New research conducted by pensions expert Billy Burrows argues that those with above average pension funds (£50K +) should avoid defaulting to a conventional annuity. Because annuity rates have fallen so dramatically over the past three years, just to earn a modest annuity income of £5,000 per year now requires a pension fund of nearly £153,000, up from £118,000 in 2009. Mr Burrows says the market is now approaching a ‘tipping point’ where middle Britain savers must look to alternatives to the conventional annuity in order to provide themselves with a decent level of income in retirement. His report, which was sponsored by MGM Advantage and Prudential also reveals that in 2012 conventional annuities still made up 92% of the market.

One of the major problems which the report identified was that of individuals and advisers often taking long term decisions based on short term factors, including opting for the highest possible starting income. Whilst this will provide the highest income initially, it does not protect against longevity or take into account future rises in inflation. Consider that the average life expectancy for a man living in England and Wales is now 85, meaning those retiring at 65 can expect to live for twenty years in retirement. If one were to compare prices at the start of a twenty year retirement to prices at the end of the retirement it would be clear to see just how difficult it would be to survive on a fixed income, which is exactly what the majority of DC savers end up doing. Aston Goodey from MGM Advantage highlights the problem for those who retired in 1991 as he argues that goods and services that cost £100 then would now cost £176. Moreover the problem could be much worse for those retiring today because inflation has been higher in the past 3-4 years compared to the last twenty years, as this graphic illustrates. The problem is further compounded by recent above inflationary rises in essential, non-luxuty purchases such as food, fuel and energy.

To combat this problem of falling annuity rates and the rise in the future cost of living Mr Burrows advises those with larger pension funds to seek alternatives to a standard annuity, including looking at investment-linked annuities. Currently these only make up a small proportion (8%) of the UK annuity market, but are set to become more prevalent in the future as retirees are forced to incur a level of risk in order to ensure they have the chance of increasing their retirement income in the future. However the report found that many advisers and clients may have been deterred from opting for these products because they are perceived as ‘complex and/or risky’. It is likely that many of those who have saved into a pension fund will have little or no experience, yet alone appetite for incurring the risk associated with an investment backed annuity. However, as has already been discussed, prices are rising and annuity rates are falling, so it maybe that a seachange in people ‘s attitude to investment and risk is needed in order to maintain a decent standard of living in retirement.

Ros Altmann, the over 50′s campaigner and former government adviser has this week criticised the IFA firm Hargreaves Lansdown over the level of commission it gains from its new enhanced annuity tool.

The tool, which was launched last week allows users to get real time quotes from the leading UK enhanced annuity providers. The company claims that the tool delivers an average increase in annuity income of £1,095 (27.08%). Given that research has shown that thousands of retirees still miss out on the highest annuity possible, this new tool will provide users with a quick and simple means of getting an enhanced quote. The tool delivers rates from nine providers which the company claims equates to 92% coverage of the market. However, despite the fact that the tool helps deliver a better incomes for retirees, the amount of commission taken by Hargreaves has been called into question by Ms Altmann. The amount of commission that is taken can vary from 1.5% to 3.5% of the fund value, which Ms Altmann claims is a ‘high sum’ and points to the fact that on an average £30,000 pot would equate to over a £1,000. She also appeared the criticise the premise of using an online tool to find an enhanced annuity arguing that “…to get the best enhanced rate, you can’t do that in four minutes.’ – according to reports in the Financial Times. Defending the tool, Hargreaves Head of Pensions said that the company had “…capped our commission rates below the maximum we could take.” He added that those companies who were offering a lower commission could not match the terms on offer from Hargreaves.

Other reactions to the new tool have been more positive.  Stephen Lowe from enhanced provider Just Retirement described the tool as a ‘breakthrough development‘ adding that it would make getting an enhanced annuity quote ‘signficantly easier‘.  Aston Goodey from MGM Advantage said offering guaranteed rates would..”…hopefully encourage many more people to consider enhancing their pension.”

A new survey conducted by the Chartered Institute of Payroll Professionals (CIPP) has found that a large majority of employers has described the auto enrolment legislation as ‘complex’. This is a substantial rise in the number recorded last time the survey was taken back in 2012, when just over half (54%) said they found the issue complex. Some other interesting findings of the survey include…

-41% of respondents believed there would little or no impact on their business

-Nearly a fifth (18%) said that the legislation would mean there would be reduced or no pay rises for the foreseeable future

-6% said they would potentially be reducing staffing levels (up from 1% in 2012)

So potentially the new regulations could prove disastrous for some employees as it could result in redundancy, although only in an absolute minority of cases it seems. However it will certainly be a concern to many that a rising number of respondents believed AR could potentially stem future pay rises for employees.

Another striking feature of the research was the attitude of employers with regard to whether or not AR would encourage individuals to save for retirement. Views on whether it would were pretty much split three ways between those who believed it would, those that believed it wouldn’t and those who though it ‘might’ encourage pension saving. These views from the employer coal face are at odds with some of the statements by ministers when AR was launched who predicted as many as 9 million people could be saving into a private pension as a result. However research from Aviva has shown that 37% of employees plan to opt out of the scheme, with a rising number of people ‘undecided’ on the issue.

UK retirees that delay purchasing an annuity lose an average income of £2,840, according to research published by Key Retirement Solutions. The company also claim that in order to recoup the lost monies, retirees would have to live for another 36 years in retirement. The figures are based upon a 65 year old male with a fund size of £25,000, who at present would be able to convert that sum into an annual income of £1,420. Fast forward two years and the annual annuity income would climb by £79 to £1,499. However by delaying their annuity purchase by two years the person in question would not have been receiving any income from their pension fund, meaning they would have lost out on £2,840. Moreover even if annuity rates did climb by 0.5% they would still lose out on this sum of money, only it would take a shorter period to make up the lost amount (14 years). Because rates have been dropping sharply, many retirees are reticent to commit their pension fund whilst returns are so poor. However as this research from Key RS shows, on average individuals can end up financially worse off as a consequence.

Despite the financial dangers of delaying an annuity, the company did also raise the point that if a person’s medical condition alters in the intervening period then they could in fact get a higher annuity income compared to what they would have been offered previously. However if that doesn’t happen then the only hope for a better offer is if there is a substantial rise in rates, which at the moment seems extremely unlikely. Although there was a slight rise in rates last month, the overall trend is one of lower rates – half what they were twenty years ago and 14% lower than they were in the Spring of 2009. The forecast isn’t favourable for either as the Bank of England looks poised for another round of Quantitative Easing which could see a further $400bn of money printing. This is in turn will put pressure on gilt prices which then could diminish any hope of a rise in annuity rates.

Of course it is very difficult to predict with any certainty whether (a) your health will change and (b) whether rates will rise which is why retirees must choose carefully when reviewing their options. One of the most important functions is to shop around the market and compare rates from rival annuity providers. According to Key RS the average boost in income for customers using their whole of market service was 22%, with some earning significantly more than this. The sad truth is however that of the half a million retirees who buy an annuity each year, only a minority (for a number of reasons) actually do bother to compare rates.

Over 50′s campaigner and ex-SAGA supremo Ros Altmann blasted insurance companies this week for the amount of profit they are making on annuities. According to a report published in the Daily Express, some of the UK’s leading annuity providers are making as much as 20% margin on the annuity products they are selling to members of the public. Ms Altmann said bluntly that…”…these huge margins are outrageous…”…adding that….  “…it looks like customers are being ripped off.” She also said that if there was a better understanding from consumers then margins would be forced down.

The variation in retirement income stems from the fact that different annuity providers offer varying rates and indeed products from one another. However, without prior knowledge of the workings of the annuity market (specifically with regard to the open market option) many customers are being sold a poor value annuity, often from their existing pension provider. The difference in income can be quite staggering, for example, a 65 year old man annuitising with a £100,000 fund could get as much as £610 more per year if they chose the best rate on the market, currently being offered by Aviva. However top rates can only be achieved by comparing providers, something which many individuals fail to do which often means they are lumbered with a lower income for life. Last year the National Association of Pension Funds estimated that this could collectively be costing as much as £1bn in lost income. This ‘lost’ income of course ends up in the coffers of the companies that are providing the poor value annuity products. The Express article exposes just how profitable annuity sales can be compared to other financial products. It claims that Standard Life made 18.6% profit on annuities in 2011 compared to just 5.2% on limited insurance, 0.7% on savings and investments and 0.3% on individual pensions. However according to Ms Altmann Standard Life is “..one of the better companies” warning that some annuity companies could be making an even higher margin.

Concerns over the workings of the annuity market are nothing new of course. However it is only recently that tangible progress towards a better deal for customers has started to occur. This month the ABI implemented it’s compulsory code of conduct which compels insurers to offer clear and consistent information about issues such as shopping around and the superior value of enhanced annuities. However in January the FSA stepped in saying it would undertake a review of the whole annuity market to…”…understand the level of the potential detriment for consumers if they do not shop around to see if there are ways to make this market work better for consumers.” Many will be hoping their report highlights the profitability of some annuity products which is clearly to the detriment of consumers who are missing out on a higher income in retirement as a consequence.

A new report published by the TUC has found that the pay gap between men and women is at it’s widest in the over 50′s age group. The report claims that on average women aged over 50 are paid upto 20% less than men. Equating this into actual figures the report says that a woman aged over 50 and working full time can expect to earn just under £12 whilst the average male salary is £14.69 per hour. The reason for the gap maybe down to the fact that more than half the women working over 50 do so part time whilst also taking home less than £10,000 year in salary. Breaking the data down further, the report also found that the hourly average pay for a women aged over 50 and working part-time is just £8.53, which is well below the national full time average of £12.76 per hour. Another key finding was that since the early 90′s there has been a huge rise in the number of women over 50 who have entered the work place, with more than 60% now active in the labour market. However with most of these jobs likely to be part-time, this rise in female employment may explain why the average hourly salary for a woman is lower than the national full time average.

Whilst acknowledging the success of so many older women getting into paid employment, Frances O’Grady from the TUC also warned of the dangers of low pay, and in particular, the impact that can have on retirement incomes. She added that many women would enter retirement with little or no personal savings, which in turn can contribute towards pensioner poverty.

The gender pay divide is nothing new of course, and yet despite government attempts to try and narrow the gap (such as the 2010 Equality Act), the differences in salary still remain. The gender gap in pay is also geographic, with some parts of the UK, such as Somerset West reportedly having gaps of up to 52%. When you get to the managerial and executive level the difference in pay is even more eyewatering. According to the Chartered Management Institute (CMI), over a lifetime a female executive can lose as much as £423,000 compared to a man in an identical position.

Today came sad the news that Saga Director-General and all round eminent campaigner for the over 50′s Ros Altmann is stepping down with immediate effect. According to a statement on the organisations website …”…Saga has decided to restructure its presence in the advocacy and lobbying space and, after much careful thought, Ros Altmann is stepping down as Saga’s Director General.” Altmann was in post for two and half years but now wishes to focus more on her role as a consultant and to spend more time in London as opposed to Folkestone where Saga are based.

During her tenure as DG Altmann became a prominent campaigner for the over 50′s, voicing her opinion on a number of important issues including pension provision, retirement and social care. She has been a fierce critic of the Quantitative Easing policy pursued by the Bank of England which has seen several bouts of ‘money printing’. Altmann claims the Bank’s actions has suppressed rather than encouraged economic growth whilst at the same time has ensured annuity incomes are depressed by lower gilt yields. She has been quoted as saying that the governors must live in an..”academic parallel universe that ignores reality” and dismissed their claim that a rise in asset prices from QE has offset the fall in gilt yields.

Altmann has also been critical of the lack of legislative action regarding reform of social care in Britain. Back in 2011 she argued that…”..the issue of care is huge, escalating, and relentless. It must not be kicked into the long grass because ministers consider it to be too hot a political potato.” Currently anyone who has assets of more than £23,250 cannot access any financial assistance from the government towards the cost of social care. This £23,250 figure therefore encompasses almost everyone who owns their own property and therefore penalises those who have been frugal enough to save and pay off a family home. in 2011 the Dilnot review recommended an upper limit on what people should have to spend of £35,000 as well as recommending that the threshold for financial assistance be raised to £100,000. Of course it is only now in 2013 that the government has decided to bring legislation forward that will cap the amount an individual has to spend at £75,000, paid for by a freeze in inheritance tax.

Altmann’s departure will no doubt be seen as a huge loss to those who care passionately about the welfare of the UK’s older generation.

A new survey conducted by the Retirement Centre has found an astonishing 81% of over 50′s will now not be enlisting the services of an IFA because of the charges being levied by RDR. The RDR legislation which came into force at the end of last year prevents financial advisors from receiving a commission from financial products and instead forces them to charge a fee up front for advice. The aim was to raise the standard of advice being given and to make the whole process much more transparent. Supporters of RDR argue that under the old regime clients in many cases may not have been aware of potentially large sums of money being received by their IFA in the form of commission payments. However, opponents of the new system say it will simply result in many clients not receiving any advice because they will be put off by the up front fees, especially those with a smaller fund. The figures in this survey seem to back up that claim. RDR bans cross subsidisation from larger funds to pay for the advice given on smaller fund which are less profitable. This means that those most likely NOT to take financial advice are those who are arguably in need most of getting it. If you look at the figures in this latest survey it would seem that the overall impact is that less people will take financial advice, the law on unintended consequences perhaps.

This is how the FSA reacted to the new research……”..a review of the impact of adviser charging will be undertaken by the FSA later this year. People have always had to pay for financial advice, it has never been free as the advice has been paid through the form of commission, Adviser Charging is aiming to make the costs transparent.” Commenting on his company’s research, Dominic Fraser-Smith from the Retirement Centre says that…. “…It is clear from our research that Adviser Charging has had an enormous impact amongst the over 50’s market and it appears that being charged a fee will prevent people from seeking independent financial advice.” He added that a fall in the number people seeking financial advice could impact on the number of people who secure the best deal at retirement when buying an annuity. Interestingly, if the figures from the research were equated to the whole of the UK it would mean 17 million people would be turning away from financial advice.

The RDR legislation has been a long time coming as it was originally announced by the FSA back in 2006. Ironically one of the stated aims of RDR was to create “...a market which allows more consumers to have their needs and wants addressed“. Ironically it seems LESS consumers will have their needs address because of the need to provide up front fees.

Writing and reporting on the UK annuity market over the past few years has seen precious few occasions where the economic news has been anything other than negative. Anyone who follows events will know that the economic weather has been hugely unfavourable to those buying an annuity, and as a result has meant that annuity incomes have fallen substantially throughout the recession. However, there now seems to be a chink of light at the end of the tunnel, in fact you might say it is more like a 500 watt halogen spotlight, if the latest newspaper headlines are to be believed. According to one weekend report, annuity rates could increase by as much as a quarter…”over the next year or two”. Given that nearly every report on the UK annuity market last year seemed to predict the opposite, you might think this claim could be described as a little sensationalist. Indeed a 25% rise would be a remarkable turnaround for rates given that they have fallen by 14% since 2009, according to the MGM Advantage Annuity Index.

So the question arises, how could such a reversal come about? Well it really all depends on the UK bond market and whether the price of UK bonds go up, down or stay the same as they are today. Annuity rates are tied to the performance of long term gilt yields, which means a drop in price of UK bonds means a higher yield for those who purchase them- e/g insurance companies. Throughout the credit crunch and subsequently the recession, UK government bonds have been perceived as being a safe haven for foreign investors. Whilst the Eurozone countries have struggled to implement meaningful austerity, the UK government set a path early on about how it planned to reduce it’s deficit, although it is debatable as to whether this has worked or not. However, this certainty attracted foreign investors which lead to the price of UK bonds rising whilst other EU countries experienced price falls. Those that argue that annuity rates will rise significantly over the next two years claim that ‘normality’ is now returning to the market and that UK bonds will not be as popular moving forward. To support this theory, one can point to the fact that many investors are predicting the loss of the much heralded triple ‘A’ rating for the UK, although when this will happen remains a matter of intense speculation. In addition this, some experts also claim that investors are also starting to move away from bonds and back into the ‘riskier’ choice of shares. This it is argued, will help to push up bonds yields and according to one fund manager, Andrew Belshaw from Western Asset, they could rise up to 5% or more over the next two years. Mr Belshaw cites four reasons to stake this claim including possible higher inflation, quantitative easing from the BoE (presumably no more of it), more scrutiny of gilts from overseas investors and a deterioration of the public finances. No one would bet against any of these. However, other experts are less optimistic arguing that yields will only reach 5% over a longer period of five years or more. Secondly interest rates are not poised to increase in the short term and have now been set at 0.5% for nearly three years now. Moreover, many investors think it unlikely that bond yields will increase to this extent whist interest rates remain as they are. In fact many are far less positive about the outlook for UK bonds, for example, James Baxter from Tideaway only expects bond yields to rise by a maximum of 3% this year and warned they could fall back after that.

What is clear from this whole debate is that no one can say with any great certainty whether rates will rise or fall over the next few years, although of course this has always been the case. It really is a matter of who you believe and more specifically what you think will happen to the UK economy, the global economy, gilts, interest rates, inflation, growth, the Eurozone, the list is almost endless. Of course for those approaching retirement this speculation over gilt yields isn’t entirely helpful when trying to decide whether to annuitise or not. Waiting two years to see if rates jump 25% is quite patently a high risk strategy as there is no guarantee that this will happen, in fact there is plenty of evidence to the contrary as already discussed. Secondly it would mean not receiving an income from one’s pension fund, meaning those 24 months of income would have to be recouped before you started to benefit financially from delaying your purchase. Equally of course, it would also be unfortunate to be locked into a lifetime rate now whilst rates are as low as they are, which is why many retirees are either only annuitising part of their fund or opting for other more flexible options such as drawdown or a short term annuity.

Putting on a few extra pounds is not an uncommon occurrence for many of the population at this time of year, after much over indulgence at Christmas. However whilst most of us will be nursing our depleted bank accounts and hoping to reduce our waistlines this month, those buying an annuity could in fact benefit from going a few pounds heavier according to Just Retirement. The company argue that those coming up to retirement and who are deemed overweight or obese could enjoy a better annuity income because these conditions may impact negatively on their life expectancy. Moreover, the number of people who could benefit is substantial as official government figures approximate that around 33% of those who are approaching retirement are likely to be obese, that is their BMI or Body Mass Index is above 30 kg/m2 (a calculation based on someone’s height and weight). Despite this however, figures show that only a mere 5th of all enhanced annuities sold are done so because of health and lifestyle factors, which means millions of retirees are missing out a potentially better income in retirement.

Of course obesity and being overweight is not normally something individuals would want to discuss publicly as many people can become embarrassed about their own situation. This means they could potentially become less likely to declare their weight and any related health issues when buying an annuity or other insurance product. However, as the government figures shows, people with a BMI of above 30 kg/m2 are far from unique and in fact are likely to become a larger minority in the future. Another possible factor is that many people may not be aware that their weight could contribute to a potentially higher annuity offer. Whereas with other forms of insurance where over-weightiness results in higher premiums (such as health insurance and life insurance), with an annuity it is financially beneficial to be classed as obese. Medical Expert Tim Crayford says individuals should be quizzed about any conditions that could result is a better annuity stating that…”…anyone thinking of taking their pension should expect to be asked about their general health and lifestyle and about any treatment they are receiving. People can be embarrassed about talking about their weight but if they’re shopping for an annuity, they need to be totally honest.”