What is the impact of not shopping around for annuities?
A briefing note published recently by the Pensions Policy Institute revealed that the number of people who don’t bother to shop around for annuities is very worrying, and the amount of money that they lose by not doing so can be substantial. In fact, statistics quoted in the briefing note show that yearly annuity sales have plummeted by 79%.
Other options are available
There can be confusion amongst retirees that they have to take the annuity option offered to them under their pension scheme. This is not the case at all; it is in fact perfectly acceptable and legal (and the right thing to do) to shop around in order to find a pension provider who will offer a better rate. This is especially important when you consider that once an annuity has been purchased, the decision is usually irreversible.
Employees should always compare with their existing provider and some providers are far more proactive.
One option that our “cash is king” nature has created is that many people are keen to take is to withdraw their pension as a cash lump sum, rather than converting it to an annuity. There is danger here, depending on what the holder’s intention for their money is. If the holder has decided not to use the money for investment purposes, the sum could quickly be spent, leaving them with less financial provisions for the future. Also, anything beyond their tax free cash amount is taxed at their highest marginal rate…meaning that hard earned fund is wasted.
Your employees may not realise that when they approach their selected retirement age, or you notify your company pension provider on their behalf that your employee will shortly want to draw their retirement benefits, they will be sent details of the annuity that will be provided.
At this point, it is important to remind the person concerned that they don’t have to purchase the annuity from their existing pension provider and they could choose the OMO (open market option) instead.
The importance of shopping around for the best annuity rate should not be underestimated, as the rates offered by differed provider vary dramatically, in some cases by up to 40%. In addition, there are different types of annuities available, including:
- Impaired life
All these products have different advantages and suitability depending on the individual’s circumstances.
Staff members approaching retirement should be kept fully informed about their options as regards their pension pot. In addition to one-to-one advice, it might be a good idea to place the Pensions Policy Institute brief on your company intranet for ease of staff access.