This article is taken from Merryn
Pensions should be simple things: you save as much money as you can; you build up a pot of cash in a pleasantly tax efficient way; then, when you are old, you spend your saved money as you wish. Unfortunately, in the UK things aren’t that simple.
Why? Because you aren’t allowed to spend your money as you wish. Far from it. Instead, the government likes to insist that you use most of it to buy an annuity from an insurance company, the idea being that you give them all your money and they, in return, give you an income for life. This is irritating for all sorts of reasons (whose money is it after all?) but it wouldn’t be so bad if the insurance companies didn’t use it as an opportunity to rip off generation after generation of pensioners.
Until 6 years ago insurance companies weren’t legally obliged to tell new pensioners that they could buy an annuity from whomever they liked. So they didn’t. Instead they had anyone who had pension savings with them buy an annuity from them – at a price of their choosing. Even the authorities eventually came round to thinking that wasn’t quite right, so it was decided that all insurers were to be legally obliged to make it absolutely clear that anyone with pension savings held anywhere has the right to exercise their Open Market Option (OMO) – to go elsewhere to look for a better value annuity than that on offer from their pension provider.
Why thousands of pensioners are living on less than they should be
The problem with this, as Kate Hughes puts it in the Independent, is that “some firms seem loath to see all that money going to a competitor.” So instead of telling people about their OMO up front they bury it in the small print. The result? According to Hargreaves Lansdown, around 2/3 of pension holders do not use their OMO and are automatically “shunted” into taking out their pension provider’s default annuity whether it is the best deal or not.
Usually, of course, it is not. According to the FSA, there is a gap of around 20% between the best and worst incomes on offer from annuities. Thanks to the general thievery of the insurance industry, thousands of pensioners are living on less than they should be – to the tune of about £500m a year in total on some estimates. And they’ll stay in that situation: there is a 14-day cooling off period after an annuity is chosen, but after that there is no going back – you are stuck with whatever you signed up to. It is, says Tom McPhail of Hargreaves Lansdown, “a once and forever decision.”
How to make the best “once and forever decision”
So if you are coming up for retirement, what do you do? For starters, make absolutely sure that you don’t trust your insurance company. The insurers are keen to let us all know that they are “working hard” to improve the way they deal with annuities, but they clearly aren’t. How hard can it be? All they have to do to meet the FSA requirement that they alert people to the OMO option is just that – alert them to it. Not very complicated is it?
Then take matters into your own hands. This is going to be one of the most important decisions you ever make – your lifestyle for a good few decades will depend on it – so you can’t get it wrong. First make sure anyone you get a quote from knows about any health problems you might have – if you smoke, if you are fat or if you have high blood pressure or a heart condition of some kind you will probably qualify for an enhanced annuity: given that the odds are you won’t live as long as other pensioners, the insurance company will offer you a higher income for the same amount of cash.
Then think about what kind of annuity you want. Almost all men choose annuities that die with them – leaving their partners in the lurch. But it is perfectly possible to get a joint life annuity that, while it might offer a lower annual income, will continue to pay out to a surviving spouse after the death of the first. That might be nicer. Finally, compare quotes – this is the vital bit: of 55 firms surveyed by the FSA recently, over half charged more than 10% more than the cheapest rate available. Visit www.pensionsadvisoryservice.org.uk to compare quotes.
This article is taken from Merryn