The regulator will look at whether people lose out when they convert their pension pot into an income with an annuity.
Converting your pension fund into an income in retirement by buying an annuity is one of the most important financial decisions you’ll have to make. If you’re in a salary-related pension, you don’t have to buy an annuity, but for most others, it’s the main way to convert a pot of money into a regular income. Most people end up buying an annuity from the same company they’ve saved with, and don’t get the most money they can. When I wrote this article originally, the then regulator, the FSA said it would look into the annuity market. This work is being continued by the new regulator, the Financial Conduct Authority or FCA.
What’s an annuity?
An annuity is simply a product that converts a lump sum (such as a pension fund) into a regular income. Most annuities are guaranteed to pay out for as long as you live. The amount you will receive every month depends on factors such as your age, your health and your lifestyle.
SAVVY TIP:It’s so important to get the right annuity for you because buying one is generally a once in a lifetime decision.
The Financial Services Authority review will start by looking at how much people could receive from all the different annuity providers in the market. As with things like car insurance, savings and mortgages, different providers offer different deals – and some are more competitive than others.
It will examine whether the processes that firms use and the way information is given to consumers helps them to get the best retirement income from an annuity.
What companies do now
At the moment, if you have a personal pension, a stakeholder, or a pension through your work that’s not linked to your salary, you have the right to buy an annuity from any company you choose (in the jargon it’s called the ‘open market option’, but don’t let the terminology put you off).
• You are contacted several months before you retire. Your pension company will send you what’s called a ‘wake up pack’, which tells you that you have the right to shop around for an annuity and that you don’t have to buy it from the company you’ve saved for your pension with.
• You are contacted nearer your retirement date. This will tell you – again – that you can shop around.
Pension companies have already committed to giving people better information – a code of practice that will be fully implemented by March this year. This will mean they have to:
• Give people clear information about the benefits of shopping around. They will also point out that you could lose out by not shopping around.
• Explain where you can get more information. At the moment, the Money Advice Service has an annuity comparison table, as do some independent financial advisers. The plan is to develop a directory of brokers who specialise in annuities. You can read more about the code of practice and what it will mean for you in my article, elsewhere in this section.
• Explain what ‘enhanced annuities’ are. These are annuities that pay out a higher amount every year, either because you have a medical condition or illness or perhaps because you are a smoker or are seriously overweight. That’s because – in blunt terms – the lower your life expectancy the more an annuity company will be prepared to pay you.
SAVVY TIP: There are now over 1,000 different medical conditions that may mean you receive a higher income from your annuity company. Even if your condition is being successfully controlled by medication, you could still receive more money every year. You can read more in my guide to enhanced annuities.
Why don’t more people shop around?
I think there are several reasons why more people don’t shop around to get the most money from their retirement income by buying the best annuity. These are some of the comments from SavvyWoman users:
• The terminology is unfamiliar and the process isn’t straightforward. As it’s a ‘one off’ decision, it’s a bit like being a first time buyer but with slightly less understanding of what's going on (at least ‘property’ is an easier concept to grasp!).
• You don’t realise how much more you could get by shopping around. There are many reasons for shopping around – especially if you have a medical illness or a lifestyle condition (such as you are a smoker).
• You are worried that you may switch to a company that goes bust. This is one I’ve heard from SavvyWoman users and it’s completely understandable. However, the fact is that your money is protected up to 90% of its value if the annuity provider were to go bust (you can read more about this in my article on how your money is protected).
Getting the most from an annuity - maximising your retirement income
VIDEO: Shopping around for a pension income - the basics
Flexible retirement - how to get more from your pension
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