5th June 2013
People are not shopping around enough when it comes to selecting an annuity despite it being one of the most important financial decisions they can ever take. The Association of British Insurers, after a long debate lasting several years, has created a code of conduct and presented it in March this year for its member insurers to comply with. This was designed to improve customer knowledge about the annuity decision thus improving what is referred to in the financial services industry as the consumer outcome. You might translate that to say ‘the more consumers know, hopefully the bigger pension they are likely to get’.
We have included the main points of the code of conduct in italics below –
– Providing clear, timely information to help people approaching retirement understand what their options are. At least two years from retirement the insurer will encourage the customer to consider their retirement options. Six months from retirement and at least six weeks from retirement the insurer will send details explaining the various options, such as combining small pots, and shopping around for the best annuity.
– Explaining the different ways to take retirement income. This will include providing for dependants, lifestyle or medical conditions that may mean they are eligible for an enhanced annuity and protecting against inflation.
– Encouraging shopping around for the right pension deal. The benefits of shopping around among other providers will be clearly highlighted along with sources of further advice. Insurers will no longer include annuity application forms so there will be less chance the customer will buy from the current provider without first shopping around.
Now the trade body has commissioned researchers Optimisa to check on consumer awareness. Intriguingly, the research issued this week found that 91 per cent of annuity purchasers were aware of the option to shop around, although only 63 per cent said they had done so and considered switching provider.
Thirty per cent chose to change provider after shopping around, with 35 per cent of annuity purchasers seeking help from a financial adviser. The study found that financial advice had a greater impact on consumers than other sources of information, with 44 per cent saying the information from an adviser encouraged them to consider alternative providers and annuity types.
Seventy-seven per cent of the pre-retirees surveyed said they had either a basic or good understanding of the different types of annuity available, with the remaining 23 per cent claiming they know “little” or “nothing” about different annuity options.
There is a significant awareness gap surrounding enhanced annuities, with just 72 per cent saying they know these products exist. Furthermore, just 16 per cent of people who were potentially eligible for an enhanced annuity actually bought one.
Mindful Money view
Our view is the lack of shopping around for an annuity remains one of the toughest nuts to crack in financial services. For years, many people have simply accepted a pension, or effectively a pension income from the pension company they saved and invested with. This can offer very poor value and, at the very least, it is worth checking other options. For example if your pension is to be your main source of income then simply accepting what is offered, without considering what it means for your spouse, whether you wanted inflation protection, and whether you could have got more, often much more, elsewhere because you may suffer ill-health (even with a health problem that you view as minor) is very bad financial planning.
The pension company you save with may offer some limited alternatives and may even be reasonable value, but it does no harm whatsoever to check what else is around. It can make a huge difference to your income in retirement. If you opt for a lifetime annuity from the company you save with, then it says what it means, that is the annuity you get for life. Among the statistics revealed today, the small numbers of people opting for an enhanced annuity are very concerning. An insurer will usually calculate that you will not live as long, and therefore will offer a bigger pension to you for the amount of money you have managed to save. It should be, in US parlance, a complete ‘no-brainer’ of a decision. To do otherwise is basically the equivalent of volunteering to take a permanent pay cut.
Mindful Money believes that regular readers of the site take an interest in their own financial decisions. We think that you are either informed enough to at least use some of the many websites that allow you to shop around for an annuity or perhaps to take financial advice at least around your retirement decision, even if you don’t do so regularly.
But a large number of people are failing to maximise their annuity decisions. We wonder if we don’t need a new system perhaps one that requires people to make a broader choice outside of that offered by their own pension provider. It is early days for the code of course. In 12 months time, we may well see a dramatic improvement. Yet, if many people continue through inertia to make a bad choice or actually take very little time to make a choice at all, then that is thousands of people a lot less well off.