A new report just out from Aviva makes for depressing reading. It tells us that 37% of workers don’t intend to take advantage of the new pension auto-enrolment scheme when they are offered it. Another 28% say they are undecided. Why? The main reason, it seems, is that they don’t think they can afford it.
We have long been mildly concerned that auto-enrolment (which acts like a pre-retirement real wage cut by forcing pension contributions) might be a challenge too far for those who have seen their real (post-inflation) wages fall every year for the last four or five years in a row. But we also suspect that affordability isn’t the only problem here. The other one? The reputation of the pensions industry.
The average British worker might not claim to know much about finance. But one thing almost everyone thinks they know by now is that if you give your money to a pension fund, they might lose a lot of it; they will probably underperform inflation; and they will certainly charge you an enormous amount of money in the process.
Oh, and when you come to retirement age, they’ll rip you off by selling you a sub-standard annuity and lock you into a lower income stream than the market offers until the day you die (rates can vary by 20%-30%).
Not all of this is 100% fair. But I’m afraid the annuity bit is. Everyone retiring with a pension has what is called an ‘open market option’ – they are allowed to shop around the full insurance market to see who will offer them the best long-term income in exchange for their pot.
However, this is rarely made clear to them by their insurance company, and they tend simply to tick the box on the form they are sent and end up with the (generally uncompetitive) one offered by the company they have been saving with. Only 40% of people ever end up using their open market option.
It’s good news, then, that the Association of British Insurers, the industry trade association, has finally been bullied into producing a new code of conduct to force its members to raise their standards. The changes? The new code will force insurers to give savers “clearer and better information” on their retirement, says Jeff Prestridge in the Daily Mail.
There will be more of a push to get retirees to consider the health and lifestyle factors that might get them an enhanced annuity rate (these are higher annual payouts for those who are likely to die young). And they will also automatically get a list of annuity specialists who they can call to help them get a better deal.
Better still, insurers won’t be able to create a default position for the apathetic by including a box tick application form for their own annuities when they send out retirement packs.
The code came into force last week and had to be implemented by 1 March. This isn’t a great time to buy an annuity – rates are still so low that an annuity purchased today will give you a 20% lower income than one purchased three years ago.
But if you do have to get one, make sure you do what this code intends you to do and shop around. The costs of not doing so are ludicrously high – and irreversible.