Many of those approaching retirement are facing pension pain as new Annuity rules are deemed not enough.
New rules recently announced that force insurers to adhere to higher standards, when they sell annuities, published by the Association of British Insurers (ABI) in early March 2012, are deemed not enough.
During the course of 2012 it is thought that as many as 500,000 people will convert their pension into income by buying an annuity. An annuity provides a stream of usually fixed payments for the reminder of your life. But figures announced by the National Association of Pension Funds showed that these pensioners are being short-changed by their insurers.
As many insurers do not tell or inform their customers that they are entitled to shop around for an improved deal or even that they can get higher enhanced payments if they are ill or even smoke. Instead, they simply try to boost their own profits by signing up their customers to their own preferred poorer paying annuity.
The ABI’s recently introduced code of practice will try to outlaw this by banning insurers from including application forms for their annuities in the retirement packs they send to customers.
The rules also mean that the insurers must:
· Inform customers of their right to shop for a better deal
· Tell customers if they qualify for a higher payout and ask about their circumstances
· Publish their annuity rates so that fair comparisons can be made.
However, these insurers are only obliged to introduce these new rules by March 2013 — so anyone retiring in 2012 may risk missing out on this vital protection and so possibly end up with a low, poorer performing annuity. This situation is made far worse due to the high numbers of people who were born straight after the end of the Second World War — as it is these people who are fast approaching retirement age.
In addition, the 2 million people in “defined contribution occupational schemes” that are run by trusts will not be covered by these new rules. This is because the trusts are not members of the ABI and are instead governed by the Pensions Regulator. Often the pension schemes’ own managers do not shop around or look for the best annuity or they are perhaps afraid of detailed financial advice. This is because they are concerned that they might be sued if their choice is wrong.
Stand up to your insurer and get a better pension
People retiring every day are retiring on a pension which leaves them financially short for the rest of their lives.
In order to avoid this from happening it is sensible to shop around for an annuity — which provides someone who retires with an income for life from their pension savings. Instead, they take the annuity offered by their existing pension company. Since 2002, pension companies have been legally obliged to tell their customers about their right to check out the competition and what they offer.
Worst affected are those savers with a shorter life expectancy — such as smokers or people who have an illness — who could perhaps boost their retirement income by as much as 30-40% by choosing the right annuity.
Many of those retiring also take out a pension which, should they die first, could leave their spouse destitute, as it will not continue paying out.
Record low pension payouts, high inflation and all time low savings rates mean it is absolutely essential for savers to squeeze every last penny from their pensions.
Most retirees never know they have made this huge financial mistake, because insurers have failed to make it clear most people would be better off if they bought an annuity elsewhere. But those who do shop around, some 40% on average receive an improved payout. With approximately 65% of pensioners perhaps qualifying for an ‘impaired life’ or ‘enhanced’ annuity.
According to the Association of British Insurers, they claim that 7 out of 10 people shop around for an annuity. And in the first 6 months of 2011, 48% of those retiring moved to an annuity with a different company. Also, more alarmingly the Association of British Insurers said documents telling retirees about choosing an annuity would not include an application form to make an application. As this would encourage people to look elsewhere rather than just signing on the dotted line. However insurers will still be able to advertise their own sub-standard annuities within the letters sent to customers and will be able to call to arrange for an application form to be sent out. The concerns raised from this is that all this will mean is that customers will simply ask for the paperwork and still won't shop around.
Buying an annuity is to help guarantee payments for care, it proposes a lifetime cap on the amount any individual pays towards their care, either in a residential home or on their own.
This guarantees a monthly tax free income towards someone’s care fees for as long as he/she lives. If annuity recipients do qualify for extra State help in the future, then the insurers might need to restructure annuity payments, giving a windfall to their family.
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