It should become much easier for people retiring to make the most from their pension savings after annuity companies agreed to revamp the way that they contact those that are close to claiming their pension.
From 1 March 2013, annuity companies that are members of the Association of British Insurers (ABI) will be forced to give much more detailed information about buying an annuity, and to stop sending annuity application forms when contacting retirees in a bid to get the searching for the best deal.
Boosting retirement income: why the changes are happening
Annuities provide retirement income for those in direct contribution (DC) pension schemes. They are a one-off, irreversible purchase, so getting the best deal possible is essential.
Despite this, as many as one in three of those buying an annuity fail to shop around and compare the offer from their current pension provider with annuity rates on the open market. Failure to get the best deal can leave individuals with over 10% less income than they could otherwise achieve.
Boosting retirement income: the new annuity code
The new ABI code requires members to do more to promote consumer choice. These measures include:
- Providers will stop including annuity forms with their letters to retirees and should no longer sell them an annuity automatically.
- Firms will explain annuity options more clearly, including information on lifestyle or medical conditions that may qualify customers for a bigger payout from an ‘enhanced’ annuity.
- Firms are also required to offer information on protecting annuity income against inflation, rather than simply offering flat-rate deals.
Welcoming the initiative, Steve Webb, Pensions Minister, said: ‘This code will ensure people have the information and support to shop around for a better pension deal when they retire’.
Boosting retirement income: why ‘enhanced’ annuities are so important
Shopping around for an annuity particularly benefits those who qualify for an enhanced annuity – a product that pays a higher rate for people in poorer health. In some cases, this can boost their retirement by as much as 40%.
Searching the market is essential as not all providers offer enhanced annuities. Specialist firms, such as MGM Advantage, Just Retirement and Partnership have long campaigned for greater awareness of the advantages of shopping around, but other companies, such as Legal & General have also called for enhanced annuities to be offered more widely.
Boosting retirement income: more transparency on annuity rates
The ABI code is part of a wider process of greater transparency, designed to encourage a more competitive annuity market. Comparing rates is still difficult for individuals, although the ABI has undertaken to publish ‘specimen annuity rates across a range of different products’ later this year.
The undertaking comes as the City regulator launches an investigation into the annuity market. Commenting on this, Joanne Segars, National Association of Pension Funds chief executive, said: ‘Greater transparency in this market is essential if people are to have faith in pensions. People need to know that they can turn their pension pots into good retirement incomes when they purchase an annuity.
‘At the moment, consumers are dealing with an unfair and opaque system that is preventing too many of them from securing a decent income for their old age.’