Annuity or cash?

Another example of why it’s so important to get good advice on your pension pot has recently been raised in the headlines.

Since the pensions freedoms were introduced allowing people to access their pension pot, the popularity of annuities has plummeted. Figures from the Financial Conduct Authority showed more than half of savers with guaranteed annuity rates attached to their pension pots are, according to Royal London, “throwing them away” in retirement, by accessing their pension funds without taking an annuity, or guaranteed income for life. Royal London is so concerned about this issue it is asking the High Court to approve plans to stop about 30,000 Scottish Life policies losing out, by offering them a cash swap deal.

If the law agrees, policyholders with guaranteed annuity rates (GAR) would be offered an actuarially fair exchange (based on the usual pattern of individual taking a tax-free lump sum) in return for surrendering the guarantee.

People would be free to opt out and retain the guarantee and existing terms if they wanted. However, the cash uplift would give them more options at retirement and, a considerable number of policyholders do seem interested in this option.

Annuity rates are determined by the return on government bonds or gilts and while they fell sharply in the financial crisis, many argue that interest rates will recover and rise – it’s a case of holding your nerve over the long term. The demand for annuities has seen a slight rise again more recently as the benefit of a guaranteed life income in these uncertain times hits home. Annuities do have many benefits, including offering financial sureness in these turbulent times and, they are easy to manage.

Interestingly, some of the some of the Scottish Life policies referred to will have been written 20-30 years ago and will not doubt have annuity rates attached that could be twice as good as the current market options. And let’s be honest, the offer is probably going to be made in a way that favours the insurers rather than the client, although The Royal London website suggests that the cash uplift for customers could be in the region of 40-80%

Royal London said it would provide free guidance for all those affected and would heavily subsidise personalised financial advice for people who need more bespoke help and of course, it will work closely with the regulator who will be protecting the interests of members. If the ruling in June goes their way, we may see more companies encouraging members to keep these valuable policies.

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