Pension providers that are members of the Association of British Insurers (ABI) will have to help customers shop around to get better annuity deals, under new measures drawn up by the ABI. The measures are designed to help prevent customers opting blindly for their pension providers' default option without doing any research.
Picking a better annuity can make a huge difference. Retirement financial planner Annuity Direct says that for a male aged 65 with a retirement fund worth £100,000 the worst annuity rate currently available would give him an annual income of £4,013, while the best annuity rate would give him £5,020. This difference of £1,007 per year equates to a total loss of retirement income of £25,175 over 25 years.
Pension providers will have to explain the range of ways retirement income can be taken, including products they don't offer themselves. Providers will have to get in touch with a customer between two and five years before their retirement date and encourage them to start thinking about their options. If the customer has not already approached the provider they must send out a wake-up pack at least between six and four months before the selected retirement date, and a follow-up pack at least 10 to six weeks before the selected retirement date.
The packs, among other things, must highlight:
■ The benefits of shopping around.
■ Ways in which you can receive retirement income.
■ Different annuity products.
■ How medical conditions or lifestyle choices might qualify you for higher retirement income.
The provider's packs must not include an annuity application form for their own products unless the customer specifically asks for it.
However, these provisions do not come into force until March 2013, so people retiring in the next 12 months may not benefit. Nor will the provisions automatically apply to pension providers who are not members of the ABI, such as trust-based occupational schemes.
It will still not be possible to compare all annuity rates because some companies do not publish them. Tom McPhail, head of pensions research at Hargreaves Lansdown, would like to see greater transparency and for investors to be able to compare all rates, for example via a league table.
Take action
If you want to get the best annuity rate you still need to do your research and shop around. First you must determine what your income needs will be, for example are you going to fully retire or work part-time, and whether you need to take an income.
Then you need to decide what sort of annuity you want. Do you want inflation protection or a level annuity, and if you have a spouse do you want the annuity to provide for them after you die?
Then you need to explore if you can qualify for an enhanced annuity if you are in ill health or a smoker. MGM Advantage estimates that around 70 per cent of the retiring population potentially qualify for an enhanced annuity which offers a higher income in retirement, but at the moment only 2 per cent of customers without a financial adviser buy one.
You should then shop around to get the best possible rate for the kind of annuity you have decided to go for.
It could be worth taking financial advice because getting the right product can make such a difference and there are so many considerations. "It's important people don't just concentrate on the highest income, they need to consider what product suits their needs best," explains Andrew Tully, pensions technical director at MGM Advantage. "For example, some people may be happy taking on an element of investment risk, so income drawdown or an investment-linked annuity could be a good option."
You may be able to access advice through your workplace, so it is worth checking this, or you can find a financial adviser at IFA Promotions (www.unbiased.co.uk) or the Personal Finance Society (www.findanadviser.org).
You can also go to brokers who will help you to shop around.
A selection of brokers
| Annuities 4U | http://www.annuities4u.com/ | 0800 043 6701 |
| Annuity Direct | http://www.annuitydirect.co.uk/ | 0500 50 65 75 |
| Hargreaves Lansdown | http://www.h-l.co.uk | 0117 980 9940 |
| Premier Retirement Services | http://www.myannuityplan.co.uk/PRS/ | 01737 233 413 |
| The Annuity Exchange | http://www.annuityexchange.co.uk/ | 0844 482 2191 |
| The Retirement Advisor | http://www.lebc-group.com/retirement-adviser.php | 020 3036 0515 |
| The Annuity Specialists | http://www.theannuityspecialist.com/ | 0151 353 1066 |
| The Annuity Bureau | http://www.annuitybureau.co.uk/ | 0845 850 8550 |
| Retirement Solutions | http://www.retirementsolutions.co.uk/annuities/open-market-option | 0800 043 6701 |
The Money Advice Service, meanwhile, publishes annuity rates, although you have to put in your personal details and it only pulls up the companies that make their rates public. You can also get information on annuities and pensions at Investors Chronicle at http://www.investorschronicle.co.uk/your-money/tools-and-calculators.
Internet comparison sites such as moneyfacts.co.uk and provider websites also have useful information.
