Shopping around for an annuity can significantly boost your retirement income according to a new report. The authors call for specific measures to encourage more to exercise the open market option (OMO) and claim that this could give annuity holders £3.3bn more between 2010 and 2030.
The Pension Income Choice Association (PICA) report says that a 65-year-old male with a pension pot of £100,000 could increase his retirement income by £1,118 by selecting the highest rate annuity provider rather than the lowest. A woman of the same age, with the same size pension pot could gain an extra £1,160. They would increase their income by 19% and 22% respectively.
Open market option
PICA, an industry group made up from product providers, independent financial advisers and employee benefit consultants, advocates a wider use of the open market option (OMO), whereby members of Defined Contribution (DC) pension schemes who are approaching retirement shop around and compare annuity quotes rather than simply accepting the rate they are offered by their current provider. According to recent Association of British Insurers (ABI) statistics just 34% of new annuitants switched provider.
The PICA report, The macroeconomic impact of shopping around for retirement income, makes specific recommendations for better communications between pension schemes and their members:
- Stage 1: a ‘call to action’ pack to be sent 6-9 months before retirement. This would list sources of information, give a brief description of the types of retirement income product available and provide examples of the potential advantages of exercising the open market option.
- Stage 2: a ‘pre-retirement statement’ to be sent to scheme members 3 months before retirement. This would contain personal details and ask about medical conditions and other factors which might impact on the recipient’s potential annuity rate.
- Stage 3: a communication sent out 6 weeks before retirement, requiring the employee to instruct the scheme of their wishes.
Registry of advisers
PICA are also calling for a registry of advisers (IFAs) who are prepared to act for those with pension funds of £50,000 or less. At the moment, those with small pension pots find it difficult to get independent advice on their annuity options. PICA also recommends a review of the trivial commutation limits, to help those with very low pension savings.
As well as helping pensioners to maximise their income, PICA, claim that proposals will increase consumer spending and boost the UK Gross Domestic Product. It also says that increasing pensioners’ standard of living will help the Treasury through reduced social security payments and increased income and indirect taxes. Commenting on the report, PICA’s Chair, Tom McPhail of Hargreaves Lansdown, said:
‘We believe and can display that they policy recommendations put forward by PICA will help boost the incomes of thousands of people across the UK as well as acting as a catalyst to consumer spending and helping to boost the Exchequer’s finance.’
For more information on annuities, see the Which? online advice guide.
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