Pension: New rules to target great annuity rip-off
RETIREES have been throwing money away for years by purchasing annuities without first comparing rates, but a new scheme aims to reduce the number making this costly error.
Despite repeated warnings, around half of all pensioners still buy the annuity offered by their pension company, rather than shopping around to see if they can get higher income on the open market.
Tomorrow, City watchdog the Financial Conduct Authority (FCA) launches a new “annuity comparator” that forces companies to show how their quote stands up against rivals.
Shopping
The FCA hopes this will push more retirees to shop around. However, some fear the rules do not go far enough as companies are still not obliged to say which ones offer better rates.
An annuity is the income you buy with your money purchase workplace or pension pot at retirement and is guaranteed to last the rest of your life.
Pension savers are free to shop around for the best deal, known as “taking the open market option”, but many fail to do so and lose hundreds of pounds every year as a result.
If your pension company’s annuity pays £2,500 a year, but another would pay, say, £2,750, your insurer must tell you that
Others miss out on something called an “enhanced” or “impaired” annuity, which pays higher income to those with serious illnesses, such as diabetes and cancer, or who smoke and drink.
They could get up to 25 or 35 per cent more income to reflect their shorter life expectancy.
Currently, if you go to a financial adviser they should compare all the annuities on the market, but this does not happen if you buy direct from your pension company.
William Burrows, retirement director at advisers Better Retirement Group, said pension companies must ask for your consent to use your personal data before issuing a personalised annuity quotation, which must now show whether you can do better elsewhere: “If your pension company’s annuity pays £2,500 a year, but another would pay, say, £2,750, your insurer must tell you that.”
When using the new comparator you should give the most complete information possible to ensure that you get the right quote.
“Otherwise the old rule applies: garbage in, garbage out,” Burrows added.
What does a pension annuity mean?
Personalised
Andrew Tully, pensions technical director at advisers Retirement Advantage, said a key drawback of the reforms is that the insurer is not obliged to give you the name of the rival insurer offering a superior deal.
Another problem is that your insurer’s quote may fail to reflect the true value of shopping around.
“This will not improve outcomes for thousands of people who continue to value the security of a guaranteed lifetime annuity,” he added.
QUESTIONS
Tully said the number one rule is always to shop around for the best rate on the open market and also to consider independent financial advice: “Always tell your pension company if you have a health or lifestyle condition, or if you smoke, to see whether you qualify for an enhanced or impaired annuity.”
Also consider other factors, such as whether you want your income to keep pace with inflation or go to a family member after your death.
Tully also suggested buying annuities in stages, as and when you need the income: “This may mean you get a better rate as you get older and if your health declines.”
You do not need to choose either annuity or income drawdown, he added: “A combination of the two may be ideal.”