Don’t write off annuities

Finally, a spot of good news for those nearing retirement. Annuity rates have finally begun bouncing back after a prolonged period of decline, meaning that people cashing in their savings today could get substantially higher pensions.

Annuities may have gone out of fashion since the introduction of the new pensions freedom rules in 2015, but these insurance contracts remain the bedrock of many people's retirement finances, since they offer a guaranteed income for the rest of your life. But while most pensioners appreciate the certainty that an annuity provides, the rates available have become very disappointing in recent years. A decade ago, the typical 65-year-old man could have bought an annual annuity income of £8,000 for each £100,000 of savings in his pension.

By last summer, that figure had fallen to below £4,500. The fall reflects people's increasing life expectancy since insurers now expect to have to pay annuities for longer but also a collapse in the yields on gilts (government bonds) since the financial crisis, as these are the assets insurers invest in to fund their annuity liabilities.

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However, annuity rates have increased over the past six months, to about £5,150 today for every £100,000 of pension savings. Enhanced annuity rates, available to people in poor health and heavy smokers, are now as high as £6,650 a year. The increase follows an upturn in gilt yields, with gilt prices falling amid concern about the prospects for the UK economy after Brexit as well as a broader move out of government bonds after a move towards higher interest rates in the United States.

The higher rates may encourage more savers to consider annuities as an option when reaching retirement, rather than opting for more risky income-drawdown products. While drawdown plans can deliver higher incomes over time, as savers' pension funds can be left invested to grow, there's also a greater risk of disappointment. However, pension savers do not qualify for the best annuity rates automatically. It's important to shop around for the best products from a range of providers, including considering options such as enhanced annuities.

Were you mis-sold your annuity?

Up to 200,000 savers who bought annuities from Prudential and Standard Life from July 2008 onwards may be eligible for thousands of pounds worth of compensation. Both insurers have conceded that the standard annuities they sold many customers were not as generous as they should have been, because these customers would have qualified for enhanced annuities, which are available to people with a shorter life expectancy due to their health or lifestyle.

The companies' admissions followed a review by the Financial Conduct Authority (FCA), the industry regulator, into whether mis-selling has occurred in the annuity market. Standard Life has set aside £175m to compensate victims of the scandal. Pension experts believe Prudential's exposure may be much higher, since it has sold more annuities since 2008.

The customers potentially affected are those who saved with each of the companies and then bought their annuities rather than shopping around savers with pensions built up at other providers who opted to buy Standard Life or Prudential annuities are not covered. The sales were "non-advised", meaning that savers bought their annuities without taking independent financial advice.

Both companies are now reviewing annuity sales made since 2008 and have promised to contact all customers who are potentially affected. The FCA estimates that the average victim of the mis-selling is missing out on between £120 and £240 of income a year for each £25,000 of pension savings they invested in Prudential and Standard Life annuities. That equates to about £6,000 over the course of a 25-year retirement.