1st February 2013
The FSA is to consider whether consumers get value for money when they translate their pension investments into an income by buying an annuity.
Many people simply accept the annuity offered by their own pension company which may not be the best deal available.
In fact, the numbers of people doing so are remarkably high despite the fact that the annuity decision can be a permanent one, certainly if you arrange a lifetime annuity.
The pension industry and many advisers have been debating the issue for years and there have been a number of campaigns designed to get people to consider what is called the open market option.
The insurance companies’ trade body the Association of British Insurers has even designed a code of conduct which it expects its members to follow in a bid to get more people to shop around.
The annuity issue has risen up the political agenda for several reasons. First of all, it is getting more and more expensive to buy an annuity or to put it another way, the same pension pot is buying a smaller income, mainly for reasons to do with gilt rates.
Second, with a new workplace pension system being rolled out, the Government wants to ensure that everyone is maximising the potential of their pension savings.
It is not just a matter of some pension companies offering a bigger income for the same size pension pot. If you have an illness, or even something that most people would not regard as such, such as slightly raised blood pressure, a pension company may offer an enhanced annuity which means you get money for life.
This is based on the rather grim calculation that you are likely to die sooner and so will ultimately cost the pension provider less in the long term.
In addition, you don’t have to take a lifetime annuity. If you have a reasonably large pot of money you might opt for income drawdown where you leave the money invested and take an income from it. You can also take out what is known as a fixed term annuity that pays you an income for perhaps a ten year term and then returns some of the money to you when you might then buy a lifetime annuity for the rest of your life.
Of course, the reason that regulators are interested in the issue is that they are worried that some pension companies are offering very low pension payouts in the belief that inertia will see many people simply take what is on offer.
That may or may not be the case. But our message to you is that it shouldn’t really matter. Hopefully as a financially aware reader of Mindful Money you will shop around. Doing otherwise after the effort you have made to build up a decent level of retirement savings really makes no sense whatsoever.