In your lifetime of personal finance decisions, getting an income to last you from the time you retire until you die is probably the biggest you’ll make. So why do so few of us shop around to get the best deal?
You’ve spent your working life putting money away into a pension, making sacrifices today to give yourself some comfort tomorrow.
And when it comes to buying the product that will give you an income for the rest of your life – called an annuity – you have to make sure you’re getting the best deal.
Why? Because once you’ve bought an annuity, you can’t change your mind. It’s a once in a lifetime choice – and you’ve got to make it count.
People make poor decisions
Unfortunately not many people do make the right decision when picking an annuity. Only 40% of people exercise the open market option – in other words, shop around to see if they can get a better income in exchange for their pension savings.
The uplift of shopping around can sometimes be as high as 50% more income per year than if you just bought an annuity from your existing pension provider.
With annuity rates in a rapid state of decline at the moment, meaning that you have to save even more to get a decent income in your retirement, getting the right annuity is more important than ever.
But it’s not just failure to shop around on the part of the consumer. A new report from the Cass Business School and the National Association of Pension Funds has savaged the annuity industry, calling it a ‘toxic market’. It claims that you are being mistreated by your pension and annuity providers at one of the most important points of your financial life.
Unfair system costing consumers £1 billion
The report slammed annuity providers, stating that consumers faced a number of ‘sharp practices and murky pricing’ that may leave the half a million people retiring every year short changed by up to £1 billion from their total future pension income.
The key findings of the report were:
- A systemic lack of transparency and understanding about how annuities are priced. In particular, annuities for people with medical conditions who could qualify for a much higher level of pension income (enhanced annuities) were flagged as having opaque pricing structures.
- Evidence that insurers push annuity rates downwards if you only have small pension savings as they don’t expect you to shop around. They also think that you’re most likely to take the rate that’s offered to you by your pension provider.
- Better rates are provided to people with bigger pension savings, punishing those with smaller pots who need the biggest uplift.
- Most people pay commission (usually paid to an adviser) when they buy an annuity. They have to pay this even if they don’t receive any advice as it’s built into the annuity rate.
If you’ve bought an annuity at retirement, what experience have you had? Did you shop around or do you think you’ve been shortchanged?