Retirees are missing out on £1 billion of income each year by failing to get the best deal on their annuity, according to a new report.
The report by the National Association of Pension Funds (NAPF) and the Pensions Institute found that half a million people retiring each year were not purchasing the best annuity, blaming sharp practices and opaque pricing in the annuity market.
People who have saved into a defined contribution (DC) pension usually buy an annuity when they retire, which is like an insurance contract that promises to pay you an income each year based on the lump sum of your pension pot.
Savers who automatically opt for the annuity offered by their pension provider, the ‘default’ option, could lose 30% of their annual pension income and in some cases 50% is lost.
The report urges retirees to use the open market option (OMO) to try and find the best deal on annuities – those looking for an annuity do not have to automatically take the annuity offered by their pension provider and can search the wider market for a better deal.
Joanne Segars, chief executive of the NAPF, said people were being ‘short-changed by a toxic system’ and millions of pounds of income was lost each year ‘down the plughole of a murky annuity market’.
‘There is no point in encouraging people to save if we do not help them get the most out of their savings. Too many end up stuck with the wrong annuity at a bad price,’ she said.
Segars added that consumers need to shop around for a good annuity deal but could not if ‘the shops are either shut or impossible to find’.
Annuity providers have been accused of a lack of transparency when pricing annuities, especially for those with medical conditions.
The report also said:
- Some insurers are pushing down annuity rates, and paying out less income, on certain pension pot sizes as they expect people will accept the first quote and not look around for a better deal.
- Insurers employ ‘cliff edge’ pricing, where rates outside of the commonly quoted £50,000 or £100,000 benchmarks are much worse and penalise customers.
- Commission charges are levied on the annuity whether the person retiring has received advice or not.
- Annuity advisers do not think it is profitable to advise on pension pots of less than £50,000 so consumers with less savings do not have access to the OMO.
- Savers who do look for a better deal still find it difficult to find a specialist adviser who will look at the whole of the annuity market.
The report recommends that the government works with the financial services industry to create a more transparent and fairer system to help people find the best annuity deal when they retire and an OMO should be built into all pension schemes.
Source : Citywire Money