Bank of Scotland Annuity Service (Bosas) says Brits are squandering up to £18,500 by not shopping around for highest annual income from their pension fund.
The bank stresses individuals purchasing an annuity have the legal right to an open market option, namely the ability to shop around to get the best possible income for their annual retirement fund.
Bosas points to figures from the Association of British Insurers (Abi) indicating more than two-thirds of UK individuals purchase an annuity from their pension provider without shopping around.
The ABI figures show the amount of individuals shopping for annuities has declined from 35% in 2002, when it became compulsory for providers to alert members nearing retirement of the open market option, to 33% in 2004.
Research from Bosas finds 36% of people already retired have less retirement income than expected, while half of respondents eho have not yet retired are concerned about the amount of income they will have when they do.
It says a couple with a £100,000 pension fund has the ability to increase their annual pension income by 13% or around £840 annually through the open market option, therefore going a long way to boosting their expectations.
The bank believes many individuals do not shop around out of loyalty to the company their pension fund is with, along with the beliefe they will make only minor gains if they pledge elsewhere.
It argues this loyalty is misplaced if individuals are not being provided with the best deals, and thatinertia is costing people vast sums of money.
Head of Bosas, Craig Jones says: "Some people may be aware that they can shop around but just don't know how to go about it. Research shows that there is limited understanding of how pensions and annuities work which means that execution only services, which offer no advice, are not always an option as they presume a certain amount of knowledge.”
Manager of pensions development at Scottish Equitable, Rachel Vahey, says providers understand the importance of shopping around for a pension, adding all annuity statements run through the benefits of shopping around and considering whether an open market option is a better solution.
Vahey says: “We introduced this new wording in 2002. I believe the industry hoped more people would consider the option of shopping around as a result of this new wording, and it is slightly surprising to see the Abi stats do not back this expectation up.”
Vahey suggests making annuities more interesting may provide a solution to consumer apathy, indicated by the research.
“Certainly the new tax regime gives us the ability to do that with value protected annuities (where if this option is taken then on death before age 75 a return of the original annuity purchase price, less installments, less tax, can be paid out) and annuities that can both increase and reduce in value - perhaps in line with events in people's lives, to make sure the retirement income fits the person's needs at that time,” she concludes.
Meanwhile, secretary of state for work and pensions David Blunkett MP, together with pensions minister Stephen Timms, has launched a national pensions debate campaign. At the inital meeting in East London, Blunkett joined 40 members of the local community to discuss the current pension system.
Blunkett said: “One of the first things I said I wanted to do when I came to the department was take the debate on the future of pensions direct to the people it would affect.”
“I want to reach out to people, to take the public into our confidence. To debate, listen and share the problems and ensure we all have ownership and understanding of the possible solutions,” he added.
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