New annuity code to help pensioners

A new code of conduct to help people who buy an annuity shop around for the best deal comes into force on 1 March. We look at what this means for retirees.
 
When you reach retirement age, it is highly likely that you will use your pension pot to buy an annuity.

An annuity is the investment vehicle which converts your funds into an income guaranteed for the rest of your life.

As this is a once-in-a-lifetime decision, it's very important that you get it right.

The good news is, under a new code of conduct, it should get easier to get an annuity with the best rates and most suitable terms for your particular needs.

What's the new code all about?

The new code, which has been drawn up by the Association of British Insurers (ABI), is designed to encourage people to shop around for their retirement income.

At present, many people simply sign up to the annuity offered by their existing pension provider without seeing what other rates are available elsewhere.

But firms must now make it clear to pension savers that they have the option to shop around, using what is known as the "open market option".

What does this mean for consumers?
Shopping around for the best possible rates is particularly important right now because annuity rates are falling.

In fact, figures from retirement income specialist MGM Advantage suggest average rates have plummeted by 20 per cent in the last four years.

"The ABI's code brings some enormous benefits to the 400,000 people who buy an annuity every year," says Richard Baddon, insurance partner at Deloitte.

"Rates can vary between providers by up to 20 per cent, and as consumers can buy an annuity only once, it is crucial they get it right."

What else is in the code?

As well as reminding people they should shop around, the code states that insurers will also have to publish their rates.

This should give consumers more insight into the market, and make it easier for them to spot an uncompetitive deal.

Providers will no longer be allowed to include annuity application forms in the information packs they send out shortly before retirement.

This should encourage people to shop around.

What about enhanced annuities?

In addition, the code will also force insurers to inform consumers about enhanced annuity options.

Enhanced rates apply to individuals who have a health condition that could affect their life expectancy.

These health conditions range from being overweight, or smoking, right up to serious illnesses.

Enhanced annuities pay out more, in some cases up to 50 per cent more, because the annuity provider is essentially calculating that you will not live as long as healthier individuals.

"By shopping around, getting advice, and making sure they disclose any medical conditions, consumers can secure the highest rates," says John Wilkinson from Nationwide.

"They can also shape their own annuity to include spouse benefits or guarantees, making the most of their pension pots in retirement."

Does the code go far enough?

While pension experts have welcomed the move, they say there is still some way to go.

"The code is a big step forward, but there is more to be done," says Tom McPhail from financial adviser Hargreaves Lansdown.

He points out that the code does not cover all pensions, in particular many workplace and auto-enrolment schemes.

"Ultimately we want a system where every consumer is able to shop around for the best possible retirement income solution, with access to the right information and advice, and to do so without any unnecessary delays or costs."

Richard Williams from The Annuity Bureau adds that there is still a lot of work to be done in educating consumers.

"This is needed to ensure people are fully aware of the options available, and to persuade consumers that the time they spend during the annuity purchase process will be time well spent," he says.

Plan carefully for retirement

In the meantime, it is vital that those approaching retirement age plan their choices properly to make the most of pensions savings and other assets.

If in doubt, seek professional advice from an annuity adviser or broker. You can also visit the Confused.com annuities comparison service.

source: confused.com