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New rules aimed at increasing the number of people who shop around for an annuity when they retire have come into force. Since 1 March, annuity providers have been required to show customers how their annuity rates compare against the best ones on the market.
The measure has been introduced by the Financial Conduct Authority (FCA), in order to try and demonstrate to retirees how much they could gain from shopping around for an annuity, rather than just settling for the offer put to them by the company that holds their pension.
Previously, the watchdog found that 80% of people who purchased an annuity from their existing provider could have received a better deal by shopping around on the open market. Over the course of a 20-year retirement, it has been calculated that the average annuity purchased pays out £8,460 less in income than the best deal.
However, some commentators have warned that the comparison in its current form will not help consumers, because of "fundamental flaws" in the way the process works.
The main criticism is that the comparative quotes only need to be produced for standard annuity rates, using basic consumer information such as age and postcode. This means that there is no obligation to include a comparative figure for an enhanced annuity, which typically pays a higher rate of income, after taking into account an individual's health and lifestyle considerations. Up to 70% of people are thought to qualify for an enhanced annuity because they have a certain medical condition or a particular lifestyle choice, such as smoking.
Questions have also been raised over why providers don't have to actually name the competitors who are offering better rates.
"These changes, although introduced with the best intent, will not improve the outcomes for thousands of people who continue to value the security of a guaranteed lifetime income from an annuity," said Andrew Tully, pensions technical director at Retirement Advantage. "Significant flaws remain where quotes produced on limited information will not highlight the true value of the annuity, and may well result in people locking into uncompetitive deals."
In terms of how soon-to-be retirees can make sure they do maximise their retirement income, shopping around for the best annuity is the number one tip. Telling a pension company about health or lifestyle conditions is also a must, to see if you qualify for a higher income through an enhanced or impaired annuity.
For such an important decision, getting professional financial advice should also pay for itself in the long-run. So too will the job of the adviser to ensure that you have the most appropriate annuity (or combination of annuity and drawdown) for your individual circumstances, as well as the most competitive rate.
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