It is reassuring to learn that Just Retirement’s campaign for better annuities is attracting advisers who are not just hoping to win a £4,000 holiday prize. Just Retirement launched its campaign a couple of months ago, the goal being to ensure that “once and for all, annuitants get the best deal possible”.
Of the 2,000 people who contacted Just Retirement, only 100 have ticked the “please don’t send me any information” box. In other words, the vast majority are keen to learn more. It is a start at improving the annuity malaise.
It is five years since the FSA changed the rules to compel pension providers to tell customers about the open market option. The hope was that more people would scour the market for a better deal rather than accept the offer from their provider.
But figures from the Association of British Insurers indicate that the FSA’s move has not had a huge impact. The number of people buying an annuity on the open market hovered between 32 per cent and 33 per cent for the first three years after the rule change and the figures for last year shows little change.
ABI members sold about £9.6bn-worth of annuities. Of this, about £5.2bn was internal (in other words, bought from the same firm that the pension was with) and about £4.4bn was external. In terms of contracts, the total was about 364,000, with about 242,000 internal and 122,000 external – or about 34 per cent.
Admittedly, these figures do not show the exact numbers of people exercising the Omo. Some may have decided to stick with their provider because it happened to offer the best deal even after scouring the market. But there is little doubt that apathy exists and this has to be a major concern because people could boost their retirement income by as much as 20 per cent simply by shopping around.
Married people all too often opt for a single-life annuity when buying a joint-life annuity may be the better course of action while most fail to consider the effects of inflation. Impaired annuities are also overlooked too often.
One of the problems is that insurers have a vested interest in keeping quiet about the Omo because they do not want to lose business. They may have to tell customers that they can shop elsewhere but they do not have to (and do not) offer comparisons to illustrate how good or poor their rates are against other insurers.
Commission has been labelled a problem, too, although not everyone agrees with this. Just Retirement says it is simply the legacy of pre-Omo days and that many IFAs have been slow to adapt to the change. It says they need to grasp it quickly because there is going to be a “tidal wave” of retirees.
Add in the cumbersome process of buying an annuity from a firm other than your provider – delays can leave you without pension income for at least a month – and you have another reason for would-be pensioners not to use the Omo.
Respected pension experts have called for a change in the rules to raise awareness of the options at retirement. For instance, they want consumers to be made more clearly aware of the competitive rates on offer when providers write to customers about annuities. The calls are welcomed and need to be acted on but in light of the annuity malaise it is intriguing to learn of Legal & General’s postcode lottery pilot, where people living in poorer areas will get a better deal because their life expectancy is lower than, say, people living in the Home Counties.
L&G argues that such principles are used already and that it is a logical step. It makes sense in many circumstances and if everybody joins in those living in poorer areas will get a higher income without having to shop around.
However, where it leaves middle England is another matter altogether. There used be to an adage that you took up smoking in the run-up to retirement in a bid to secure a higher annuity payment. Now there could be another equally unappealing option. You can leave the leafy suburbs behind for areas such as certain inner cities, where average life expectancy is poorer.
Paul Farrow is money editor at the Sunday Telegraph