Public understanding of annuities has improved but more work is needed as the debate around pensions hots up, according to the Association of British Insurers.
This latest research suggests public understanding of annuities and what they offer the consumer is better than widely believed to be the case. Further, competition in the annuity market and customers’ right to shop around is delivering higher retirement incomes at both the bottom and top ends of the market.
While half (52%) of those buying annuities do shop around, at least 60% of annuitants still continue to buy their annuity from their pension company.
Advice plays a key role in encouraging people to shop around for the best deal as the report reveals 81% of those who exercised the 'Open Market Option' had received advice. This compares to 19% of those who bought their annuity from their existing pension provider.
To maintain and build upon the progress made, the report says more consistent advice is needed to help individual consumers get the best value for money, and further efforts are needed to improve education and understanding of annuities more generally. It points out, “worryingly” 45% of respondents agree with the statement suggesting a pension and an annuity are the same product.
There is also a need to target publicity about annuities to different income and gender groups and to look at the sources of information provided. When questioned about use of a telephone information service, consumers would be most likely to use such a service if it was provided by the Financial Services Authority (FSA), despite the relatively low use made by annuitants of current information provided by the FSA.
The report does not think the government should take on increased longevity risk and become an annuity provider, as has recently been suggested, because “it would be difficult to see how this could be reconciled with the right to shop around and providing choice for the consumer about the right type of annuity to meet their own personal circumstances and requirements for retirement income”. Instead, the effect is likely to be increased consumer confusion, claims the report.
Simplification of the market would also make it easier for consumers to shop around. The ABI says the government has taken a bold step in simplifying the tax regime for pensions from April 2006, but the radical simplification of the accumulation, or pension saving, stage is not reflected in the regime which applies when pension savings are turned into income. As a result, “the process will continue to be complex and difficult”, the report states.
Helen McCarthy, the ABI’s head of pensions and savings development, says: “Our research shows that while consumer awareness of annuities is better than previously thought, there is still work to be done. In particular, more effort should be made to get across the message that people can shop around when purchasing an annuity — very often they will get better value for money by doing so.”
McCarthy adds the new ABI Statement of Good Practice on Pension Maturities, to be published soon, will smooth the process of purchasing annuities.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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