EVERYONE has their pet hates. It may be the smell of cooked cabbage, the sight of Manchester United lifting another trophy or the sound of somebody clipping their toenails.
For many people nearing retirement, however, the need to buy an annuity before the age of 75 could well top the list. The thought that you can spend most of your pension savings on an annuity only to have the insurer get it if you die the next day can grate.
Various ministers have attempted to change the law on compulsory annuity purchase, but so far the Government has stood firm. But if you have a pension pot worth more than £250,000, there is a way to tread around the system.
Two years ago, London & Colonial (L&C), an insurance company based in Gibraltar, launched what it called the open annuity. This scheme, which has Inland Revenue approval in the UK, enables wealthy individuals to draw a regular income from their pension pot, even after the age of 75, and returns any unused money to their estate when they die. The person can also decide where their money is invested.
So has this product been a runaway success? Well, not quite. Since the open annuity was launched, L&C has taken in only £70 million from 100 customers. It seems the wider public — albeit only those with £250,000 pension funds — still needs some convincing before they send their money towards the Rock.
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Tom McPhail, head of pensions research at Hargreaves Lansdown, the independent financial adviser, says: “The problem is that the product’s design became so convoluted to gain Revenue approval that it almost negated some of the advantages.” The Gibraltar connection and annual management charges were also a turn-off for some, he says.
But Ken Wrench, chief executive of Open Annuities Ltd, the British holding company marketing the product, says: “The product is actually quite simple and could be compared to a self-invested personal pension in its complexity.”
Mr Wrench also points out that investors receive the same degree of protection as anyone buying a product from an insurer based in the UK. However, he admits that the product has only niche appeal. People who buy the open annuity need to be comfortable with managing their own financial affairs and must be prepared to take on investment risk. If the stock market falls, your retirement fund could fall too.
But the point he makes — and one with which Mr McPhail agrees — is that the open annuity is one of the options that people with large pension funds should consider, especially if they have concerns over their health. For it is those people who stand to lose out most when they buy a conventional annuity, because they are likely to die before they have received their money back in the form of annual income.
The figures bear this out. If a 65-year-old man were to spend £350,000 on a regular annuity guaranteed for ten years, he would have received a total of £148,000 net of higher-rate tax if he died in ten years’ time. With an impaired life annuity, which pays higher rates to someone who has had medical problems such as a heart attack, he would have received £173,000.
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However, by investing in an open annuity, and assuming a 5 per cent growth in the fund over this time, the total amount returned to the man in the form of annuities, and his estate by way of a lump sum, would nearly double to £318,000. If the money did not pass to a spouse, however, there may also be a small inheritance tax bill.
With the open annuity, people can invest in any type of collective investment, such as a unit trust or investment trust. The management charges are 2.5 per cent in the first year and 1 per cent thereafter.
It is up to the policyholder to decide how much money to withdraw from the fund each year, although this will generally be in line with the return paid by a regular annuity — about £7,000 for every £100,000 invested.
To ensure that people who live for a long time do not eat up all their capital, it becomes obligatory to buy a regular annuity once the fund reaches 35 per cent of the original investment. It is also possible to commute the fund in return for a regular annuity at any time.
LINKS
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Open Annuity: 01444 415630, www.openannuity.net.