Steve Webb, the UK Pensions Minister has continued his attack on the current UK annuity market. In a recent interview, Steve Webb confirmed the sentiment of many in the pensions’ industry – the current UK annuity market is out of date. In the UK, when a person wishes to start drawing their pension the most common way to do this is still by purchasing an annuity with the lump sum they have built up. This is despite other more flexible options being available, like Income Drawdown.
Unfortunately, for many when they come to buying an annuity they do so without advice and, consequently, without understanding the options available to them and the potential pitfalls. As a result, many continue to buy single life annuities (meaning the pension dies with them) using the annuity rates offered by their current pension plan provider. This is despite the fact that looking at an open market annuity may increase the annuity rate they receive significantly.
To exacerbate matters, UK annuity rates have fallen sharply in recent years with an all time low being reached in January 2013. These falls have been driven by low interest rates, rising life expectancy and quantitative easing. By way of illustration, a male aged 65 with £100,000 buying a flat rate single life annuity would have received an annual pension of over £15,000 in 1990. By January 2013 this would have reduced to just under £5,400 and by January 2014 would have risen to just over £6,000. As the purchase of a standard annuity is an irreversible transaction, a person is locked in for life to the rate they obtained upon purchase.
While the purchase of an annuity can be the right option for people in certain circumstances, it is important that advice is received in advance so that the person understands the pros and cons of such a purchase.