Single life annuities ‘betraying’ British widows – and what you can do

A former government advisor has warned that millions of widows across the UK are being “betrayed” by pension providers whose schemes “die” with their husband.

Pension expert Dr Ros Altmann notes that insurers are making around GBP 1 billion each year by pocketing the remaining pension pot when a husband dies – rather than giving it to the surviving spouse – via products known as single life annuities.

He states that “the UK annuity market is failing its customers.”

Approximately 425,000 people exchange their pension pot for an annuity every year with an insurer, which guarantees them income every month for the rest of their life.

The problem arises because women typically outlive their partners, and men are often not told the full implications of the complex pension plans they sign up for.

Due to a general lack of understanding, the majority of individuals take out a single life annuity – which, after the individual dies, is not passed onto the spouse.

Many are initially attracted to these schemes as they offer a larger income than joint life annuities which guarantees to pay out to the surviving spouse.

How to know if you’re affected

If you are on a ‘defined benefit’ scheme, you are not required to purchase an annuity at retirement, and at least 50% of your pension will automatically be defaulted to the surviving spouse.

However, if you are a private sector worker with a ‘defined contribution’ pension, you will need to purchase an annuity when you retire.

If this is the case, it’s important to know that you do not have to take the annuity offered by your provider, and that no two annuities are the same.

To ensure your spouse will receive income from your annuity, you should purchase a joint life annuity.

“Shopping around” annuity providers can see you increase your pension income by as much as 20%.

There is an exception to this rule however; such as annuities with a guaranteed annuity rate (GAR). If your annuity offers a high GAR rate (such as 10%), this is probably much higher than any rate which can be found elsewhere, and you may want to stick to your existing provider.

Step by step guide to choosing your annuity

  1. Six months before you retire, your annuity provider will send you a ‘wake up’ pack detailing the total value of your pension, and the types of annuity they can provide you with.
  2. A follow up pack sent ten weeks before you retire will ensure you are aware of all the options.
  3. At this stage you should either take independent financial advice to help find the best option for your retirement, or contact an advisor at your pension provider to answer any questions you may have. You may also wish to contact other annuity providers yourself to find the best deal – completing this stage will nearly always see you increase your income during retirement.
  4. After enquiries are made, your potential providers will send you personalised annuity packages detailing the quote itself, all the options available to you, and which products might suit you best. You may find this includes the offer of an enhanced annuity, which is beneficial for those in ill health.
  5. When you have decided which pension is the best option for you, your current pension provider will release your pension to your chosen provider. The annuity should be set up within a month.

Buying an annuity is a large and irreversible decision, so it pays to take expert advice from an independent advisor.

However, if you are comfortable in your knowledge of annuities you may research the market yourself – thus saving on costs.

You will need to factor in your current pension value, any goals you may have, and any health issues in order to find the best annuity for your needs.

Lastly, if you are living overseas, you may want to purchase a Qualified Recognised Overseas Pension Scheme – or QROPS. Not only does a QROPS mean you avoid the need to buy an annuity, but you can also avoid UK income taxes on your pension, and pass on 100% of your pot to your loved ones when you die.

Below is a list of some related articles, guides and insights that you may find of interest.

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