The ABI last week announced steps to improve take-up of the open market option so more people shop around to get the best deal on their pension pot.
The ABI will make it compulsory for providers to send certain information to people approaching retirement and stop providers sending application forms or “tick here and return” options, which encourage people to buy an annuity with their existing provider. These are welcome steps and will help more people make the best of their retirement savings. However, in isolation, these steps will not transform the retirement process – more work still needs to be done to ensure as many people as possible make the best decisions.
Before I go further, I think it is important to highlight a couple of facts. First, some people who buy an annuity from their existing provider get a decent deal and would benefit little or not at all by shopping around. However, a bigger group lose out significantly by simply buying a conventional annuity with the ceding provider.
ABI statistics on the take-up of enhanced annuities prove this. Forty-two per cent of those who buy an annuity on the open market get an enhanced rate. In comparison, a paltry 1 per cent of those who remain with their existing provider get this uplift. With MGM’s average enhanced client getting 23 per cent more income than they would have otherwise received, this is a massive issue which cannot be ignored. Too many people are getting a poor deal.
Second, while there is much focus on helping people get the best rate, it is important that we have much greater ambitions than this. The key is educating people so they make the best possible retirement income decision that suits their individual circumstances. Taking independent financial advice is the best way to achieve this. But we need to accept commercial realities.
With the RDR approaching, advisers are unlikely to be able to give advice to many people with small and medium-sized pension pots.
So we need to help those who will not have access to independent advice work out which retirement solution is best suited to their needs.
This will not be simple. It needs a joined-up approach from the Government, regulators and the industry to work out how best we can educate people and help them move on from the fear, cynicism and general lack of understanding which pushes many to the default option.
We cannot expect everyone approaching retirement to get the best possible deal. However, we can help many more people get a much better deal.
The ABI changes are a welcome step but we need to make sure some providers do not try to water down the proposals. Now we need the whole industry to work together to keep taking steps forward so more people make the best of their retirement savings. This will not be an easy task. There is much work still to be done.
Andrew Tully is pensions technical manager at MGM Advantage