Pension savers are still at risk of losing thousands of pounds despite industry initiatives to speed up transfers, according to Virgin Money.
The firm warns the ABI’s 30-day target for converting pension funds into annuities is a welcome start, but does not go far enough, following FSA research which criticised delays. It is urging companies to complete transfers faster.
"The financial services industry should be doing everything possible to make the transfer process as smooth as possible so customers receive the best possible payout. The risk of losing thousands of pounds is a genuine threat," a Virgin Money spokeman says.
The FTSE 100 has lost approximately 40% of its value since October 29th last year, substantially increasing the risks savers face when transferring funds.
A fund worth £100,000 last year could therefore have lost as much as £40,000 over the year and providers have reported a rise in savers asking for annuity quotes then deciding to delay purchase, according to Virgin Money.
Virgin Money says pensioners already face a dual risk from delays in processing annuity transfers: The loss from payouts not starting on time, and a potentially bigger loss from annuity rates dropping during any delay in sorting out paperwork.
A 65 year old retiring on a £100,000 fund could expect an annual income of £7,776 or £650 a month, says the firm. However, for every month the pension provider delays paying out, the pensioner would lose his monthly income, which over three years, could cost him £2,000.
Similarly, for a woman of the same age, whose payout would be £7,320 on a £100,000 fund with a monthly income of £610, a three month delay would cost over £1,800.
Furthermore, if annuity rates dropped 0.5% during the transfer period, to 7.24% for men and 6.82% for women, the annual payout would fall by £500 a year. This payout would then be fixed for life, resulting in retirement losses of approximately £10,000 over 20 years.
While annuity rates are currently at a six-year high, likely Bank of England rate cuts could mean yields on bonds and Government gilts could fall and cut annuity rates.
Virgin money says it will send out maturity forms to its pension customers within five working days when they request an annuity transfer form and will send a cheque to the annuity provider within a day, once the customer returns the forms, to speed up the transfer process.
The figures are based on a lump sum investment of £100,000 for a level annuity with income paid monthly in arrears, with a current annuity rate of 7.74% for men and 7.32% for women.IFAonline
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m