Pensions World

Most retirees simply do not understand the need to shop around for the best annuity, says editor Stephanie Hawthorne.

Could annuity misselling be the next financial scandal? Already, one fifth of all trust based defined contribution (DC) members are over 50. Additionally, with the arrival of auto-enrolment, millions will be faced with the prospect of buying an annuity for the first time.

Customers have just one chance to get this right. Once the contract is made, it is irrevocable. Yet around a third of the 650,000 people who retire every year fail to shop around. Many of them simply do not understand what they are doing.

The difference between the best and worse annuity rate can be a huge 25%. In addition, around one third of the population nearing retirement may be eligible for enhanced annuities of up to 40%, because of ill health or smoking. As the Pensions Regulator (TPR) says: “Many pension scheme members face a steep learning curve in the period before they retire, following low levels of engagement with pension saving throughout their working lives.”

By law, members must be offered the open market option. TPR research shows that although the letter of the law is followed with 98% of pension scheme literature mentioning the open market option, only 23% of members exercised their right to shop around to get the best deal. There is room for improvement as, worryingly, 30% of schemes which submitted literature to TPR in its last survey had breaches of retirement disclosure regulations.

Could a trustee be sued?

Could a trustee be sued if a member were unaware of higher payments for those with medical conditions?

Many people opt for the highest initial income from an annuity – the single life option – omitting to make provision for their spouse which could leave one partner in dire straits. Do members realise the difference between single life and joint life options?

More employers should offer pre-retirement seminars as an employee benefit, alongside the more usual staff canteen and gym membership, not just to their top executives but to every member of the workforce.

Few employees take independent advice on retirement and many employers leave members to fend for themselves for fear of being seen to give “advice” or even the possibility of being sued if a recommendation for an independent financial adviser goes wrong. This is short sighted. If scheme members face life’s longest holiday with just a jargonful retirement guide, arguably that might meet today’s basic legal standards, but this may not pass muster in 20 years’ time when a spouse dies and a widow is left destitute. Pre-retirement packs should be much simpler. They should grab members’ attention and motivate them to take action, rather than putting them off with legalese.

There have been a few cautious steps to improve matters, such as the Association of British Insurers’ initiative to remove the application form in the communications the existing provider sends customers, but many people might just see it as a clerical error. The open market option should become a default option, otherwise the relative trickle of annuity complaints (423 to the Financial Ombudsman Service (FOS) in the year to 31 March 2011) will become a tidal wave. Typical complaints (of which around 41% are upheld in favour of the consumer) concern delays in setting up an annuity as well as those from people with health concerns who feel an enhanced annuity would have been more appropriate. 

It is not enough for trustees to just secure a decent pension pot for their members. They must ease them on the road to retirement as well. A bad decision can mean the difference between decades of comfort or penury in old age.

We must not fail our retirees.