What is an annuity?
It is a type of insurance policy that provides a regular income in exchange for a lump sum. On retirement, holders of personal pensions must use their pension pot to purchase one, after taking up to 25% of their fund as a tax-free lump sum if they wish. They can defer that purchase until age 75, by taking 'drawdown' from their pension, but eventually they must convert to an annuity. Their fund disappears, and the once-only purchase sets their income for life. The payout is based on the average length of time people this age group live, not the individual's health.
Why are they not offering good returns?
Annuity rates have fallen in recent years, depressed by falling returns on government bonds and not helped by the Bank of England's quantitative easing. In January 2010, the average annuity for a 65-year-old with a £50,000 pension pot would have paid an annual income of £3495. Today that pension pot would generate an annual income of £2786.
Why has the financial watchdog stepped in?
Age UK Enterprises says almost a third of retirees with an annuity weren't made aware by their pension provider that they could have shopped around. The Association of British Insurers is to launch a new code from March 1 to make the 'open market option' clearer. But the Financial Services Authority (FSA) wants to shake up the market further.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
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