Thousands of people could receive larger pensions as a result of the way Annuities are marketed to members of company pensions.
At present around one in three people buy their Annuity from the same people who have managed their pension and do not shop around for the best Annuity rate. This can lead to lower incomes in retirement as it is not always the case that the existing pension provider will offer the best Annuity rate. Furthermore an Annuity can never be changed, choosing the wrong Annuity provider can therefore be an extremely costly mistake.
However a new initiative from the Association of British Insurers (ABI) could signal a change, and encourage more people to shop about for the best rate.
At present pension companies include send a retirement pack to members a few weeks before their planned retirement date. It is thought that including Annuity quotes, along with application forms, in this pack encourages people to accept the Annuity being offered to them without shopping around for a better deal.
Data released by the ABI backs this up, of the 70% who do shop around, 46% end up buying their Annuity from a different provider, indicating that in many instances a better Annuity rate can be found in the open market.
The ABI believe that “customer inertia” is one of the key reasons why people failed to shop around. They said: “Most consumers receive an application form for an annuity from their existing provider as part of the communication pack posted to them in the run-up to their retirement date.”
They continued: “Many (people) simply complete and sign the application form and send it back to their existing provider, rather than shop around for a better deal.”
A simple check of an online pension Annuity calculator will give you an idea of whether you can get a better Annuity rate from shopping around.
As a result of these figures the ABI has decided to ban its members from including Annuity purchase forms in the retirement pack they send out to members, although they will still be allowed to include an Annuity quote.
It is hoped that this will encourage the 30% of people who do not currently shop around to do so.
By just accepting the Annuity offered by the current pension provider it is also likely that many people are missing out on the option of an Enhanced Annuity rate.
An Enhanced Annuity provides a higher level of income to people with health or lifestyles issues such as smoking.
Gary Shaughnessy, UK managing director of Fidelity Worldwide Investments, said: “With only 1% of annuities purchased from the incumbent insurer being enhanced annuities, we see huge potential for individuals to radically improve their retirement income by shopping around.”
Not everyone however has welcomed the ABI’s move, Tom McPhail, chairman of PICA (Pension Income Choices Association) described it as a “fudge”.
He said: “Insurers will still be able to include a quote for their own annuity, which may be significantly less than the best rate available on the market. Presented with this quote consumers are still likely to accept it, even if they do not have the means to do so immediately to hand.”
He added: “More far reaching reform is needed to ensure pre-retirement communications lead to more retiring investors shopping around for the best rate, and indeed a rate which is appropriate for them and takes account of their health and lifestyle.”
“Pre-retirement packs should be much, much simpler. They should present shopping around as the default option, and should not include either an annuity quote or an application form from the pension provider.”