Annuities: new report highlights the cost of making the wrong choice

07/02/12
Annuities

A new report has claimed that the way Annuities are sold is costing retirees billions of pounds each year.

Anyone who has used a pension Annuity calculator in the past few months will be aware of how far Annuity rates have fallen. However a report by the National Association of Pension Funds (NAPF), based on research by the Pensions Institute, has highlighted other issues which are seemingly reducing retirement incomes.

The report claims that the way Annuities are sold by Annuity providers was “unfair and opaque” with some insurers guilty of “sharp practice and murky pricing”.

Open Market Option

The report focused on the fact that many people are still not shopping around for the best Annuity rate.

Every money purchase pension, for example Personal Pensions, Stakeholder Pensions, SIPPs and many work place pensions offer an Open Market Option, or OMO. This allows the owner to shop around for the best Annuity rate; however the NAPF report claims many people are still not taking advantage of this option.

Despite the fact that it is no longer compulsory to buy an Annuity, it is still a popular option for those people wanting a guaranteed income for life. We are passionate about making sure retirees get the most competitive Annuity rate and would always recommend shopping around for the best rate and also to check whether or not they qualify for an Enhanced Annuity.

To help people who are retiring we have written the ‘5 Golden Rules of buying an Annuity’  and also produced a list of ‘9 questions to ask your Annuity adviser’.

We would also always recommend that retirees consider alternatives to an Annuity, which may be more appropriate for their needs.

However, when it comes to an Annuity it is clear that the message to shop around is not getting through to many retirees with the NAPF arguing that the OMO is not being used because of obstacles placed in the way of retirees by Annuity providers.

“The process for choosing an annuity is a complex one and the majority still go for the “default” option by sticking with their pension scheme provider.” the NAPF report said.

“This failure to shop around for a better deal can wipe 30% off their annual pension income, and in some cases up to 50%,” it argued.

We would agree with the NAPF’s conclusion. The paperwork received by many retirees is lengthy and in our opinion unnecessarily complex, this can in many instances put retirees off shopping around and simply taking the Annuity offered by the existing pension provider. Other issues putting people off shopping around include the perception that taking advice will increase costs, that there is little benefit in shopping around and that it is simply easier to take the default Annuity.

Employers were also criticised by the report, who, according to the NAPF do little for retiring workers to ensure they get the best Annuity rate possible.

Thinking of buying an Annuity soon? These links will help you make the right decision

Pension Annuity Calculator

‘5 Golden Rules of buying an Annuity’

‘9 questions to ask your Annuity adviser’

Annuity rate bands

The NAPF are also unhappy at the way Annuity providers price their Annuities.

The report said that Annuity providers “tailored” their Annuity rates based on the purchase price and operating “cliff edges” which, according the NAPF, unfairly penalises retirees.

However this was refuted by the Association of British Insurers (ABI), who represent Annuity providers, saying that the claim was based on anecdotal evidence.

However, Otto Thoresen, director general of the ABI, also said: “We fully agree that all customers need to shop around,” he said.

Thoresen continued: “70% of our customers already shop around with 44% switching provider, but this is a critical decision for our customers so we need to do all we can to improve this further.”

“We are consulting on a compulsory code for our members to help the third of customers who don’t shop around to make sure they take the right decision and get the best deal.”

“Toxic system”

Joanne SeagersChief executive of the NAPF, Joanne Segars (left), said retirees were “short changed by a toxic system”.

She continued: “Every year a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market.”

“Lower and middle income workers are especially vulnerable – too many end up stuck with the wrong annuity at a bad price.”

Of course, if these “lower and middle income workers” seek independent advice and shopped around they would not be stuck with a potentially lower

Annuity rate for the rest of their life. However, for a number of reasons there often seems to be a reticence from this group to seek advice; this is something that insurers and advisers alike need to address urgently if the situation is to improve.

Annuity Advice

The NAPF suggested that retirees with pension pots of less than £50,000 were most at risk, saying that pension funds of this size were not large enough to be profitable for most Independent Financial Advisers; again forcing retirees to accept a potentially inferior Annuity from their current pension provider.

The NAPF said: “It is virtually impossible to find a specialist adviser who covers the whole market and who is willing to help those with smaller funds.”

We have to disagree with this conclusion.

Here at Investment Sense we passionately believe in everyone’s right to receive advice on their Annuity purchase from an Independent Financial Adviser.

We actively welcome retirees with ‘smaller’ pension funds, who will receive exactly the same treatment as those people with larger pots and can rest assured that we have searched the whole Annuity market to secure the most appropriate Annuity.

If you are approaching retirement and would like to review your options then do not hesitate to contact our team of Independent Financial Advisers who will shop around on your behalf and help guide you through the range of options you have.

Our team can be contacted on 0115 933 84330115 933 8433 or by emailing info@investmentsense.co.uk