In the UK, there is help needed to get the UK best pension annuity rates for the hundreds of thousands of people retiring with a pension annuity each year.We have had the choice of single life and joint life annuities, level, escalating, or inflation proofed for many years now but in addition we now have temporary annuities, annuities with value protection, post code, variable, enhanced annuities and impaired annuities. This product evolution has led to a new phenomenon which is a trend towards individual annuity pricing. We are moving into a time where there is no longer a standard annuity rate. Every retiree is priced on the basis of their own profile.
In effect, unless a retiree can show a good reason why they should qualify for some kind of enhancement, they will be offered relatively low UK annuity rates. Therefore the importance of shopping around utilising the open market option (OMO) for your retirement income becomes that more crucial. The differences in annuity rates are substantial, with retirees able to secure for themselves enhancements of more than 20% in some cases. The problem also has an impact on lower earners, and high earners are more likely to receive financial advice and to get the best solution for them in retirement.
Unfortunately the proportion of personal pension type pension investors who do shop around using the OMO is stuck below 40%. In spite of the efforts of the Treasury, the department for work and pensions (DWP), the Association of British Insurers (ABI), the Financial Services Authority (FSA), the Pensions Regulator, The Pensions Advisory Service (TPAS) and all the media coverage from journalists and financial advisers, the majority of retirees are still not shopping around, and this must change.
A proposal on the table is that we move to a three-stage process. Initially, about six months before retirement, investors should be sent an informative wake-up pack which explains their options and gives guidance on what to consider and what financial solutions might be appropriate to various situations, as well as sources of additional information. Then around three months before anticipated retirement, investors are sent a pre-retirement statement, partially completed by their existing pension provider. This statement would be a simple one-page document including all the key information for shopping around with the OMO: pension fund value, pension commencement lump-sum entitlement (tax-free cash), as well as boxes for the investor to complete with information on their history and around three very simple medical questions which could be used to identify eligibility for enhanced annuity rates. Finally, just a few weeks before actual retirement, the pension provider would write asking for confirmation of what choices the retiree would like to make. I think this is a step in the right direction, removing the default option away from the current pension company providing the annuity.
