“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's 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
This is an important safety net for many people. Maximising retirement
income is extremely important for poorer pensioners with smaller pension
The ABI's 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's website at