• Text size      
  • Send this article to a friend
  • Print this article

Think twice before buying into one-year annuity pension products

THE Treasury Select Committee's verdict on the 2014 Budget changes to pensions and savings is spot on.

It welcomes the decision to stop forcing savers to buy an annuity or income drawdown product if they want to take any money from their pension fund.

However it rightly warns the Financial Conduct Authority (FCA) to be vigilant and to intervene early if new products to replace standard annuities are defective.

Unfortunately, it seems that the FCA may be failing its initial test. The first new products to be launched since the budget changes are 'one-year' annuities. These are being advertised as a stop-gap that allow customers to take their tax-free cash, without having to make a lifelong irreversible commitment to buy an annuity before the new system starts fully in 2015.

The products may sound appealing. But I cannot really see how they are in a customer's interest. Someone with a pension fund of £100,000 would take £25,000 tax free cash and then £75,000 goes into the one-year annuity.

This is actually an income drawdown fund that earns only around 0.5% interest for the year - a very poor rate.

Worse than this, however, one-year annuities can be sold on a 'non-advice' basis.

In this case those selling the products receive around 2% commission.

So, after one year, the customer will have paid 2% commission to earn 0.5% return on their money.

They will then have to buy another product and pay yet further fees.

In fact customers do not need to buy these products at all. Under the new rules since the 2014 Budget, they would be able to just take their tax free cash and leave the rest of their fund alone.

Even if it was invested in a cash fund within their pension they would be much better off than paying 2 per cent to move it. However, some pension company systems apparently struggle to cope with paying out tax free cash, unless the customer moves the rest of the money into another product.

Therefore, these one-year annuities help pension companies overcome their own technological shortcomings.

Meanwhile they offer no benefit to the customer.

Finally, customers are not being warned of the potential tax implications of buying these products.

If they die within the year, the money in the one-year annuity will be taxed at 55%.

Within a pension fund, the money would pass on tax free on death before age 75.

Overall, this is a good test for the FCA to respond to the treasury committee's calls for early intervention.

I cannot see what customer benefit there is in these one-year annuities.

Customers get no better options than they would have without buying the product, and they could lose 2% of their fund. They earn a paltry return on the money.

Yet they still have to buy another product a year later.

The one-year annuity sales also endorse the importance of the Treasury Committee's calls for the free guidance promised from April 2014.

This guidance stressed the importance of being demonstrably impartial and certainly not biased in favour of products or providers. Surely it is time for customers' interests to be properly safeguarded.

The regulator has a duty to act quickly to prevent significant detriment from new products that fail to deliver value.

The new regime is bound to spawn a whole host of new product initiatives.

In this situation customers really need to know that the regulators are going to protect them against unsuitable developments.

Dr Ros Altmann is an independent analyst and lobbyist on pensions

Contextual targeting label: 
Finance

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis.
If you're a relatively new user then your comments will be reviewed before publication and if we know you well and trust you then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

232340