’ – the evidence suggests that the pensions industry has been making millions of pounds a year by doing precisely that. Publishing rates is a good start, but it’s only when proper advice and decent outcomes become standard that things will really improve.

If you’ve bought an annuity at retirement, what experience have you had? Have you felt short-changed by your investment? Has the ABI’s move to publish comparative rates given you confidence you’ll get a better deal?


We seem to have a Bank of England that has discovered that if they do naff all for the public (like help keep savings rates at pathetic levels) they can have a job for life.

The simple answer is yes as long as Quantitative Easing is seen as the only way forward. Annuity rates have dropped with every round of QE.

And what’s with pathetic low interest rates, that doesn’t help people trying to save for the future or live off their savings.

A danger is that people will start looking at housing and thus construction firms as an investment with yet another unsustainable boom kicking off. Then big tears when it all goes wrong yet again.

Annuities are not simple products – they are an insurance that you spend all your money on in return for a guaranteed return for life, so predicting the long-term future being difficult, providers invest in reliable long term bonds. Not currently offering good returns. How long is life expectancy – it is increasing, but will be affected by existing medical conditions or health-threatening habits (e.g. smoking). Management charges differ, as will the payment for a dependent’s pension and for inflation-linking. The profitability to the provider will also differ.

A major issue is the effect of charges made by the provider – the danger of capping these is that those currently making lower charges may increase them to the cap. I wonder whether that will happen in a competitive industry.

The key is to encourage (force?) everyone to shop around for such a major item before choosing their pension. My advice would be to use a financial adviser to discuss your needs and find the best provider for your savings, unless you feel confident enough to do it yourself. The cost of doing this should be far outweighed by the better deal they should achieve for you.

Personally, unless you are very risk-averse and have little or no other pension (apart from the basic State) I would look at a Self Invested Personal Pension for some or all of the fund – you can draw down an income up to, I think, 120% of a typical annuity and have the hope that the investments will increase in value over your life. Subject to 55% tax, any unused fund will be passed to your heirs upon your demise.

Derek laxton says:
22 December 2014