There is little more frustrating for consumers than trying to find out information about a product from providers who seem reluctant to give out even the most basic information.
A reader has been in touch about his experience of getting a quote for a retirement annuity as he considers whether to opt for that approach or put his pension pot into a more flexible Approved Retirement Fund.
“I emailed three of the providers for information regarding the current pricing of annuities, providing them with rough details of what type of annuity interests me,” our reader wrote. “I was told politely to talk to my financial adviser and, when I did, also got fobbed off by them until my PRSA matured. The whole thing involves more secrecy than the Freemasons.”
As someone who had spent a significant portion of his career in financial services, the reader felt it was more than condescending of the companies involved to simply refuse to engage with him.
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So he turned to us. Any chance of finding out what sort of income he could expect if he put his pension pot into an annuity? The answer is yes – at least to some degree – but it turned out to be excruciatingly more difficult than it should be.
Annuities are coming back into favour after years in the wilderness when the very low rates on offer meant they simply were not an option for most people.
Back in 2020, someone looking for a joint life annuity – where the spouse would get 50 per cent of the monthly payment after the main policyholder died – was getting a rate of around 2.89 per cent – or no more than €2,890 for every €100,000 they gave the insurer for the policy.
By 2022, this had risen by a full €1,000 to 3.99 per cent – €3,990 per annum per €100,000 – and by the end of last year to a rate of 4.4 per cent, which would give a pension of around €4,400 for your €100,000 premium.
Those figures have since risen to as high as 5 per cent with one provider which, in terms of retirement income, is a jump of 76 per cent in the amount you can expect to receive each month for the same €100,000 investment compared to the 2020 figure.
You’ve saved all your life to pull this pension pot together and you are coming to the end of your earning capacity so getting the best deal for your cash is important.
We asked five annuity providers the same questions. What annuity rate could a 65-year-old man who is not a smoker and has no particular health issues (our reader) expect to secure? Conscious that this newsletter is directed at a wider audience than this one reader and his peers, we also asked what rate would be available where the retiree wanted to provide for their spouse to continue to receive a 50 per cent payment after they died.
And given that inflation can eat into the value of your pension income over time, we asked how the figures would be affected if the person buying the annuity – the annuitant – wanted to see their payment rise in line with the consumer price index, or by 3 per cent per annum, whichever of those figures was the lower.
In addition, we asked how all those figures would be affected if you wanted to guarantee that the annuity would be paid for five years even if the annuitant died within that time.
The five providers, in alphabetical order, are Aviva, Irish Life, New Ireland, Standard Life and Zurich and the table below shows the relevant rates to the degree that they actually provided the information.
(If this table doesn’t display properly, click here and scroll down to see it)
We made some schoolboy errors in the questions – forgetting to lock down the age of our spouse and not putting a figure on the pension pot we were looking to invest – and those factors can change the figures but we have put in the footnotes the basis on which the quotes were provided.
They were also provided based on different dates: most were priced as of March 1st, but one was based on rates available on March 11th. These things count to be fair to the providers.
The level of competition – some might call in paranoia – in the sector was telling. Most providers wanted to know what we wanted the figures for and, in particular, whether it was for comparison with other providers.
They then provided some though rarely all the information requested. Credit to Aviva, New Ireland and Zurich for being the most responsive. Irish Life needed more time to get through things but, as you can see, they were able to provide the information.
But Standard Life? You’d swear we had been asking them to hand over the secrets of Fatima. An answer of sorts emerged, eventually, but only after much cajoling and, as you can see from the table, in very limited detail.
And that’s all the more surprising given that Standard Life runs an annuity tracker which it publishes on its UK website quite openly. It is also interesting that, on the basis of the most recent version of that tracker that I could find, a 65-year-old could secure a rate of 7.25 per cent for a single life level pay annuity in September last year.
That is significantly better than anything available in the Irish market but it is worth remembering that rates do depend on interest rates and so can vary from country to country.
Between the reader’s experience and ours, it is quite clear that some parts of the annuity sector are anything other than focused on openness and transparency with their customers.
Having said that, there are certain issues that people need to be aware of when weighing up competing offers.
Time: Rates are tied to interest rates and these can change daily. The rates quoted above were valid only for the dates quoted and all providers cautioned that they could be different by the time an individual got in touch with them.
Age: Every three months counts and the older you are, the higher the rates can be. So, in our example, Aviva chose to quote for a person aged 65 and six months. That will deliver a different rate than if they were just turning 65. For instance, going back to the UK Standard Life annuity tracker. While a 65-year-old could get a rate of 7.25 per cent on the £100,000 pension pot, this would fall to 6.53 per cent if they were looking to lock in the annuity at the age of 60, or rise to 8.18 per cent if they held off until they were 70.
Health: Similarly, if you are in poor health, you might expect a higher annuity rate on the basis that you are actuarily likely to die sooner. The same, famously, traditionally applied to smokers – about the only time this habit pays you a positive dividend. I didn’t ask any of our five providers if that remains the case but I expect it does. The rate offered is based on risk and if you are a smoker, the chance is that the insurer will have to pay you a pension income for a shorter period.
Amount: There will also be some variation depending on the size of your pension pot. And if the figures thrown up by Irish Life’s annuity calculator are to be believed – and there is no reason to believe otherwise – the higher the amount you are putting into your annuity, the lower the rate you can expect to receive. It struck me as counterintuitive but that goes to show how some consumer presumptions can be misleading in the world of personal finance. Never be afraid to ask questions and demand answers in clear and simple English.
When it is paid: Some providers pay monthly in advance; others in arrears. It does make a difference but the main thing is that you know.
Overlap: In annuities this relates to the situation where you have a guaranteed payment of your annuity for five years and have also made provision for a spouse to receive half that amount after you die. Were overlap permitted under your policy, your spouse would get both their 50 per cent payment and the balance of the five years of full payment guaranteed under the policy. Certainly in all the quotes provided to me, overlap was specifically excluded, so your spouse would only get their half payment from the date when the guaranteed payment of your annuity expires.
Guaranteed payment: We addressed this in the quotes above. The default if you buy an annuity is that the insurer commits to paying you the agreed income monthly for as long as you live. Once you die, the payment stops, unless you have made provision for your spouse to receive a reduced payment until they die. You can put your €300,000 pot into an annuity and die within months, in which case the insurer makes easy money. Or you could survive into your 90s or beyond in which case the insurer might even be out of pocket. Either way it is not like an ARF where whatever you have not spent when you die forms part of your estate for inheritance purposes: with an annuity, you are handing over your cash and the insurer owns it from then on.
That’s why some people like to pay for a guarantee – typically that the annuity will be paid for five years even if the person dies before that. You can see from the rates quoted that there is little difference between the rate for a simple level pay annuity (with no inflation proofing) and for level pay with a five-year guarantee. Clearly the experience of insurers is that people survive at least to 70 and they price accordingly. It is worth noting that Aviva tells me all their rates have a one-year minimum payment period anyway even if you don’t ask for a guarantee.
Inflation proofing: This is where things get more expensive. Prices are now 18 per cent higher than they were back in 2020 according to the CSO, so your euro doesn’t stretch nearly so far. Some of the five annuity providers offer a rate that allows for your annuity payment to increase by 3 per cent a year (3 per cent escalation) while others offer an option for the rate of inflation as measured by the CSO’s consumer prices index up to a maximum of 3 per cent. As they are not guaranteeing 3 per cent on those years when inflation is running below that – and the European Central Bank wants to keep inflation at around 2 per cent – you can get a slightly better rate where this option is available.
But in either case, as you can see from the figures, you can pay highly for inflation proofing your pension. While the single life level pay premiums range from just over 5.1 per cent to just shy of 5.7 per cent, the inflation proofed quotes for the same people are offering rates of between 3.5 per cent and 3.9 per cent. In real money terms this means you are getting roughly €1,600 a year less per €100,000 pension pot – or a payment that is over 30 per cent lower simply to allow for the risk of inflation.
And even then, in recent years, 3 per cent cover would not have protected the value of your pension. Once that slips, there is no way of getting it back.
Spousal provision: Again, like everything with annuities, extra bells and whistles come at a cost. Depending on your spouse’s personal pension cover, ensuring they stand to benefit albeit from a reduced payment should you die first can make sense. In a world where women’s pension cover is dramatically poorer than men’s, it stands to reason. Paying for it will be nowhere near as expensive as inflation-proofing your retirement income but again, you need to have the figures to hand and make your decision in full possession of the facts.
Of course, it does not have to be an all or nothing situation. Irish people are in general risk averse. That’s why the guaranteed income offered under annuities appeals to many people even though you have more control over an approved retirement fund (ARF) which also remains invested in your retirement, allowing you to enjoy the impact of further investment gains (or suffer investment losses) on your income in retirement.
Remember there is nothing to stop you putting some of your pension pot into an annuity and the rest into an ARF, if that is what works best for you.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
