The Liberal Democrats are calling for the open market option for annuities to be made the default for personal accounts.
Shadow Work and Pensions Secretary Danny Alexander has tabled an amendment to the Pensions Bill after research showing that the cost of not using the Omo could be the same as increasing the annual management charge from 0.3 to 5 per cent.
The research by Hargreaves Lansdown shows that when the open market option is not used, even in the best-case scenario, the impact in terms of charges would amount to an extra 0.21 per cent a year.
The average difference between the best and worst annuity rates in tables published on the FSA website is around 15 per cent.
For someone investing in a personal account for 25 years, this would translate into an additional annual charge of 0.98 per cent. For someone investing for five years, it would add 4.88 per cent.
Alexander says: “With two-thirds of people not using the Omo to buy an annuity, we must do more to get people thinking about a decision that will determine their income for the rest of their life. The Omo must be the default option or many investors will end up paying over the target charge rate for their annuity.”