Annuity transfer target will still cost pensioners

Pension savers need increased protection against transfer risks when they turn funds into retirement income despite industry initiatives to speed up annuitisation, Virgin Money warns.

Its warning comes after the Association of British Insurers agreed a 30 days target for converting pension funds into annuities following Financial Services Authority research which criticised delays.

Unprecedented stock market volatility, which has seen the FTSE-100 lose around 40 per cent of its value since October 29th 2007, has substantially increased the risks savers face when transferring funds.

A fund worth £100,000 last year could have lost as much as £40,000 over the year and annuity providers have reported a rise in savers asking for quotes and then deciding to delay.

Pensioners already face a dual risk from delays in processing annuity transfers - the loss from payouts not starting on time and a potentially bigger loss from annuity rates dropping during any delay in sorting out paperwork.

On a £100,000 fund a 65-year-old man retiring today could expect an income of around £7,776 a year or over £650 a month. Every month the pension provider delays paying out he would lose the monthly income with a three-month delay depriving him of close to £2,000.

For a 65-year-old woman the payout would be £7,320 on a £100,000 fund with a monthly income of £610. A three-month delay would cost over £1,800.

And if annuity rates dropped 0.5 per cent during the transfer period to 7.24% for men and 6.82% for women the annual payout would fall by around £500 a year to £7,240 a year for the man and £6,820 for the woman. The payout would be fixed for life with the result that over 20 years in retirement losses would soar to £10,000.

Annuity rates are currently at a six-year high but the likelihood of further Bank of England rate cuts means yields on bonds and Government gilts could fall and in turn cut annuity rates.

Virgin Money pledges to send out maturity forms to its pension customers within five working days when they request an annuity transfer form and to send a cheque to the annuity provider within a day once the customer returns the forms.

Spokesperson Scott Mowbray said: "The ABI's 30-days target is a welcome start but companies should be aiming to turn round transfers much faster.

"Buying an annuity is a one-off decision and one which retired people have to literally live with. With a fixed annuity the income you receive is fixed for life so the losses from delays are also fixed for life. There's no second chance.

"The financial services industry should be doing everything possible to make the transfer process as smooth as possible so customers receive the best possible payout. The risk of losing thousands of pounds is a genuine threat."