Sweetener: Royal London has written to 33,000 savers offering to boost their pensions by between 50 and 80 per cent
Customers of one of Britain’s biggest insurers could be left thousands of pounds worse off if they accept a sweetener to give up valuable pension perks — and then live a long retirement.
Royal London has written to 33,000 savers offering to boost their pensions by between 50 and 80 per cent.
It would mean a nest egg of £50,000 would be increased to between £75,000 and £90,000 overnight.
But in exchange, customers must tear up lucrative contracts that entitle them to retirement payouts that are far higher than normal.
This could mean giving up as much as £100,000 over a 20-year retirement, analysis for Money Mail found.
Experts say they expect other firms to follow Royal London by offering bonuses to customers who agree to ditch guaranteed annuity rates.
Hundreds of thousands who took out pensions in the Seventies, Eighties and Nineties have guaranteed annuity rates in the small print of their contracts.
Typically, these promise to pay about 10 per cent of the value of a saver’s pension pot every year for the rest of their life. That means on a £50,000 pension you would get as much as £5,000 a year.
Such generous payouts are unheard of today. Customers shopping around for the best standard annuity deal can get no more than £3,000 for their £50,000 pension.
Insurers are keen to rid themselves of guaranteed annuity rates because increasing life expectancy means the cost of providing them has become extremely high.
And now, EU rules state they must hold vast sums of cash to cover the generous promises.
Royal London wants to offer customers with guaranteed annuity rates a bonus if they opt out of the guarantee.
The idea is that customers who want to use pension freedoms to withdraw money, rather than buy the lifetime income from an annuity, will get a better deal.
The firm has not yet confirmed how much the bonus will be. It says how much someone receives will vary, depending on the specific rate they were guaranteed if they opted for an annuity.
The longer ago a customer signed up to their pension, the higher their guaranteed annuity is likely to be.
Royal London says the top-up would reflect the guarantee’s value and be checked by an independent actuary to ensure fairness, and that it will provide subsidised financial advice.
But calculations for Money Mail show how carefully savers will need to check valuations to ensure they get a fair deal.
For example, if someone with a £50,000 pension pot received a 50 per cent boost, they would get an extra £25,000 for retirement — taking their pot to £75,000.
Boost: The deal would mean a nest egg of £50,000 would be increased to between £75,000 and £90,000 overnight
But if they had to give up a 10 per cent guaranteed annuity rate for that they would be missing out on a lifetime income of £5,000 a year.
If they lived 20 years, they would have collected £100,000 — or £25,000 more than if they had accepted the lump sum.
Even if Royal London offered to boost their pension by 75 per cent, the customer would end up £12,500 worse off in this scenario, according to specialist advisers Better Retirement Group.
Billy Burrows, director of Better Retirement Group, says: ‘It may be tempting to accept a larger pension pot in lieu of a guaranteed annuity rate, but you should ask a financial adviser to do the sums because you could end up worse off.
‘Insurance companies will always calculate the figures in their own favour.’
There are a number of circumstances where it may work out best to accept the bonus. With many guaranteed annuity rates, firms bar you from the higher payouts if you want your pension to continue to be paid to your partner after you die.
Other guaranteed rates only apply if you agree to take your pension on a certain date, such as your 65th birthday.
If you do not tick these boxes, taking the cash could work out better. Those who plan to spend their pension as a lump sum — for example, to pay off a mortgage — may also want the cash.
The Royal London deal is some way from being done and dusted.The firm says that if its letter gets a positive response it will need to launch a court case to obtain legal permission to unwind its pension contracts.
Sir Steve Webb, the former pension minister and now policy director at Royal London, says: ‘No one will have to give up a guaranteed annuity rate — if they opt to retain it then that’s their decision.
‘The problem we’re trying to tackle is that six in ten of people with these guarantees are giving them up for nothing — they want to access their cash and throw away the guarantee in order to do so.
‘If we offer them an uplift in the value of their fund, they can still access their cash, but will get a better deal.’
Experts say that if Royal London’s proposals are successful, other firms will follow suit.
Standard Life, Phoenix and Prudential are understood to have thousands of customers with guaranteed annuity rates.
Nathan Long, senior pensions analyst at Hargreaves Lansdown, says: ‘There is no doubt that this deal is going to be more favourable to Royal London than members… Other companies will be closely monitoring how well it goes.’
The Financial Conduct Authority says 58 per cent of savers with guaranteed annuity rates did not take them up between October 2016 and March 2017. Four in ten took the money as a lump sum.
Its rules state that savers who wish to cash in a pension pot worth over £30,000 with a guaranteed annuity rate must take regulated financial advice.
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