12th August 2013
Just over three quarters of people or 76% of those approaching retirement believe that staying with their existing pension provider will ‘make no difference’ to the amount of money they receive from their annuity, reveals new research from specialist insurer Partnership.
With the financial services industry focusing on encouraging people to shop around for their annuity, Partnership undertook research with 2,0o0 consumers to test the understanding of people between the ages of 45 and 65. While the majority of people (60%) correctly deduced that gender had no impact on annuity income and 50% realised that they would receive more if they retired later, a real lack of understanding about other key aspects of these policies was revealed.
Just 13% realised that by taking an annuity with their existing pension provider they risk reducing the amount of income they get from their annuity and a mere 17% understood that if they smoked or were overweight they could potentially get more. Relatively few people also realised that if they were in ill health or had a medical condition, they could get more from their pension pot (36%) or that due to post code pricing, living in a nice area may mean a lower income from their annuity (8%).
This is all clearly very concerning as the pension industry has made a great deal of its campaigns to encourage people to shop around.
|What impact would the following factors have on the amount of income you receive from your pension pot?||Get More||No impact||Get Less|
|Staying with your existing pension provider||11%||76%||13%|
|Ill Health / Medical Condition||36%||41%||23%|
|Smoking or being overweight||17%||56%||27%|
|Living in an expensive area||7%||84%||8%|
Andrew Megson, managing director of retirement at Partnership, says: “For most people, choosing an annuity is one of the biggest financial decisions of their lives as they will be setting their income for their retirement. Therefore, it is extremely worrying to see that most people simply assume that staying with their existing pension provider will have no impact on the amount they receive.
“For people with medical or lifestyle conditions, the impact of not shopping around is likely to be even more devastating as an increase of 20% in excess of a standard annuity would be reasonably typical for one of our 65-year old customers and, for severe conditions, could be considerably more.
“This research suggests that we need to work harder as an industry to encourage people to actively consider their options rather than simply taking what is offered. Whether people choose to speak to various providers themselves, work with an intermediary or use a comparison service is their choice but it is vital that they do something or risk receiving significantly less than they hoped.”
Mindful Money view:
We feel it does no harm to keep saying this. The pension provider you invest with, does not have to be the provider you ultimately buy an income from. Years of inertia mean that very many people have made this mistake. Not shopping around means that they risk taking a permanent pay cut in retirement, which is a shame given that millions of people will have devoted a substantial proportion of their pay to investing in a pension. It doesn’t apply to all pensions, because not all pensions require that they be translated into an income but where it does – and that includes individual pensions or workplace schemes such as group personal pensions – then investors may have to choose to actively stay invested, choose your own annuity or be defaulted in the annuity on offer from their existing firm.
We believe that the vast majority of Mindful Money readers won’t make this mistake of course and will seek to maximise what income they can get for their money whether that is with an annuity or perhaps through a mixture of income drawdown and an annuity. But we also hope Mindful Money readers tell all their friends and family that unless they are getting some sort of defined company pension, they need to separate their pension investing and their pension income decisions in their minds and in reality or they may be considerably less well off.