Pensions Minister Steve Webb has accused insurers of making excess profits by trading on the fact that consumers don’t shop around when buying an annuity.
His remarks underline the way that retirees can miss out by making the wrong choice.
Annuity firms face scrutiny
Mr Webb’s comments were broadcast last night on Channel 4’s Dispatches programme, ‘What’s your pension really worth?’ A wide-ranging critique of the pensions industry, this raised the issue of how some firms sell retirees short by offering uncompetitive annuity rates.
Interviewed, Mr Webb said: ‘Companies have clearly traded on the fact that consumers don’t shop around…they are making what I suppose an economist would call, excess profits…they are taking advantage of people staying put.
‘Successive governments have failed to ensure that consumers get good value for money in the annuity market and that’s something we’ve got to change.’
The Minister said the Financial Conduct Authority (FCA) is already conducting a review and promised ‘further action’.
Shopping around for the best deal
Annuities provide retirement income for those in defined contribution (DC) pension schemes. To make sure you get the best deal visit Which? Annuity Advisers.
Although you are free to ‘shop around’ on the open market to find the best deal, only 30% actually switch provider when they come to retire, with the majority buying their annuity from their pension firm.
This is despite evidence that rates vary significantly – by at least 10% for standard annuities and up to 38% for those who qualify for an enhanced annuity due to poor health or lifestyle conditions.
Getting the best rate is important, because an annuity purchase is a one-off irreversible deal – make the wrong choice and you are stuck with a poor rate for the rest of your life.
Buying the right type of annuity
As well as getting the best rate, it’s important to make sure you buy the right type of annuity.
Although most people settle for a single-life annuity, many are unaware that this can leave their partner unprovided for. A joint-life annuity continues to pay out after the first partner’s death, but is not widely promoted.
Enhanced annuities pay more than standard rates but are not offered by all providers. By not shopping around and comparing their options, those who qualify could miss out on a chance to boost their retirement income significantly.
Which? Annuity Advisers service
Because buying an annuity is such a crucial, once-in-a-lifetime purchase, Which? Annuity Advisers has been launched to help you make the right decision.
Which? Annuity Advisers has been launched to help consumers get the right annuity deal for their pension pot.
With access to one of the most extensive panels in the market, it conducts a thorough search to help you find the right deal, and will guide you through every stage of the annuity buying process.
Impartial and unbiased
The annuity advisers and administrators are paid a salary, rather than commission. Any bonus they receive is determined by the quality of service and advice they provide.
Details of the actual adviser charge payable by you will be shown in the illustrations you are provided with, although this is subject to a £600 minimum amount and a £2,000 maximum amount.
Which? Annuity Advisers also offers a non-advised service for people who know what kind of annuity they want, but would like us to search the market on their behalf.
It will scour the market for the best rates and present them to you to make an informed decision about your retirement income.
The commission rate will not exceed 1.5% of the amount actually invested into the annuity. There is no minimum fee but the maximum charge is £2,000, although this may be exceeded in very rare instances.