From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Campaign for Annuities Reform

    Campaign for Annuities Reform

    19 January 2014

    Sunday Times calls for urgent action to address annuities market

    Please sign the petition to call for reform – You can sign here:

    More than 1000 people every day at risk of buying the wrong annuity and thousands of widows will lose out

    It’s great to see the Sunday Times running a campaign for annuities reform.  This huge market is not working well for its customers and reform is required quickly.

    Many people just buy the annuity offered by their current pension company which frequently pay terrible rates.  That’s bad enough, but not only are they getting poor rates, many are also buying the wrong type of annuity.  For example they buy a standard annuity when they could have qualified for a special one that pays more due to a health issue or they don’t buy an income to provide for their partner’s retirement, only their own, leaving their partner with no pension.

    Annuities are a unique financial product, most customers do not understand them and they are irreversible. If you buy the wrong kind of annuity, or buy one when you don’t need to, you or your partner may live to regret it and you cannot change your mind.  Therefore, it’s vital to understand what you are doing and make the right decision straight away.  Annuities are complex and the market needs regulatory intervention to protect customers.

    Unfortunately, there is almost no regulation of annuity sales at all and no controls on the value for money or charges – companies can charge what they like and will often take large sums from your pension fund just for selling you an annuity.

    As auto-enrolment brings millions more people into pension savings, it is crucial to make this market work better for customers to deliver good value pension income.

    The Sunday Times campaign calls for five significant changes that would really help customers to do the best thing for themselves.

    If you want to support this campaign, please sign up and call for the Government and regulators to make changes.

    These are the five things the campaign is calling for five key reforms:

    1.      Force insurers to make retirement options clearer to customers:  Pension companies should not write to people before retirement to suggest they need to buy an annuity.  Those reaching their previously selected pension age should just receive a statement of the fund value and some standard wording to tell them about the options they have.  This would include explaining that they do not actually have to buy an annuity, that they could perhaps take their fund as cash, that they can use income drawdown or other products like fixed-term or guaranteed annuities and that they must find the right kind of annuity if they are buying one. Current rules require pension companies to tell customers about annuities and using the open market option to shop around for better annuity rates.  This misleads people into thinking they have to annuitise, when many will be better off not buying an annuity at all.

    2. Reveal the true cost of buying an annuity, whether direct or via annuity brokersBuying an annuity will always cost money.  Whether you buy from your pension company or use an on-line or telephone broker, you will have to pay fees or commission.  The campaign calls for Regulators to require all annuity sellers to reveal their charges clearly at an early stage, rather than misleadingly suggesting they offer a ‘free’ service, yet then charging commission for selling you an annuity which they only mention at the point of sale.

    3. Fully underwrite every annuity
    Those who smoke or have medical problems, such as high blood pressure, are eligible for much higher pension income from an enhanced annuity.  But the best rates are achieved when the annuity is individually underwritten to cover any health or lifestyle issues each customer has. This would produce fairer – and usually higher – income.

    4.  Ensure pension providers prove that customers have understood the importance of providing for partners:  Unfortunately, many people think the secret of success with annuities is finding the highest rate.  This is not necessarily the case.  It is vital to considers cover for partners and it should be obligatory for customers who have partners and choose not to buy a ‘joint life’ annuity to sign that they understand the implications of not doing so.  Millions of widows have been left with nothing because their husbands only bought a single life annuity.  More than £3bn from people’s pension savings of people buying annuities in the next three years will be lost to their widows/widowers in future, leaving hundreds of thousands without their partner’s pensions in future.

    5. Simplify the rules for smaller pension fund amounts: Currently, pension savers with individual pots of less than £2,000, can take the entire amount as a lump sum.  But trying to annuitise sums under £10,000 is extremely poor value and results in savers potentially wasting thousands of pounds of their savings.  The campaign calls for the level at which people are allowed to take their money as cash to be increased, perhaps to £10,000.

    These five changes would make a massive difference to hundreds of thousands of pensioners, giving people a better chance of maximising the value of their pensions savings for themselves and their family and delivering better retirement incomes.  After all, isn’t that the point of pension saving in the first place?

    You can link to the Form to support this Sunday Times campaign here, please sign:

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