People are receiving more pensions information than ever before. But are they paying attention to it?
Back in 2014, Donald Trump was still terrorising reality TV contestants on The Apprentice and UKIP was making immigration-themed calypso songs. In Scotland, nationalists were conceding that independence had been put to bed for a generation. How things change.
Pensions were still complicated in 2014 - you can always count on that being the case - but the options for those entering retirement were more straightforward than they are now, albeit more limited.
Prior to the introduction of pension freedom reforms in April 2015, far greater numbers used their pension pot to by an annuity, the insurance product that turns savings into a guaranteed income for life. When the rules changed, many more of these people were eligible to access their savings with full flexibility, in either lump sums or through drawdown - taking income payments from an invested pot.
The effect of the shift is evident in the sales figures for annuities from the time. The Association of British Insurers, the members of which sell the bulk of annuities, has confirmed that sales fell from around 74,000 in the three months before the changes1 were announced to around 18,0002 in the three months after they were introduced – a 76 per cent decline.
Before pension freedoms, instead of worrying if retirees would blow all their money on a Lamborghini, regulators and ministers mostly worried about people buying annuities.
The problem, long in evidence, was that too many people would reach retirement with a pot of savings and then sleepwalk into buying an annuity that wasn’t the best available to them, giving them a lower income in retirement than they could have had.
As an insurance product, the rate of income an annuity pays depends on underwriting, and the insurer’s view of your expected lifespan. To form that view it will ask you about all aspects of your health, lifestyle and other circumstances.
It may pay a healthy person who has worked in white-collar jobs, say, £5,000 a year but this could jump to £6,000 for someone with a heart complaint who has worked in manual labour all their lives.
To get to this point, however, a retiree has to seek out those insurers willing to give them a better deal, and this wasn’t happening enough. Instead, many would reach retirement unaware that they could buy an annuity from the whole market of providers, or even perhaps that an annuity was separate from the pension they had been contributing to.
With annuities often offered by the same companies administering the accumulation of retirement savings, many simply rolled into their pension company’s standard annuity on the assumption that it was all one process.
As well as a potentially lower rate, this also risked leaving retirees with standard annuities that didn’t provide other features that would benefit them - income rising with inflation, benefits for dependents or guarantees that income would continue for a period after the purchaser died.
Regulators could see the problem and had an extra motivation to act as well – rates on annuities overall, which are umbilically linked to interest rates, were at a record low after the financial crisis. With annuity income already squeezed, it was all the more important that retirees got the best deal on offer.
Work by the regulator, the Financial Conduct Authority, in 2014 had identified potential problems in the sales process, sparking even more work that eventually concluded last year. The result is that – barring a few company specific cases – people are mostly getting the information they need to buy the best annuity they can.
But does that mean they are paying attention to it? Since pension freedoms were introduced, Fidelity has been running an ongoing study into the first cohort of people to retire under the new rules – The Class of 20153.
Among the latest survey results are the worrying statistics that: 25 per cent of annuity purchasers surveyed were unaware of their ability to shop around; 38 per cent were unaware that lifestyle of health could be grounds for getting a better rate; 19 per cent were unaware annuities could provide an income for a spouse or partner after death and 27 per cent were unaware that they could provide income that rises with inflation.
It may not be that such a lack of awareness will have necessarily led to worse outcomes for these people, but it is a concern nonetheless. A quick look at current annuity rates shows why.
For a 65-year-old with a £100,000 pension pot, a standard annuity would pay £4,789 at current rates4. That’s with no inflation-proofing but includes a guarantee that the annuity will pay for at least 10 years after the purchase, even if the buyer dies in that time.
According to the latest annuity rates provided by retirement specialists Just5, if this person were a 10-a-day smoker and the annuity underwritten to reflect that, the income would rise to £5,203.
Type-2 diabetes would mean a rise to £5,410, while previously suffering a stroke would see it jump to £6,163. For someone who had survived bowel cancer the income jumps to £6,690 – 39 per cent more than the non-underwritten annuity.
And it isn’t just serious health issues that move the dial. Simply being a single person, or consuming 18 units of alcohol a week (the recommended limit is 14), will be reflected in a higher annuity income.
The fight for pension income is not getting any easier, so missing out on money that is readily available through a lack of knowledge is a tragedy. Pension freedoms may have resulted in fewer people taking annuities, but the stakes for those who still do remain just as high.
And the numbers may even increase again from here, because a greater proportion of workers will hit retirement with nothing but defined contribution pension pots.
They are likely to want and need guaranteed income above the state pension but, short of defined benefit schemes that many of those retiring now enjoy, they will have to rely on an annuity for that.
They may have better information to inform their choices, thanks to the work of regulators, but if they continue to miss out on the best deal, there is more work to do.
Ed Monk is associate director for Personal Investing at Fidelity International
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