12th February 2013
This apathy is incredibly expensive, because by failing to look for the best deal, UK retirees are collectively losing £1bn a year, according to research from the Pensions Institute (here is a link to a PDF of the report). The fact is, regardless of what you might think, you do not have to buy your annuity from the pension provider you saved with all your working life. They won’t be offended if you leave them – after all, they’ve already been paid for looking after your pension for the last 20, 30 or 40 years through the annual management charges deducted from your pot of investments.
Shop around when you come to retirement and you can often get up to 20 per cent more income every month for the rest of your life, just by switching to a provider offering a better rate. And if you have a medical condition that means your life expectancy is shorter, you can get even more, in certain cases as much as 40 per cent more.
The Financial Services Authority is so concerned at the way the current system encourages apathetic pension savers to stick with their existing provider that it has launched an investigation into whether providers are genuinely delivering value for money.
This investigation is long overdue. A year ago a probe by the Pension Institute, an independent academic organisation, found evidence of annuity providers massaging their numbers so they would come near the top of best buy tables in national newspapers.
Here’s just one of the scams. Because one newspaper’s best buy table cited annuity returns for a 65 year-old male with a £100,000 pot, a provider was found to have offered a market-leading rate for anyone buying an annuity with exactly £100,000, which meant they topped the table, but offered far lower rates for people with pots even a few pounds above or below that level.
Another area of dubious practice is the refusal of some insurers to actually publish how much their annuity rates actually are. They do this because they feel it is too damaging to reveal just how bad their rates are, one consequence of which is that journalists like me are unable to name and shame them with the accuracy and regularity we would like to.
Instead these insurers currently send the person approaching retirement an indication of how much they will pay, and remind them they can shop around. Sadly, too many Britons tick the box and send back the form in the pre-paid envelope.
But this process is about to change, at least for those insurance companies that are members of the Association of British Insurers, which includes all the big ones. The ABI has taken steps to put its house in order with the introduction of a new code of conduct that will, from March 1st, require providers to make it much more clear to customers that they can get more by shopping around, particularly if they have got a medical condition that would entitle them to an enhanced annuity rate. By the summer they will also be required to publish their rates.
But it will still be down to individuals to do the legwork of finding the right deal for them, unless they are prepared to pay to see a financial adviser.
There are lots of factors to bear in mind when buying an annuity. One of the most important is whether your existing provider offers a good rate. You can already compare what you have been offered with the best deals on the market at the Money Advice Service website – http://pluto.moneyadviceservice.org.uk/annuities. Currently only the most competitive annuity providers in the market give their data to this service, yet even then there is a 10 per cent difference between the best and worst deals. So you can imagine how much worse value the rates of providers who are too ashamed to publish them are likely to be.
The other really big factor is your health condition. Even mild conditions such as obesity, high cholesterol, hypertension and diabetes mellitus can get you an enhanced rate. Conditions such as cancer, chronic asthma, diabetes, heart disease, kidney failure or stroke will earn you considerably more. So if you think you fall into this category then you should really go and speak to a professional adviser.
But it is also important to consider other factors such as whether you want inflation protection – it means you get less money in the early years of retirement when you are likely to be active and spending more money, but on the other hand if you survive for three decades or longer, your spending power is going to be seriously eroded.
And if you have a spouse or partner you need to consider whether to buy a joint life annuity that will pay them an income if you die first.
People with bigger pension pots at retirement should also ask themselves whether they even want to buy an annuity. The more money you have, the more risk you can afford to take. This could mean going into income drawdown in retirement or opting for one of the ‘third way’ annuity products that give you exposure to the stock market while guaranteeing a certain level of return.
Whatever you do, make sure you take control of the decision and get as much advice and information as possible before you sign on the dotted line. You only get one chance to buy an annuity, and it’s a decision you will live with for the rest of your life.