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Ask Justin

Ask Justin

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How safe are annuities?

Retirement | Annuities Helpful? 27

Asked by Islaylassie, submitted 23 June 2010.

Open Quote Hi, Justin. While shopping around for annuity quotes recently, I suddenly wondered what would happen if the company from which I eventually buy my annuity expires before I do!

They're all big insurance companies, but after the mayhem in the financial sector over the past two years who knows what might happen in ten, twenty, or even thirty years' time. Once they're handed over to the insurance company, are people's hard-earned pension funds protected or ring-fenced in any way?
End Quote

Answered by Justin on 24 June 2010

The chances of a big insurer going bust are slim (worst case there would probably be a government bailout), but as you point out we should never say never after events of the last few years...

Annuities are usually backed by gilts and corporate bonds, but the assets don’t have to be ring-fenced from an insurer’s other assets. So insurance companies do not guarantee your annuity would be safe if they hit the rocks.

Fortunately annuities are covered by the Financial Services Compensation Scheme (FSCS) under the insurance category. This means compensation is unlimited, although only 90% of a claim will be paid.

If possible the FSCS might look to transfer the annuity to another provider on the same terms, in which case you should notice little difference except for a possible delay in receiving income will the process take place.

Otherwise you’d claim for the equivalent lump-sum value of your annuity based on the cost of a new policy to provide the same level of income and benefits (such as joint life cover and indexation). You would then expect to receive 90% of this value with which to purchase a new pension annuity.

Of course, FSCS rules and levels of cover could change in future, but I think it’s unlikely cover for annuities would fall. Ensuring safe, reliable pension income would be a pretty fundamental objective for any government.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .

Comment by Islaylassie at 5:30pm on 24 Jun 2010:

As always, that's very helpful and quite reassuring. I'd assumed that the FSCS might apply but didn't realise that was unlimited (which is good), or that it guaranteed only 90% of any claim (not so good). I imagine that's not widely known.

Whilst any government would want to ensure safe pension income, I don't have the same faith in government finances that I had ten or twenty years ago - although possibly more than I had two to three months ago.

Presumably no insurance company has ever hit the rocks, apart from AIG which was, so far as I understand it, more of a re-insurance company than something like, say, Legal & General or Aviva.