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Discharge of duty

Shopping around is a concept that can never be over-emphasised to consumers, especially where annuities are concerned.

Since 2002, pension providers have been obliged to let investors know of their right to take their pension fund and purchase an annuity elsewhere. Research by specialist adviser Annuity Direct shows shopping around results in the average retiree’s income increasing by 10 per cent. However, the process of transferring an annuity has been fraught with delays and advisers claim the transfer system is now a mess with investors missing out on millions of lost annuity payments every year.

The FSA, which is already investigating the paperwork sent to investors to advise them on the open market option over fears it is too confusing, is now being urged to take action over differences in the quality, quantity and nature of the paperwork required to transfer the cash.

Discrepancies in the type of information needed means some payouts can take weeks or months to come through. Hargreaves Lansdown pensions research manager Tom McPhail says the problem is nothing short of a scandal.

In late 2005, the Association of British Insurers issued new guidelines to life offices. Its voluntary good practice on pension maturities aimed to make sure all insurers pay out swiftly by streamlining the claiming process as life offices and advisers said the main obstacle to speedy cash transfers appeared to be a result of the discharge form sent out to investors when they applied to buy their annuity.

McPhail says: “There is not a common discharge form, and this means there is a problem when life offices interface with each other.”

But there are still delays despite attempts by three of the biggest annuity providers – Legal & General, Prudential and Aegon – to develop a common discharge form and the ABI’s insistence that providers pay up within 14 days of a completed application.

Last month, the ABI reissued guidance as part of its customer impact guide, but instead of giving 14 days as a guide, the ABI suggested that pension providers should aim to pay out by the time the investor retires.

McPhail claims this amounts to a climbdown. He says: “The ABI represents the life offices and why should life offices invest in speeding up their transfer systems? How can you justify to shareholders spending large amounts on upgrading systems only to improve the amount of business leaving the company?”

Closed life offices have even less of an interest in transferring the money quickly and McPhail says one solution is to make the open market option mandatory, which means, in effect, both closed and open-for-business life offices automatically have to give their investors the cash to shop around.

Once an investor has decided to buy an annuity, the pension companies would be required to pay up as quickly as they would when settling a unit trust, electronically and within five days of application.

If mortgage companies can turn around hundreds of thousand of pounds of business in days, McPhail sees no reason why life offices cannot do the same with annuities.

Aegon Scottish Equitable managing director of annuities Mike Douglas believes more consumer choice will revolutionise the post-retirement investment market. He believes the availability of third-way products that combine ongoing investment with income-generating features will negate the reliance on annuities and mean that customers will look for products that provide the best of both worlds.

Standard Life senior pensions policy manager Andrew Tully believes technology is the answer.

If providers used the same terminology and made more use of technology, Tully feels the issue could be resolved.

He says: “Standard Life has a quick turn-round, 94 per cent of our transfers take five working days, but we do have issues with other providers as the difference between types of information can slow things down.”

ABI spokesman Jonathan French believes that pension companies are doing what they can. He admits the problem is taking too long to sort out but claims the ABI is trying to speed things up. He says: “It takes a time to turn round a supertanker.”

But McPhail, who has presented Hargreaves Lansdown’s proposals to the Treasury and the FSA, says there is no excuse. “The industry needs to get its house in order. In 2012, there will be a record number of retirees, around 850,000 of the baby boomers will be needing to buy an annuity. Things need to be sorted out before then or all hell will break loose.”


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