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Improved annuity guidance is set to increase uptake of the open market option. Samantha Downes reviews the choices available to investors who want to shop around

The results of the government’s long-awaited annuity review are expected to inject some much-needed life into the annuity market, providers claim.

In his pre-Budget report Chancellor Alistair Darling, unveiled plans to make consumers more aware of their right to shop around for better-priced and more appropriate products.

The plans, which include a web-based consumer choice tool, better-focused information and a review of pension providers’ maturity literature against the principle of treating customers fairly, are expected to shake up what has been a fairly static part of the pensions industry.

Just Retirement head of retirement solutions Nigel Barlow says there is nothing wrong with annuities themselves, it is how they are presented.

“Our research has shown that a surprising level of people were not aware of the open market option. People tend to opt to take an annuity out with their pension provider because the maturity literature they are sent is quite unwieldy.”

Barlow says choice is not the issue. He says: “People need to be made aware that there are many different types of annuities.”

The most popular annuity sold is the conventional annuity – over 90 per cent.

But Barlow adds: “Conventional annuities are the easiest option but for most people they may not be appropriate.”

He points out that some investors would benefit from a unit-linked annuity, which is investment-linked.

He says: “If they can afford the risk, then this is a better option than the conventional route.”

There are also so-called limited-period annuities, which combine a guaranteed income for a fixed period with the balance of money remaining invested. After the end of each fixed period, the invested fund is then used to provide a new ann-uity or the investor can cash all their fund in and buy a lifetime income.

Kevin Pacey, head of the Bank of Scotland Annuity Service, says investors can also choose to have an inflation-linked annuity. He claims that 17 per cent of today’s 65-year-old men will live into their 90s. Taking out a conventional flat rate will not account for 20 years worth of inflation and could seriously erode someone’s retirement income.

There are also annuities for those who don’t expect to live 20 years past retirement age.

Specialist annuity providers such as Just Retirement and Tomorrow claim not enough is known about enhanced or impaired life annuities. An enhanced annuity will pay out more than a conventional one because they are designed for those with a reduced life expectancy.

An impaired life annuity pays an even higher income for those who have significantly lower life expectancy. These will be appropriate for investors with medical conditions such as heart attacks, heart surgery or angina, life-threatening cancers, or other life-threatening illnesses, such as Parkinson’s.

Tomorrow product and marketing manager Matt Trott claims that more than 120,000 people purchased a standard annuity in 2006, when they could have qualified for an enhanced rate and claims investors are missing out on up to £40m by not choosing an enhanced annuity.

For those who do expect to have a long and happy retirement, there are even more types of annuities such as Prudential with-profits annuity for protected rights. It exploits A-Day legislation which allows investors to invest their protected rights pot in “real” assets such as equities and property. Prudential claims this also allows the investor to protect their income from inflation.

Then there are the products, which are annuities in all but name. Hartford Life’s Hartford Platinum product, allows investors the benefit of investment with the option to buy an annuity at any time. It has a feature called a guaranteed retirement income plan, which allows retirees to draw a minimum income for the rest of their lives.

Hartford managing director of marketing John Enos says the Hartford’s plan allows investors to lock in up to the first 10 per cent of the increase in their fund value during good years and live off that during bad years.

He says that unlike an annuity, an investor can easily switch beneficiaries or transfer their fund value free of charge to another pension plan if their circumstances change.

If you select Hartford Platinum’s guaranteed retirement income plan it can guarantee your income for the rest of your life. You can even choose to extend this lifetime income guarantee to your spouse or partner.

The plan also comes with a significant death benefit which means if the person does not live as long as expected, the money left in the account goes to their heirs, which lets people provide for the next generation.

Aegon Scottish Equitable International has also launched one of these so-called third-way products. The bond, known as 5 for Life invests in investment funds made up of equities and fixed interest assets. The value of the plan moves up and down in line with the performance of these assets, minus charges and withdrawals. The policyholder can purchase this plan between the age of 18 and 80 and surrender part or all of their plan for the cash in value at any time. If the policyholder dies, the plan will pay out 100.1 per cent of the cash in value of the plan.


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