Every now and then the financial services industry takes a tiny step in the right direction. So it was last week when the insurance industry announced that it was going to devote some effort to getting people to shop around for a better annuity deal when they retire.
Currently, anyone with a money-purchase or defined-contribution pension plan gets a letter from their pension provider just before they retire. It gives them an illustration of the annuity they can purchase on the spot direct from the provider. It also includes an application form so they can go right ahead and get that very same annuity. And that, says Jeff Prestridge in The Mail on Sunday, is exactly what most of them do. This is a major mistake.
Why? Because the first deal offered is invariably “duff”. You can pretty much always get a better one by using your ‘open market option’ (Omo) and shopping around. You can get a much better one if you have any conditions that qualify you for an enhanced annuity: the sooner you’re likely to die, the more your provider will pay you until you do. You might also want to provide for your spouse. The first annuity you’re offered will be a single, not a joint, annuity. Take that, and if you die before your spouse, so will their income. So what’s the tiny step?
You’ll still get the letter with the duff illustration. But the application form won’t be included. So you won’t get to sign up immediately and might be encouraged to shop around.
The insurance industry no doubt thinks this is a great leap forward for transparency. But it still isn’t good enough, as insurers will just send the application form in another letter. Unless they include proper instructions on how to go about it, people are still likely to take the quote they’re offered whether the application form is in the same envelope or a different one, says Lorna Burke of Citywire.
So the only way to make sure pensioners get the income they’ve saved for is to include a proper pre-retirement pack in each letter, full of advice on the different types of annuity, the pros and cons of each and the application procedure.
All this would be irritating for the insurers (the worse the annuities they pay out, the better their profits), but it would be good for retirees. And what’s good for the income of British pensioners is good for all of us. As Andrew Ellson points out in The Times, it would cut the means-tested welfare bill for the over-65s; raise the income tax take a little; and possibly, most importantly of all, it would make the market genuinely transparent. That really would be a great leap forward.