Half a million 'have wrong annuity'
Published on 07 February 2012 03:00 PM
The 'unfair and opaque' way annuities are sold is costing half a million people a up to £1 billion from their collective future income, experts have warned.
The report, by the National Association of Pension Funds (NAPF), said it is too difficult for savers to find the best deal.
And the 80% of people with a pension pot of less than £50,000 are being denied the 'open market option' (OMO) where they can find the best products and rates, it declared. (Most annuity advisers will not find it profitable enough to advise on pots of this size, so the OMO is effectively shut.)
The report found that fewer than one in five people have the financial knowledge needed to pick the right annuity at the best price without professional advice. And those who are savvy enough struggle to find the best rate as it is virtually impossible to find a specialist adviser who covers the whole market and is willing to help those with smaller funds.
The report also criticised a 'severe lack of transparency and understanding' about how annuities are priced - 'especially for those with medical conditions who could qualify for a much higher level of pension income'.
Failure to shop around comes at a high price
When they retire, people in the private sector saving in a 'defined contribution' pension - now the most common form of company pension scheme - use their pension pot to buy a product called an annuity from an insurer. This gives them a regular income and is a one-off, irreversible decision that defines the size of their pension for the rest of their life.
The process for choosing an annuity is a complex one and the majority still go for the 'default' option by sticking with their pension scheme provider. This failure to shop around for a better deal can wipe 30 - 50% off their annual pension income.
NAPF chief executive Joanne Segars said: 'Every year a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market'
She called for the market to be reformed to ensure more transparency in the way it is priced and structured.
'People need stronger support in picking the right annuity,' she added.
Copyright Press Association 2012