Thousands of over 55s are missing out on maximising their retirement incomes because they are not picking up the best financial advice or simply do not understand how pensions work.
The government is running a consultation on helping those approaching retirement improve their finances – and the working party is due to report in April after seeking opinions from financial firms as well as other organisations.
As a response, the Association of British Insurers, the trade body for pension firms, has agreed a compulsory code of practise that stops providers sending automatic annuity application forms to their customers.
The intention is retirement savers will check the market for the best annuity rates rather than buy what could be a poor deal.
Pension providers are not signing up to the code out of charity – the government has warned that if they do not police their own shortcomings, legislation is likely to make them offer customers a better deal.
Interestingly, the ABI is taking part in the consultations and reportedly announced the code without discussing the option with other members of the working party.
The question for the ABI and pension firms is whether the code goes far enough in protecting consumer rights or is it just a rearguard action in an attempt to forestall an inevitable change in the law.
Automatic annuity sign up is a mistake
Signing up for a pension firm’s annuity offer without checking out the market is an expensive mistake for many that can mean ending up with 40 per cent less retirement income than they could find by shopping around.
The ABI reckons around 650,000 people a year turn 65 and around do not shop around for an improved annuity deal – which adds up to about 196,500 people eking out their money to fund a poorer retirement.
The main problem for annuity buyers is making a bad decision sticks with them for life, as once someone is locked in to an annuity, the decision cannot be reversed.
Some might accuse the pension providers of making money out of the customer’s misfortune by not pointing out to them that other, better financial deals are available – but the pension firms claim they have done nothing wrong and customers are free to shop around for a n annuity that pays more money.
For a pension saver, these automatic sign-up forms do not include vital information that could earn them a better income with an enhanced annuity.
Qualifying for an enhanced annuity
Enhanced annuities pay out more money to retirement savers suffering from lifestyle or medical conditions.
That does not mean someone has to suffer a serious illness to gain an extra pay out – in some cases simple conditions that are not life-threatening, like high blood pressure, high than normal cholesterol readings or high blood pressure can qualify.
Enhanced annuities are one of the few financial products that offer better terms to smokers.
Across the market, annuity providers offer better terms to customers suffering from around 1,500 medical conditions. Not every provider covers every option, but shopping around could throw up an annuity firm paying significantly more than a customer’s pension provider.
Enhanced in terms of an annuity means the monthly payment is more. The firms offer higher payments to customers who smoke or who suffer a condition because they are unlikely to live as long as their healthier counterparts.
How much more an enhanced annuity will pay depends on several factors – including the saver’s age, medical condition and amount invested.
Assuming a 65 year old male annuity investor with a £50,000 fund and a single life level annuity guaranteed for five years, a standard annuity would pay around £3,000 a year – high blood pressure would add £300, diabetes with insulin reliance would add about £600, while someone suffering pancreatic cancer with radiotherapy and chemotherapy could add £1,500.
Other options for annuities
Other factors can affect the level of annuity pay outs.
These include taking single or joint life annuities; how annuity payments are received – for instance whether they are level or inflation-linked; whether income is taken in advance or arrears and if the contract agrees a guarantee period.
Pension drawdown
Pension drawdown is also a serious financial consideration for the over 55s. Drawdown lets the pension investor take control of their investment.
Flexible drawdown lets some individuals withdraw as little or as much income from their pension fund, as they choose, as and when they need it. You have to declare that you are already receiving a secure pension income of at least £20,000 a year and have finished saving into pensions.
Income drawdown sets no minimum amount for withdrawal, which lets individuals leave their pension untouched for as long as they like – with some conditions:
• The maximum income for drawdown is the same as the investor could raise from buying an annuity.
• Drawdown is subject to review every three years until age 75, and every year from annually from age 75
• Tax-free cash lump sums can be paid after age 75 if the investor has agreed to earmark funds for drawdown at the same time, even if they decide not to take them.
Taking annuity or drawdown advice
The rules about buying annuities and pension drawdown are complicated and need tailoring to each person’s financial circumstances.
It’s clear pension firms and their trade bodies are not trustworthy as they have their own agendas that often precludes offering a full range of advice to savers.
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