The findings of the FCA's review into the annuities market, and the proposed changes, have been widely welcomed by the industry. It's hoped that it'll lead to improved competition in the sector, more shopping around and, ultimately, improved incomes for retirees, as research has found that failing to shop around could cost consumers a huge amount of cash.
The cost of not shopping around
The review uncovered widespread issues surrounding the sales practices of annuity firms, particularly when it came to enhanced annuities, with the market simply not working effectively or in the interest of consumers. Firms often failed to tell consumers that they could shop around, and in many cases they didn't let customers know that other providers could offer enhanced annuities for medical conditions that they didn't underwrite.
This lack of encouragement could be one of the reasons behind the low rate of consumers heading to the open market, and ultimately, their incomes could suffer from it. Given that around 60% of people could qualify for enhanced annuities, a large number of retirees could potentially miss out on a higher retirement income if they don't shop around.
To highlight this issue, My Pension Expert carried out research to demonstrate just how much income retirees could lose out on if they didn't search for the best rates.
They compared the quotes given to a 65-year-old male with a pension pot of £100,000 who was looking to purchase a lifetime annuity. The top quote available would offer £5,842 per year, but the worst would result in just £5,143 – a 16% difference. Over the length of a typical retirement for a 65-year-old male (23 years), this equates to a potential loss of £16,077 in income, a significant sum of money, and one that could have a dramatic impact on the standard of living the retiree would be able to achieve.
If the individual qualified for an enhanced annuity, perhaps because he was a smoker, drank and had high blood pressure, the disparity becomes even greater. In this scenario the top rate would provide £6,926 per year, a full 26% more than the worst deal he could be given should his circumstances not be factored in. Over an average retirement, this could result in a staggering £41,009 of lost income, all because he failed to shop around.
Annuities can still be a solution
Despite the FCA's findings, and the fears that annuities would see a significant drop in interest following the flexibilities announced in this year's Budget, the FCA has said that the right annuity, when purchased on the open market, offers good value for money for those with average pension pots. This is why it's so important to thoroughly compare the options – annuities could still be a viable option, but as My Pension Expert's calculations show, failing to shop around could seriously jeopardise your standard of living in retirement.
Scott Mullen, director at My Pension Expert, commented: "It is essential that those looking to purchase an annuity shop around for the best rate and make sure that it factors in their individual medical and lifestyle conditions. It's one of the most important financial decisions a person will make in their lifetime, and a wrong move could end up costing thousands.
"We would always recommend seeking advice, as thanks to the recent Budget there are now even more options open to retirees, which as a result have added further complications to the retirement process. An adviser can guide you through the procedure making sure that the right product is selected to suit your individual circumstances at the best rate available."
This kind of decision is never something to make alone, so if you want to stand the best possible chance of maximising your income throughout retirement, always speak to the experts. Head to the open market rather than your pension provider to ensure you don't lose out on all that income, and to get the process started, consult our no-obligation annuity planner to consider your options.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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