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If it’s broken, fix it!



The latest State of Retirement research report, published by LV= last week, confirmed what we probably all expected – people are continuing to feel the pinch of the economic climate, and pension savings are being cut to fund other household expenditure.

The impact of this is clear. People are not saving enough for retirement, and are having to delay their retirement as a result.

In this situation, it is astonishing to see some providers attempt to defend the current Open Market Option take up rates. Research from PICA has shown that customers could increase their income in retirement by up to 20% by shopping around at retirement.

However, last year, 60% of all annuities purchased in the UK were done so from the customers’ existing pension provider.

Whilst I understand the arguments that some customers may get lucky, already hold a pension with a competitive annuity provider, or have a GAR, these arguments really don’t hold water when you realise that less than 1% of all internal annuities contain any enhancement due to medical or lifestyle conditions.

On the basis that 40% of annuitants qualify for an enhanced annuity, this leaves an awful lot of customers receiving a significantly lower income
in retirement than they need to. If ever there was a more appropriate definition of misplaced loyalty, then I would like to read it.

Let’s be clear, the current pension maturity process is broken. A tweak here or there to the wording of the Wake-Up is not going to a significant
difference. We need a radical new approach. We need to stop trying to defend the current system and design a new process that will serve the best interests of customers.

The process of purchasing an annuity can be bewildering. It is a difficult decision for even financially savvy customers, so it’s no wonder that many people have problems. But it’s an important decision. Making the wrong choice now will affect the income a customer receives for the rest of their life.

But the fact that it is a difficult decision should not be used as an excuse to leave things the way they are. We know that customers faced with difficult ecisions will often take the line of least resistance – the default option, so it needs to be removed.

There will be challenges in engaging customers at retirement and educating them to make an informed decision, but these are by no means insurmountable. Customers need to be prompted into shopping around for the best option, and we need to make it as easy as possible. This is where the idea of a Pensions Passport comes in. But we need to go further than this.

There needs to be an education process – showing people how to get more information, how to get comparable quotes and where to go for advice. Not all these steps are yet in place, but there is no reason why we cannot implement these steps in a very short space of time.

The LV= survey highlighted that 17% of over 50s did not want to work past the age of 65, but know they may be forced to due to a lack of pension savings. At the same time, they could be underestimating the value of their existing pension arrangement by up to 20%, if they are going by the annuity rates being offered by their existing providers. Forcing people to work past their preferred retirement date cannot be an equitable solution for customer, and can hardly be described as a TCF approach from providers!

A free market for annuities is coming, and some providers have already grasped the nettle and are becoming more transparent. However, others
remain with their head in the sand. The existing situation cannot be allowed to continue, and this is why we need legislation now to force those
providers into accepting the reality and giving their customer a fair deal at retirement.

Matt Trott is Head of Annuities at LV=


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