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Bringing annuities out in the open

“You could get up to 20 per cent more from your pension fund if you choose

the right annuity” is a typical media claim. Shopping around for your

annuity on retirement can mean you get a much higher income than you would

by staying with your pension provider.

This assertion is commonly coupled with the criticism that “pension

companies do little to enlighten their savers of their right to look


The ABI tackles that criticism this week with its statement of good

practice on annuities. Among other things, the statement requires pension

companies to explain to consumers that they can shop around for an annuity

(otherwise known as exercising the open market option) and that this can

result in a higher retirement income.

The statement is a further example of the insurance industry&#39s efforts to

improve the quality and clarity of communications with policyholders,

building on the Raising Standards initiative.

The statement also recommends that companies set out the full range of

options available on retirement (including the many different types of

annuity available) and sets standards for the timing, terminology and

content of letters sent to policyholders approaching retirement. The ABI

has taken the lead in raising standards of communication in this area

because we want consumers to be fully aware of their options at retirement.

There has been much debate recently about annuities and whether they are

the best product to provide retirement income. A number of alternatives

have been discussed and it is right to look at how flexibility can be


In the meantime, we are keen to concentrate first on ensuring that

consumers (and others) are aware of the wide range of products available

(including the features and benefits) and that they know they can shop

around. For example, many people with poor health do not realise that they

can get better annuity rates than their healthier counterparts by buying an

impaired life annuity.

Much of the annuities debate overlooks the benefits and important

protections which annuities already provide for consumers.

Crucially, they provide insurance against outliving your resources by

providing an income for life. Against a background of people living longer,

this is invaluable for consumers.

Annuities are easy products to understand and they are also secure with

relatively low risk – two factors which research indicates are top

priorities for consumers. The benefit of the cross-subsidy inherent in

annuities is also significant since this enables many people to maximise

their retirement income. The funds of those who die earlier than exp-ected

are used to subsidise the inc-omes of those who live longer.

This benefit is not available with other products such as income drawdown,

where higher investment returns do not generally compensate for the loss of

the cross-subsidy.

This is an important safety net for many people. Maximising retirement

income is extremely important for poorer pensioners with smaller pension


The ABI&#39s paper, Is There An Annuity Problem?, published in April,

considers this topic in more detail. It analyses both the criticisms and

benefits of annuities, concluding that many of the problems associated with

annuities are overstated and based more on perception than reality.

The main alternatives to annuitisation being put forward would benefit

only a small minority of wealthy individuals. Although there is room for

more flexibility in the rules governing annuities, we should seek to ensure

that any changes benefit those with small pension pots as well as those who

are better off.

A copy of the full statement is available on the ABI&#39s website at


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