Are annuities really that bad – or is lack of advice the real problem?

Please accept my apologies but I use my blog today to discuss the topic of pensions. Once again we have a sensationalist headline about pensioners being “ripped off” by annuity providers and insurance companies.

The coverage is in response to a report by the Financial Services Consumer Panel, which is heavily critical of the annuity market. While I agree that the market for pension income is currently in need of reform, there are some simple solutions to many of the criticisms leveled by the report.

First of all, I would like to point out that an annuity is not the only possible source of income in retirement. There are many options to consider all of which have their benefits and drawbacks.

Unlike many financial decisions, the choice of how to generate an income in retirement generally can’t be reversed or changed once it is made. The choice of how you take an income from your accumulated retirement funds, and which provider you choose to provide that income, is vitally important. A wrong move here could cost you up to 45% of your income for the rest of your life.

The first mistake that many retirees make is simply to accept the annuity they are offered by their insurance company or pension provider. There is a good chance that the deal offered to you by your existing provider will not be the best, and in some cases can be significantly worse that those offered by other providers.

Secondly, many new retirees fail to consider what their needs will be in retirement. Do they need an income to be paid to their spouse on their death? Will an inflation-linked income be cost effective? What if long-term care is required during retirement? The answers to these (and many more) important questions should be considered before making any decisions. All too often these issues are not given the attention they deserve.

Finally many people simply assume that an annuity is the correct solution for them when in actual fact a different retirement income solution may be more appropriate.

A professional, independent financial planner can help you to decide on the best way to generate an income in retirement as well as making sure that your family will be provided for should you pass away. In addition, by completing a thorough cash flow forecast, your financial planner will be able to show you the likely impact of your retirement decisions, before you make them, so that you can avoid any costly mistakes.

Retirement income is a highly complex area where there are no second chances. If there is one time in your life when you consider taking professional advice, surely this should be it.