Open Market Offers Higher Income
Savers reaching retirement age will no longer be encouraged to buy an annuity from their existing pension provider, under reforms to help them maximise their incomes.
A new initiative, to be introduced early next year, will ban pension providers from including application forms for their own annuities in letters sent to customers who are approaching retirement.
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This industry-led measure is designed to prevent the 350,000 individuals who currently turn 65 each year from signing the annuity forms, thereby failing to seek higher levels of retirement income from other pension companies. According to the Pension Income Choice Association (Pica) – an industry body lobbying for new rules – signing the form could cost pensioners retiring in any single year £3.3bn in income over their retirement.
Industry studies have repeatedly shown that individuals who use their “Open Market Option” – to request annuity quotes from other providers – can achieve thousands of pounds more income over their retirement, than their own provider offers.
For example, research by Moneyfacts, the independent financial data provider, found a £700 a year difference between the best and worst annuity rates for a man retiring today with a £100,000 fund.
Individuals who are in poor health, or who smoke, can achieve even higher income through an enhanced annuity, which is not offered by all providers.
But in spite of the opportunity to secure a more comfortable retirement by shopping around, industry figures show fewer than half – 46 per cent – of 650,000 people reaching retirement each year use the Open Market Option.
“The Association of British Insurers (ABI) believes all consumers should shop around to maximise the income from their pension savings,” says the industry body, which is introducing the ban on application forms. “However, not enough people shop around currently. This new industry initiative has been developed to make a significant difference to people’s retirement outcomes.”
A new compulsory code of practice will oblige the ABI’s 300 members, which account for 90 per cent of all annuity sales in the UK, to stop sending out annuity application forms with pre-retirement communications.
It will also ensure that customers “receive all the information they need to shop around in one easily accessible place”.
Welcoming the ABI’s initiative this week, the government said it will form part of a wider package of measures to encourage consumers to get the best from the annuity market.
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However, others in the pension industry said it did not go far enough.
”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,” points out Pica.
“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. The absence of an application form could easily be mistaken for a simple clerical error. This tells you all you need to know about its potential to radically change people’s behaviour.”
Pica believes government action is necessary to ensure that the default position is that everyone must review their options at retirement.
“Pre-retirement packs should be much, much simpler,” says Pica. “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.”
Source: ft.com - 09-29-2011