I asked one of my peers in England for his thoughts on this recent program. He kindly permitted me to publish them in a blog post. (Thanks Abraham!)
Channel 4 Dispatches on Annuity Mis-selling: A Simple Solution To A Big Problem
One topic that has been in the media a lot lately is how people who buy annuities at the point of retirement (that is, converting your pension pot into income for life) are being ripped off by insurance companies. A recent Channel 4 programme highlights the plight of people who buy annuities and Pension Expert, Ros Altmann suggested that this may be a much bigger scandal than PPI Mis-selling.
Buying an annuity from the same pension provider you saved with can cost you thousands of pounds in obscure charges. And there is no control to ensure that people get the best rate they can. But often, it’s not enough to simply ‘shop around’, as people can end up buying the wrong type of annuities.
The programme makes some very interesting points and asked the government to look at the annuity market. But I think an important question to ask here is: why are people buying annuities directly from insurance companies? The thing with annuity is, it’s one of the few financial products you can’t go back on once you have bought it! The decision stays with you for life; for better or for worse till death. In fact, the decision can often have an impact long after you are gone, as your spouse or partner may or may not receive income from your annuity, depending on the decision you make at the point of purchase.
So why are people making one of the most important decisions of their lives without getting the best expert, independent advice they possibly can?
The answer is simple; it’s often due to the perception that taking advice from a financial planner is costly. It’s a bit like representing yourself in major court because you don’t want to pay a lawyer or doing your own company accounts or taxes because you don’t want to pay a good accountant to do the job. While there’s nothing illegal about any of these, and you may well do a decent job, chances are if you get things wrong, the penalty often dwarves the cost of paying a qualified and experienced professional to do the job in the first place.
This is true when taking income from your pension pot. Often, shopping around for the best annuity rate IS the WRONG starting point. A standard annuity is just one of the several options available and to start with that is simply putting the cart before the proverbial horse.
A good starting point will be a detailed assessment of your needs and a clear picture of how you can meet those needs with available resources. Then and only then do we start to consider what the best way to draw income from your pension pot. Sometimes buying an annuity is part of the solution, other times it isn’t. Working with a good financial planner in vital in making this very important decision and often, the benefits outweigh the cost many times over.
There may well be a big scandal in the annuity market and politicians need to do something. But the end, there is a simple solution available right here and now – get advice. We can sit around and wait for Westminster to do something or we can take action and get professional advice.
Abraham Okusanya M Sc.
Paraplanning|Investment Research for Financial Advisory Firms