Changes to the way annuities are sold are supposed to help savers get more from their pensions – but will they work?
Britain’s pensions firms have come up with new guidelines to help those approaching retirement make the most of their savings.
The Association of British Insurers (ABI) says that providers should do more to encourage their customers to shop around when it comes to buying an annuity – the product that turns pension investments into a guaranteed income for the rest of their lives.
Consumer groups have long complained that too many people end up buying a poor-value annuity from their pension provider, and thus lose out on hundreds, if not thousands, of pounds of annual retirement income as a result.
The blame has been laid at the door of pensions firms, which, it’s claimed, do not do enough to explain the importance of seeking other quotes. The ABI’s new guidelines are an attempt to counter this criticism.
But some experts believe that the new rules do not go far enough, and the whole annuity-buying system needs to be reformed.
What’s the problem?
The reason people don’t always maximise their retirement income is that the companies which run their pension funds also sell annuities. These firms obviously prefer their pension customers to stick with them and buy an annuity as it boosts their profits.
But from a consumer’s perspective, the company which provider your pension is unlikely to be the company which offers you the highest annuity rate, given the amount of competition in the market.
What often happens is that savers either think they have to buy an annuity from their pension provider, or they think it would be too much hassle to shop around.
It is estimated that around two-thirds of savers fail to seek annuity quotes from other companies – instead they just settle for the default option from their provider.
In some cases, individuals simply don’t realise there can be large differences in the amount of money annuities can generate, depending on which firm you approach.
This is especially true when it comes to savers in poor health: certain medical conditions can result in much higher annuity rates, so it is vital you inform providers of any illnesses that affect you when you’re looking for quotes.
The difference in income produced by a “standard” annuity and one for someone in poor health can be as much as 40 per cent, according to ABI figures.
What is the ABI proposing?
Under current rules know as the Open Market Option (OMO), pension firms have to tell their customers shortly before they retire that they have the right to seek annuity quotes from other providers.
But many question whether this message is being pushed hard enough.
The ABI’s new proposals tell firms exactly what information they should be giving.
Between four and six months before each customer’s retirement date, pension providers send out a “wake-up pack”. This gives an idea of the size of the pension pot, and explains how the customer can turn their savings into a regular income.
The ABI says it should also “highlight the benefits” of shopping around for an annuity, and explain how to do so.
But some campaigners – such as the Pensions Income Choice Association (Pica), which represents a number of advisers and annuity providers – say that shopping around should be the default option. This would mean that savers would not be able to get an annuity until they had sought quotes from other firms, rather than being automatically signed up to an annuity by their pension company.
What should you do?
The fact that you’re reading this article is a good sign – it means you’re aware that buying an annuity is a very important decision, and you are therefore more likely to search for a number of quotes when you reach retirement.
Shopping around is straightforward, and Confused.com’s annuity service can help: it shows you how to work out what type of annuity is right for you, and lets you compare offers from the UK’s leading providers to make sure you’re getting the maximum amount of income in retirement.
To learn more read our beginners guide to annuities and compare annuities here.
