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Employee benefits
13 July 2022
Author: Steve Butler

What’s an annuity? Something from a Dickens novel?

Introducing Pension Potential - a tool to help employees boost their pension buying power

Although it sounds like it, an annuity is not some kind of obscure Dickensian medical condition.

(Jump to period drama scene, the drawing room of a grand residence. A footman reads a hand-delivered note to the head of the household: “Sir, it is with profound regret that I must inform you that I, The Reverend Rathbone, will not participate in this afternoon’s village fete because my annuity is most disagreeable, causing considerable discomfort…”)

You get the picture. An old-fashioned name for something you can’t quite put your finger on but which conjures up words like lumbago and scrivener: belonging to a different age, certainly.

Unless you work in the pensions business, that is, where an annuity is a mainstay of planning for retirement. Or, at least, it was before 2015 but more on that later.

Simply put, you hand over what you’ve saved in your pension pot to an insurance company in return for a guaranteed, annual income for life in return. There are further nuances such as time limits, annuities for couples etc but that’s the nub of it.

The amount you get obviously varies, depending on how much you’ve saved and how fit and healthy you are (the unavoidable fact is that if you’re not very well to the point your lifespan may be shortened, the more generous your annuity).

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Sounds callous but an annuity is calculated to provide for the rest of your years. If there are fewer of them, this is factored in. And that can be good news amongst what’s clearly unwelcome.

And without wanting to go into the kind of detail which may have delighted some of Ebenezer Scrooge’s nib-dipping contemporaries, it remains a relevant tool for retirement planning but, in our view, partly held back by thinking as outdated as its name.

Generally, how much your annuity pays you is down to interest rates. Very broadly, the higher they are, the more you get. So, the last decade or so has seen relatively low values. Combined with people living longer, this also suppressed what they would pay.

And that’s before the pension freedoms of 2015 were introduced, giving savers free rein to do as they wanted with their pension pots rather than swapping them for an annuity. Its architect, the-then chancellor, George Osborne, declared: “no one will have to buy an annuity anymore”. (with the emphasis on the “have to”).

But as pensions become more individualised (we’re talking about defined contribution schemes here), securing a guaranteed income in retirement can be tricky. For all their faults, annuities offer this very thing – a set figure.

Added to this less-than-buoyant state of the market, was also prevalent ignorance that annuities were – and are – a financial product in a competitive market. Savers often bought an annuity direct from their pension provider without considering that they should compare what they were being offered to other deals on the market.

And this is another candidate for a term which fails to resonate in the popular imagination. Being made aware of the option to source other deals on the market is known as the: Open Market Option. Very technical sounding and not much help, in my view. When does the market open? You can choose it? If you want??

Why not: Compared To Other Annuities? Or All Annuities Available? Or: Annuities On The Market? Or just: Here is what you have in your pension pot to buy an annuity from any provider.

In short, our latest innovation does this for people who want to be sure they have the information they need and context in which to understand it. Like buying petrol or even a car, there’s a great deal of everyday data to indicate the parameters in which you are transacting.

Pension Potential is free to employers to help their staff see more clearly their retirement options but more specifically to be able to guide them, online, through the process of buying an annuity.

By bringing together a range of potential annuity deals in one place, anyone exploring is able to see a clear, informed picture of how much each is worth. At the risk of sounding obvious, this tells them whether or not what they may be being offered by one provider is good or poor value before formally applying.

In an era of comparison websites and instant internet indexing of prices, trades and values, we believe applying this technology better to prepare people at this stage is helpful. They are able to digest their own personalised report and can speak to one of our team about their options.

In other words, a bit more 21st century digital than 19th century Dickens.

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At Punter Southall, we have a team of highly skilled risk, compliance and legal experts with deep in-house practical experience. Get in tough if you would like a friendly chat with one of us.