Helping your staff at retirement

Imagine yourself as one of your staff. You save hard through your career, you build up a pot of money and the time comes when you want to/have to draw on those sav­ings to pay the bills, enjoy the holidays and look after yourself when your health starts failing.

At the moment, the average amount that someone builds up in a private pension is around £50,000. Almost everyone decides to take the quarter of their pot on offer as cash (£12,500). This leaves £37,500, about which difficult decisions need to be taken. The leftover amount has to buy an “annuity” : a lifetime income that only stops being paid when the “annuitant” dies. If a couple take out a “joint annuity”, it only stops being paid when both annuitants are dead.

The good thing about annuities is that they offer guarantees;

• the money will be paid no matter how long you live;
• the amount paid, whether it stays level or goes up, is paid according to rules you know at outset and is guaranteed;
• that the quality of the guarantee is very high, as this is a very highly regulated product and is only offered from financially stable guarantors.

The bad things about annuities is that they are more complicated than they look and, if you don’t take care when you come to buy one, you could be ripped-off. When we say “ripped-off” we don’t mean defrauded; we mean you could be ripping yourself off by not getting the best deal in the market.

A recent study by Legal & General suggested that only 27% of men who reach retire­ment are really healthy. The rest would be regarded as “impaired lives”: the phrase the insurance companies use to describe somebody with a reduced life expectancy. You can reduce your life expectancy through your own actions – smoking, drinking and acting recklessly – or you can have your life reduced through accidents or con­ditions you can’t control. Actuaries are paid to predict how long people with certain conditions or certain behaviours are likely to live. They can even make assumptions based on your postcode!

Did you know that some postcodes in Tottenham are reckoned to have people who live on average 17 years shorter than people who live in some postcodes in Chelsea? (Don’t tell José Mourinho!).

So how you behave, your medical history, and your postcode, all tell insurance com­panies whether you are likely to live for a long or short time. The worse your condition, the shorter your lifespan, the less time the annuity needs be paid, which means the higher the annuity that’s paid.

But frighteningly, although only 27% of us are in tip top condition, over 50% still allow ourselves to receive the lowest annuity possible. A high proportion of people who buy standard annuities are ripping themselves off.

Now you might say (and the Daily Express and the Daily Mail do) that this shouldn’t be allowed to happen and that people should be protected from themselves. While there are calls for Government action, there really isn’t the need. The vast majority of people who buy annuities are about to leave work. As an employer, involved in organising workplace pensions, you can – for little extra effort –make sure that your staff get the help they need to get not just the best type of annuity, but the best rate from all the suppliers in the market.

The simple way to do this is to consult with an expert and there are plenty of them. In fact the Pension Income Choice Association (run by media celebrity Tom McPhail) has just launched a directory of responsible brokers whom your staff can talk to. You can simply promote this list and let your staff get on with it, or you can be more proactive and research them to find a broker right for your firm. Brokers like to deal through employers as you ensure that they speak to employees at the right times – typically in the months leading up to retirement.

But whatever you do, make sure you choose the right broker. Here are our tips

Questions we’d be asking our broker:

1. How independent are you? Independent/restricted/tied
2. How do you charge for your broking services?
3. Do you cap the commission you take? If so, when does the cap apply?
4. Can we see the service level agreements you provide to employers and their staff?
5. What references can you show me from other employers you have worked with?
6. Can I contact these contacts directly?
7. Do you provide a full advisory service?
8. How do you charge for advice?
9. Are there cases you will not take on?
10. If so, what are they and why don’t you deal with them?

If you’d like more help to select an annuity broker, there is an online directory that lists reputable brokers. The Directory is located through the Pension Income Choice Association.