Advisers have reiterated their advice to people approaching retirement to shop around for their pension income after it was revealed that the financial regulator had begun a new pricing probe into the £11bn annuity market.
The advice came after the Financial Services Authority (FSA) announced it had begun a two-phase probe to determine how much consumers might lose by accepting quotes offered by their pension provider.
Since 2002, pension providers have been required to highlight to customers that they have the right to use the “open market option” or take their business elsewhere, rather than simply accept the annuity quoted by their provider.
But in spite of the fact that there can be a 20 per cent difference between the best and worst annuity rates, most savers are not getting the best deal for their savings, or taking advantage of higher rates for medical conditions which shorten life expectancy, known as “enhanced” or “impaired life” products.
The thematic review, which began in January and is likely to continue throughout the year, will look at whether there are companies or particularly groups of savers where detriment is more likely to occur.
This will involve a pricing survey of annuity providers, and will compare rates offered to consumers through a range of distribution channels, including rates available through the open market option and those for existing pension policyholders.
“The wide variations in pricing that have existed for many years between the most competitive annuity providers and the least competitive annuity providers suggests that the FSA’s review is long overdue,” said Richard Eagling, head of pensions at Moneyfacts.
“The extent of the detriment that consumers may face as a result of not shopping around when purchasing an annuity may surprise many who automatically assume that the difference may be negligible on the basis that the underlying product is the same.”
According to Moneyfacts, an individual with a pension pot of £50,000 looking to purchase a basic standard annuity could receive up to 16.2 per cent less income in retirement by failing to shop around for the best deal.
“For a 65-year-old living for another 20 years in retirement this translates into £7,940 less income in monetary terms,” said Moneyfacts.
“The difference would be greater still if the individual qualifies for an enhanced annuity on the basis of their health or lifestyle.”
The industry says it is taking steps to improve shopping around, with a new code of practice that will bind members to highlight the open market option and not simply sell them a standard annuity without checking their medical history.
“ABI [Association of British Insurers] members are on track to implement a new code of conduct on retirement choices on March 1, which will ensure that customers are prompted to think carefully about the decisions they need to make, encouraged to shop around and signposted to sources of advice and support,” said the ABI.
However, advisers said the code was flawed and may result in a limited shopping experience rather than whole of market, where better rates and more suitable annuities are likely to be found.
It was also not clear whether the FSA probe would focus on enhanced rates, where someone who suffers from ill-health, or who is a smoker or overweight could get much better rates.
“Over 50 per cent of people at age 65 have a health or lifestyle condition that would qualify them for an enhanced annuity,” said Jim Boyd, director of corporate affairs at Partnership, the annuity provider.
“Our latest analysis has highlighted that the extra income that a typical 65-year-old customer with a health condition would receive in their pension is 25 per cent – and this is after taking into account the recent gender pricing changes.”
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