View more on these topics

The high price of annuity transfers

What options should someone have if they become dissatisfied with the investment performance of their unit-linked annuity? There is nothing in legislation to prevent annuities from offering links to a range of different fund managers, similar to the trend in the pre-retirement market.

Indeed, this will be seen increasingly as a prerequisite for a quality unit-linked annuity. But what of clients who seek wider scope to transfer their annuity in the same way as they could transfer a drawdown contract. Why is that more of an issue?

In essence, an annuitant is insuring against the possibility that he will have a very long life over which to spread his pension capital – and there is a surprisingly high probability that this will be the case. There is a 27 per cent chance that a 60-year-old man buying a pension today will survive to age 90 and a 10 per cent chance that he will survive to age 95.

Pension scheme members need to recognise that, if they rely on their own pension fund, it is likely to be insufficient to sustain income into their later years. By striking a deal with a group of people in the same circumstances, that difficulty can be overcome.

The deal is that an individual pools his fund so that, on his death, the balance of his fund is available to those who are still alive. Conversely, if a member lives to a very old age, the funds of those who have died earlier will help to sustain his income.

But not everyone of the same age has the same life expectancy. People who have suffered serious illness are more likely to die early than those who are healthy.

So it is reasonable that an annuitant who has suffered, say, lung cancer prior to retirement and whose expectation of life is therefore significantly reduced should receive greater benefit. This concept, of course, underlies the development of impaired life annuities. It is also the major barrier to annuities transferring between providers.

Let us consider an individual who bought his annuity when he was 60, then contracted lung cancer during retirement. If he were allowed to transfer his entire fund between annuity providers, then his choice would be:

Remaining in his initial pool and receiving benefits based on his projected mortality when he took out the annuity.

Moving to a different provider to secure higher benefits because the assumed mortality now allows for the fact that he has lung cancer.

Not a difficult decision but one which obviously disadvantages the members of the annuity pool he joined initially. If the original deal among the members of the pool is to be preserved, then the pool should retain part of the transferring annuitant&#39s fund to reflect the change in mortality.

Such an approach would raise two main concerns. The first is the need to underwrite transfers out of annuities. This would be an expensive and probably unwelcome procedure. The extra complexity introduced by advisers having to explain transfer options and providers having to allow for additional expenses could impact adversely on the conventional annuity market on which so many consumers rely for a straightforward and competitive product.

The second concern would be the adverse PR from taking a surrender mortality value adjustment from a transferring annuitant as a result of his having contracted an illness, no matter how justified the adjustment is. You just need to look at comparisons of annuities for healthy and impaired lives to see that the reduction could be significant.

Any move to allow transfers between providers must consider the vital insurance issues implicit in annuities. The price of not doing so is to put at risk the low-cost competitive annuity market which so many people rely on to deliver their retirement income.

Recommended

PIA expels IFAs

The PIA has expelled IFAs Allied Anglo Financial Services of The Old House, White Heath, Ashford Road, Hollingbourne, Maidstone, Kent and Weybourne Financial Services of Weybourne House, 15 Aylesbury Road, Wendover, Buckinghamshire. The two firms are no longer authorised to conduct investment business they no longer meet the FSA&#39s financial resources requirements. Allied Anglo was […]

Global Asset Management – GAM Asian Hedge Fund

Tuesday, November 27, 2001.Type: Offshore hedge fund.Aim: Growth by investing in companies in Asia excluding Japan withstrong domestic brands.Minimum investment: $15,000.Place of registration: British Virgin Islands.Investment split: 100 per cent in companies in Asia excluding Japanwith strong domestic brands.Isa link: NoCharges: Initial 5 per cent, annual 1.5 per cent.Commission: Subject to negotiation.Tel: 0800 919927.

Compliance conundrum

The news that the CML has called for a delay in implementing mortgage regulation beyond the current proposed dates next August can come as no surprise.What would be very surprising is if they have any success. One of the main reasons being cited to justify a delay is the lack of time available to do […]

Independent view

Twenty years ago, most chartered accountancy practices took the view that their bread was buttered with auditing and accountancy services.They were, however, not averse to taking commission from suggesting pension policies to their clients and using the local life inspector to do all the running around and sign up the client. They quite rightly felt […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment