250,000 widows or widowers at risk in annuity market each year
by Dr. Ros Altmann
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Annuity buyers don’t realise their partners may get nothing as insurers pocket most of their pension fund
Auto-enrolment must include help on annuities
Annuity reforms should focus on finding the right annuity not just getting better rate for the wrong product!
Widows and widowers betrayed by annuity market: The UK annuity market is set to betray hundreds of thousands of future widows or widowers every year. Most people do not understand how annuities work and, having saved for decades, if they buy the wrong annuity, their partner will be left with nothing when they die, while the insurer pockets most of their pension fund.
80% of annuity buyers fail to provide for their spouse: Each year, around 425,000 people buy an annuity but approximately four in buy the standard ‘single life’ annuity, which is for themselves only. They hand over all their pension fund, and the insurer undertakes to pay them back some of their money each year until they die. But if they die before their partner, even if that happens very soon after retirement, their partner will no longer receive any pension payments.
250,000 future widows or widowers a year at risk: Assuming around 75% of annuity buyers have a partner, that will leave over 250,000 future widows or widowers at risk of losing the ongoing pension they could have had if they had not bought the ‘single life’ product.
Final salary schemes cover partners automatically, new-style pensions don’t: Unlike final salary-type pensions, which automatically have to continue paying a partner for their whole life too, modern pensions require individuals to choose what kind of pension they will buy. As most people do not understand how annuities work, they select the annuity that pays them the highest initial income. Around 80% will buy a single life annuity, which means that whenever they die, their remaining pension assets are just kept by the insurer.
Insurers will often keep between three quarters and half the pension fund: Even with a 5-year guarantee, today’s low annuity rates of mean the insurer keeps around three quarters of the pension fund if they die relatively young and with a 10-year guarantee the insurer still keeps around half their pension fund.
Annuity reform should focus on buying right annuity, before finding best rate: Having saved all their lives, most people want to get good value for their pension saving. If they understood the ins and outs of annuities, by being able to speak to an adviser and being warned of the risks of buying the wrong kind of annuity, would they really want their pension fund to go to the insurance company, rather than it being used to support their family after they have gone? If someone helped them understand the implications, they would have the chance to make better decisions.
Even enhanced rate annuities are often single life: Most people need advice to help them understand the reasons for them to buy a different annuity, not just the one that looks to offer the best starting income. Even if they buy an impaired life annuity and receive a better rate than they are first offered, failing to include cover for a spouse can still leave widows or widowers with nothing from their pension savings.
Women particularly at risk: Women (especially those in their 50s and 60s) are particularly at risk, since they are least likely to have their own pension. Due to their past lack of pensionable employment and low earnings, they rely more on their husband’s pension savings. Over the next 10, 20 or 30 years, they will lose out if their husband has bought the wrong annuity. To avoid millions more older women being poorer than they should be, annuity selling needs urgent reform.
Auto-enrolment will see millions more at risk: As nearly all employers have closed their traditional final-salary-type pensions, auto-enrolment will see millions more workers saving in defined contribution schemes each year. Therefore, addressing the injustices and unfairnesses of annuity purchase has become increasingly important. Annuities are not working properly for buyers, with the balance of power and information in the hands of the sellers.
Reform needs to help people find the right product first, and only then to find best rate: All the emphasis of annuity reform has been on encouraging people not to just accept the annuity offered to them by their pension company, and to ‘shop around’ for a better rate. But this is not good enough. Just going to an annuity broker and obtaining a ‘better rate’ may be better than nothing, but will not be the best for the customer. Shopping around for a better rate for the wrong product is not what customers need. They need help finding the right product first. Just trying to get a higher income at first will not necessarily maximise the value for their pension savings. Advice is crucial to help people understand the implications of annuity purchase.
Treating customers fairly could help protect future widows and improve annuity value: ‘Treating customers fairly’ involves making sure they have the best chance of doing what is right for themselves after saving so hard for a pension. We know people do not understand annuities and they are complex products. Currently, buyers who do not understand the market are being misled into focussing on the ‘rate’ rather than on finding the right product first. This leaves many more households at risk of later life poverty, even if they saved diligently for years.