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The meaning of life

We are told that buying an annuity is an important decision. You need to do a bit of research before you decide what to do. I agree with this. As a result of research I have been carrying out on annuities, I am planning a wild party on May 17, 2034. If you want to know why, read on.

The Government&#39s consultation on annuities has not yet produced any formal response but the subject is still very much alive.

The debate on allowable forms of annuity product or options continues apace and the FSA has recently published a consumer factsheet on annuities.

Taking the last point first, consumers are most likely to come across the factsheet as part of the information they get from their pension provider shortly before their policy pays out and they need to make a decision about buying an annuity.

The factsheet makes consumers aware of the open market option and briefly explains the different types of annuity that the consumer can buy. In particular, it uses a flowchart to introduce consumers to the idea of escalating annuities, enhanced annuities and impaired life annuities.

Consumer education (or “informed choice” as it is called) forms a sizeable part of the Government&#39s consultation document and surely no one would disagree with the overall aim.

The factsheet is a useful and necessary starting point. Where there might be some difference of opinion is in the way the factsheet (particularly the final checklist) encourages consumers, armed with this limited information, to shop around for an annuity to meet their requirements.

The possibility of using the services of a financial adviser is also mentioned but shopping around is the main thrust of the document. Given that only three lines of the factsheet are devoted to investment-linked annuities (a category which includes not only with-profits annuities but other variations), it must be questionable whether the consumer has enough information to make an informed choice.

Whether it is for the purposes of shopping around or to enable consumers to have a more meaningful discussion with their adviser, there is a strong argument for looking at ways of giving consumers more information than is contained in the factsheet.

For example, given that an annuity provides an income for life, you might want some idea of how long that might be. Indeed, some decisions about annuity options, such as taking an indexed annuity with a lower starting point than a level annuity, depend on a trade-off between income now and income later. Knowing something about your expectation of life might help with these decisions.

You can get a sort of answer to this question by looking at websites such as which, after answering a series of lifestyle questions such as how often do you brush your teeth, you will get a very precise time of death. For example, it informed me that I would die at 5.34am on May 18, 2034. Hence the party on May 17.

However, some might want a more reasoned response to their question and there is nothing in the FSA factsheet to help with this. Information from annuity providers might talk about “expectation of life” and give some examples but this is an average result with a wide variation around that average.

For example, 25 per cent of a group of males aged 65 can expect to live around five years longer than their expectation of life. If you were buying an annuity, you might want to know that you have a fair chance of outliving your expectation of life.

There are lots of ways of presenting this information in a straightforward way to consumers but the point is that no one currently attempts to do so.

Similar arguments apply to different types of annuity. Here again there is a trade-off, this time between the possibility of a higher annuity at a cost of greater risk. For example, you could opt for a with-profits annuity instead of a guaranteed non-profit annuity.

The equity investment behind the with-profits annuity has historically performed better than the fixedinterest assets in which the guaranteed annuity will be invested. Depending on the assumptions made, the with-profits annuity could start off higher than the guaranteed annuity but it could end up lower.

This can be described in words and is a good argument for getting advice rather than shopping around but the message is unlikely to be reinforced by the figures shown on the illustrations you will get.

Again, there are many ways in which you could be presented with this information in a way which was particular to your circumstances. It is really a question of trying out the alternatives on consumers to see which works best.

Other examples of the trade-off effect would arise if, to pick up on the other aspect of the consultation, new forms of annuity were permitted. There has been a lot of lobbying for a moneyback annuity and everyone agrees that, from a consumer perspective, it would be a sensible development.

Anyone considering such an option, if it became available, would give up some annuity in return for a reducing and limited death benefit. But how much annuity would be given up? Obviously, it would be greater the older you are.

You might also want to know when the death benefit will run out and, if the option for a five-year guarantee still exists, you might want to consider that as an alternative.

The point is that the more options which become available, especially where risks or benefits are being traded off, the greater the need for a form of presentation which presents the options to consumers in a way which helps them appreciate the choices and where the trade-off is.

Meanwhile, I had better get on with planning that party as my website tells me that I have only got 999,388,790 seconds left.


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