Annuity providers must now tell customers if they could get a better deal from a rival firm, following the introduction of new rules from the Financial Conduct Authority (FCA).
Currently, more than half (55 per cent) of annuity buyers purchase their guaranteed income from their pension provider, rather than shopping around for the best rate.
This can be a costly mistake – the difference between the best and worst rates is currently 5.78 per cent according to Hargreaves Lansdown, but while this might not sound much, the difference will rack up over time. Over a 20-year retirement, an individual with a £100,000 pot would miss out on £6,010 in lost income, according to figures supplied by the firm.
The difference could be even greater for buyers with health problems. If you have a lifestyle or medical issue that means you are likely to have a reduced life expectancy – for example you smoke, have high blood pressure or are diabetic – specialist annuity providers can offer enhanced rates. In some cases, this could boost your income by close to 40 per cent, Hargreaves Lansdown says.
Behavioural testing from the FCA has suggested that telling customers they could get a better deal elsewhere will encourage them to shop around.
However, although providers will have to tell customers what the best quote is, they will not have to say which provider is offering it.
Experts have welcomed the move, but question whether it goes far enough.
Nathan Long, senior pensions analyst at Hargreaves Lansdown says: ‘Weighing up your options at retirement is absolutely crucial and this is especially the case when it comes to buying an annuity. Last year the FCA found that 80 per cent of people who purchased an annuity with their existing provider could have got a better deal on the open market, so anything that encourages shopping around is welcome.
‘More than half of people opting for an annuity receive an improved income because of health and lifestyle, but the new rules are fairly flimsy on this point and are not offering the same level of prompt.’
Andrew Tully, pensions technical director at Retirement Advantage agrees and adds that with quotes being based on postcodes alone, the uplift may not seem sufficient enough to justify shopping around. This would mean people with health problems could miss out on a sizeable boost.
‘These changes, although introduced with the best intent, will not improve the outcomes for thousands of people who continue to value the security of a guaranteed lifetime income from an annuity. Significant flaws remain where quotes produced on limited information will not highlight the true value of the annuity, and may well result in people locking into uncompetitive deals,’ he explains.’
This article was originally written by our sister publication Moneywise.
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