Why it's important to shop around for your annuity

Thursday, 19 November 2009 04:45

Savers are not getting the best value out of their workplace pension schemes because they are not getting enough information, according to the Pensions Regulator.

In a report on the information sent out to savers coming up to retirement, the Pensions Regulator found much of the literature is not up to scratch, and pensioners may be missing out as a result.

According to the report, just 23% of employees saving into a direct contribution (DC) pension in a trust-based scheme through their work took advantage of the open market option, despite evidence shopping around for the best annuity could secure a much better pension.

It's not just trust-based schemes, however; in 2008, just over a third of those taking an annuity exercised their right to purchase it on the open market.

This failure to shop around means thousands of pensioners could be worse off in retirement, as there is no switching allowed once you have made the final decision.

Malcolm McClean, chief executive of The Pension Advisory Service, says: "People spend 30 to 40 years contributing to a pension scheme and then blow it at the last minute!

"It is clear that you will get a better deal if you shop around."

Once you have six months to go until retirement, the company looking after your pension pot will write to you with information on what to do next.

Unlike with state or defined benefit (final salary) pensions, saving into a defined contribution scheme requires the saver to take some action when they come to retire.

This means choosing a product that will turn your pension savings into an income for the rest of your life - an annuity.

Usually, the pensions provider you have been saving with will also offer you an annuity. But you also have the right to shop around for a better deal, as annuity rates differ from provider to provider.

Your pension provider has to mention this in the reminder document it sends to you when you are near retirement.

However, Mr McClean is concerned that sometimes this choice is not made clear enough.

"Often we find that insurance companies aren't that keen to encourage people to shop around - they would rather take the money themselves," he says.

David Cooper, marketing and distribution director for Just Retirement, agrees this is part of the problem.

"The companies have a vested interest in keeping that money for themselves," he says.

Yet shopping around for a better deal can net pensioners a better income for their hard-saved cash.

David Cooper says: "I would say most people will benefit by ten per cent, and a lot will benefit by 20% to 40%."

Unfortunately, once you have bought your annuity there is no switching allowed, so there is no room for regret.

However, a reluctance on the part of insurers to encourage their customers to check out their rivals is not the only problem.

"The Financial Services Authority has spelt out to these companies that they have to encourage people to shop around, and so has [trade body] the Association of British Insurers (ABI), so there is pressure on the insurance companies," Mr Cooper explains.

"I do wonder sometimes about key feature documents that are 19 pages long and the real information is on page nine - when it should be on page one. But I think the real problem is with the individual."

No matter how well the insurer explains the shopping around option, it is useless when many of these packs end up in the bin, he adds.

Shopping around does not have to be complicated - comparison tables are available on the FSA's Money made clear website and on The Pensions Advisory Service's site as well as in many weekend newspapers and on the internet.

"It's not hard at all, it's just finding out from your annuity provider the value of your fund, then ring up a few other providers and asking what they will offer," says Mr McClean.

Although it is possible to find your own annuity without too much time and effort, there could be greater benefits from seeking professional advice, Mr McClean adds.

"An annuity planner can advise on different types of annuity, and if you have a health problem, you may also be able to get a better price."

The best way to do this is to consult a specialist financial adviser, says Mr Cooper.

However, there can be further obstacles with finding someone to help.

"There are not that many independent financial advisers (IFAs) in this space and many don't see it as viable to deal with a small fund. It can vary, but there are certainly IFAs that won't consider funds under £75,000, plenty that won't deal with funds under £50,000 and most won't look at funds under £25,000."

This is because many advisers work on commission, and for smaller funds IFAs will be unable to recover their costs. It is possible to get charged for advice but again, for smaller funds it may not seem worth it.

But Bob Bullivant, fromAnnuity Direct, believes it is possible to get advice cheaply.

"We could handle those funds - absolutely," he argues.

And it can pay to get advice.

"Sometimes products have a guaranteed annuity rate," he says, which can mean some consumers with older-style pensions may already have a market-beating product - but with the key terms buried in the policy documents may not realise it.

On the other hand, others have penalties for early retirement which would take a large bite out of their retirement income. An adviser can have a look at their client's policy and identify these advantages or pitfalls.

In addition, they can also find ways to significantly boost retirement income.

"If I look at July, we had a client who we increased their annuity by 100 per cent, and another by 164 per cent. These were people with medical conditions, so they were able to get enhanced annuities - but nonetheless, it shows how important it is to shop around," explains Mr Bullivant.

Enhanced annuities are offered to retirees with medical conditions, or even smokers, and can increase income dramatically.

To keep costs low, consumers can do much of the legwork themselves by using comparison tables, then approach an adviser to make sure the sale goes smoothly.

Tim Whiting, proposition director for Annuity Bureau, says: "The way we're structured at the Annuity Bureau, people can decide whether they do it themselves by using comparison tables or pay for a more detailed report."

Mr Whiting believes if the insurance company could point consumers in the direction of websites with comparison services, they might be more inclined to shop around - but they may be wary of doing anything that constitutes advice, as well as being reluctant to send customers elsewhere.

The big problem is making consumers aware of what is available, Mr Bullivant says.

He believes the FSA should be applying more pressure on the insurance companies to encourage consumers to shop around when they come to buy their annuity - not only because it is good for pensioners, but because it would benefit everyone.

"There are massive benefits from UK PLC's point of view - if someone is getting more income, the government gets more tax! If every client could get between 12% and 15% more income for the rest of their life, that's a lot of money.

"So this is actually costing the country money."

The Pensions Income Choice Association (PICA) is lobbying for change on this issue, and has just published its recommendations. The group is hoping to get enough support from politicians and the industry to persuade the FSA to make some small, but significant, changes to make more people aware of the benefits of shopping around.

The group's chairman, Tom McPhail from Hargreaves Lansdown, says: "The key recommendation is to remove the default option of taking the insurer's offer."

PICA believes that by making the default option shopping around, fewer people will simply accept the first offer. This could also be made easier by putting all the information they need onto one form, which they can then either take to an adviser or put into a comparison site.

Taking the simple step of shopping around, which many people are used to doing now for their insurance, bank accounts and utilities, could give thousands of pensioners a much-needed pay rise.

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