Annuity Cartel?

jonose

Does anyone share the view that pension annuity providers might be operating a cartel?
When your pension coughs up the final value at retirement it is the annuity contract which guarantees to pay your monthly pension for the rest of your life.
But why is it that a Building Society will pay almost the same as you can obtain from an annuity?
That’s about 6% per annum return on your money when you’re a 65-year-old annuitant?
What’s more, the Building Society won’t swag your capital when you die!
We are required by law to surrender our pension funds at age 75.
Parliament says it’s the price of preventing wastrels ‘blowing the bundle’ when they retire. Such grasshoppers would become a financial burden on the rest of us in their dotage. But should that allow the annuity providers to do an ‘Equitable Life ‘ on the entire population?
After all, it was their Actuary who got the sums wrong and demonstrated just how much ‘protection’ is offered by actuarial calculation.
The Actuary, of course, is the person who calculates how much income should be generated by an annuity. The actuary at Equitable Life allowed it to ‘con’ the Great and Good.
Those unfortunates were people who ‘should have known better’, including Members of Parliament, the Judiciary, the Civil Service and the Boys at Lloyds to name but a few. That shambles, naturally, caused a great deal of clucking and the dust has not yet settled on the debacle.
Yet now we apparently have another mess in the making.
Who checks these guys? Their Institute perhaps? Well maybe they use a rusty abacus.
A ‘fag packet’ calculation shows that £100k over 30 years produces £277.78 per month available for capital repayment; that is, getting your own money back. Those are the numbers if you retire at 60 and live until you’re 90. After all, you just might last that long, and that’s what the Actuary most fears.
So just in case, he screws you.
Our guardians at the Financial Services Authority, with their comparison website, show the dear old Prudential will pay you, aged 60, £556 per month for your £100,000.
That is the best! An annual rate of return of 6.67%.
So if we assume that you will live until your 90th birthday then you’re going to get £278.22 per month in ‘interest’, because the remainder is a return of you own money.
What rate of ‘interest’ is that? How about 3.34% per annum!
So maybe they are frightened you’ll live to be 100. Does that justify the low initial payment?
No it does not. You too can do the sums. Capital returned over forty years is £208.33 per month and the annuity ‘return ‘ is therefore £347.67 per month. An initial ‘interest ‘ rate of 4.17%pa.
Yes but, they’ll tell you; the capital is eroding over the period of the annuity isn’t it?
Really?
A simple savings account interest rate of 6%pa gives a return of £6,000 for £100,000 over the first year. That’s £500 per month against an annuity rate of £556. Find a rate of 7% and you’ll get £583.33 per month and beat the offer of the Man from the Pru by £27 per month.
And here’s the real kicker: die just twelve months after taking out this annuity and the Pru gets to keep at least £99,328.
No wonder they call it ‘Prudential’!
Oh well, perhaps you can get away with a ‘drawdown’ plan? Of course it’s going to require a great deal of expensive advice, but that’s a whole different fairy story.
And after all that, when/if you get to 75 then the annuity becomes compulsory anyway.
Naturally, by the time you reach this great age you’ll be due a higher monthly income because the Grim Reaper is by now breathing down your neck.
The FSA shows a company which will do better than the Pru by £43 per month for your £100,000. They will pay you £869 per month. Feeling better? £10,428 per year for £100,000 invested.
Why, that’s 10.428% pa. Not bad eh?
But, hang on. If you now live to be 90, and by statistical quirk that is much more likely, because you’ve survived so well up to the 75 mark, then how much of this munificence is a simple payback of your own money?
The answer is £555.55 per month. It would take fifteen years from age 75 to exhaust your £100,000 fund. Therefore the ‘real’ return on the annuity is £313 per month; £3,756 each year. A ‘rate’ of 3.756% per annum. Scandalous or what?
How much profit is being made from this annuity business? Does anyone out there and outside the companies know? If the information is not known to our ‘guardians’, because it’s probably ‘commercially sensitive’, then should there not be a statutory maximum return to the provider (and adviser)?
This would at least give some balance to the way we are all required by law to surrender our pension funds to the annuity companies.
Thoughts please.

dunstonh

Does anyone share the view that pension annuity providers might be operating a cartel?

Not if you look at their pricing. no.

But why is it that a Building Society will pay almost the same as you can obtain from an annuity?

At this moment in time that is the case. 4 years ago, annuity rates were double the average savings account.

What’s more, the Building Society won’t swag your capital when you die!

Buy a value protected annuity if that concerns you. However, your building society will lower the rates as they see fit. The annuity provider cannot.

We are required by law to surrender our pension funds at age 75.

Not necessarily. Although its best to plan on the assumption you have to in case the Govt changes it's mind.

Our guardians at the Financial Services Authority, with their comparison website, show the dear old Prudential will pay you, aged 60, £556 per month for your £100,000.
That is the best! An annual rate of return of 6.67%.

None of the last 5 annuities I have arranged (in the last 2 weeks) have used Prudential. Pru tend to be up there but they are not the best. The FSA tables are not reliable to make a decision.

And here’s the real kicker: die just twelve months after taking out this annuity and the Pru gets to keep at least £99,328.
No wonder they call it ‘Prudential’!

Well, if you choose no value protection or guarantee payment then that is the case. However, they pay you a higher income for doing so. You dont have to buy that annuity though. If you had value protection, you would have got most of that £99k back minus the 35% tax charge.

How much profit is being made from this annuity business?

Its quite low profit. Many companies have withdrawn from it due to high risks of guarantee, capital adequacy requirements and the low profit margins.

GeordieMac

Dunstonh

Quote:
What’s more, the Building Society won’t swag your capital when you die!
Buy a value protected annuity if that concerns you. However, your building society will lower the rates as they see fit. The annuity provider cannot.

Thanks for this info ... but is it available generally ...?

I have been trying to get Level Annuities, Guaranteed for the longest possible period and with the maximum lump sum ... But ... so far ... have never been offered longer than 10 years ... even though it takes about 17 years just to get the fund paid gross for medium funds (£10k) ... and about 19 years for small funds (£2.5k) ... I'm 60 now ... my dad lived to 74 and was not overweight ... I am overweight.

Jonose ....
My opinion, so far, of the Insurance Companies ... Is that they are going to be great to Invest in, in a few years when they should start collecting on all the recent policies ... and ... that they employ their A team on looking after the funds in Payment to maximise their profits and pay themselves, Employ the B team on Unit and Investment Trust Assets to keep up a decent reputation, Employ their C team on Cash because that not too difficult ... Employ their D team on Admin because that needs to be looked after too ...
... and employ the E team on the Build up of assets in Pension Policies because they don't want to give their A team too much of a problem of how much they will have to pay out....

dunstonh

Thanks for this info ... but is it available generally ...?

You can get it via IFAs on the open market but I have never seen it offered from a pension provider on their own maturing plans.

I am overweight.

In which case you may qualify for enhanced rates. Height/weight ratio is considered with some providers and if you are overweight you can get better rates. One of these that considers H/W ratio also offers value protection.

Even relatively small things like high blood pressure, asthma, high cholestoral etc can qualify for improved rates. You dont have to suffer a major condition to get improved rates.

EdInvestor

Value protected annuities are really a type of income drawdown with a built in guarantee.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/09/02/cmann02.xml

As with all guarantees, you pay quite a lot for it.It's not that hard to set up the equivalent of this yourself more cheaply.

dunstonh

As with all guarantees, you pay quite a lot for it.It's not that hard to set up the equivalent of this yourself more cheaply.

You certainly pay for it but I quoted one earlier in the week that was only £200 a year lower on income compared to the 10 year guarantee.

With good health, it can actually be cheaper to take the higher income, with less guarantees and purchase a whole of life assurance. Indeed, some of these can actually be purchased on single premium form now without the need for monthly commitment (Norwich Union have a good one for that).