Shop Around For A Pension When You RetirePosted on: 14 August 2008 by Gareth Hargreaves
Approaching retirement? You could get a better annuity rate and increase your income with the Open Market Option.
Despite the introduction of the Open Market Option (OMO) five years ago, three quarters of people nearing retirement have no idea what it is, and almost three in five of those already retired failed to take advantage of it, indicates research by Partnership.
Pension providers are not making it easy for retirees. The Financial Services Authority (FSA) found delays had occurred in over 60 per cent of 238 annuity transfer cases reviewed. Despite these delays, using the Open Market Option to transfer your pension could significantly increase your retirement income.
A man aged 65 could benefit by £1,440 a year by shopping around, and a woman of the same age by £1,428, found Which? research. As a man aged 65 has a life expectancy of 17 years this could mean an extra £24,480 in income. A women of 65 is expected to live for 20 years, so would benefit by an extra £28,560 over her lifetime.
"Purchasing an annuity is a once in a lifetime decision so it's important to get it right," says Which? personal finance campaigner, Dominic Lindley. "Those with health problems may be able to benefit by even more."
One in two UK retirees could qualify for a better annuity rate because of medical complaints, estimates Partnership, yet the research reveals that half of people over 50 who suffer poor health are not aware their medical condition could entitle them to a greater annuity in retirement, potentially costing them over £20,000 during the course of their retirement, and in some cases much more. More than eight in ten poor health pensioners who switched provider were able to purchase a greater monthly annuity as a result.
50connect asked Ruth Clarke of Partnership, who provide enhanced annuities, for her advice on shopping around for an annuity.
The Open Market Option
If you have a money purchase or defined contribution pension scheme, where you've built up a pot of money, at retirement you have the option to convert that fund into an income, whether that be through an annuity or an income drawdown product.
Since 2002 providers have been required to make consumers aware that they have the option to shop around at retirement and don't have to take an income from the provider that they've been saving their money with. The provider should send a pack in the period leading up to retirement which reminds the customer that they have this option.
However the take up of the Open Market Option is only about 1 in 3.
It's difficult to predict how many people could benefit from taking their pot of money onto the open market and looking to get the best rate they can, but we know from our records it's about 2 in 5 consumers. We think that at least 50 per cent of people would benefit by going onto the open market, but people just don't seem to be aware of it.
The process is probably more complicated than it needs to be, because it's not standardised across the industry, so different insurance companies have different requirements and they use different forms.
If you have a pension with a 'zombie fund', a closed insurance company that has been bought up, these companies don't necessarily make life easy for customers. So it can be a challenge to get the forms completed, find the right provider, send the forms and then get the money sent across so the annuity can be set up. We've had cases where we've waited the best part of over 252 working days before the money was transferred from one provider to ourselves so we could set the annuity up. That's a long time to wait for your income when there's no need for it.
However, though it can sometimes be slow, the process should be simple. You tell your existing provider that you're going to exercise your Open Market Option and that the money will be going to whichever insurance company, you complete the form, the new insurance company requests the money from your existing scheme and it should go across. It's not much more difficult than moving ISAs around.
It's well worth transferring to get a better rate.
A big development over recent years has been the emergence of annuities which are bespoke to the individual, and take into account the individual's circumstances. This can be at a basic level such as where you live, your postcode for example may help get an increased annuity.
Enhanced annuity providers such as Partnership and many others look at an individual's state of health. For people who have some sort of pre-existing medical condition, and it doesn't need to be very serious, there's always benefit in shopping around because you may well get money because of that. Whether you've had an angina or heart attack, are diabetic or smoke, those sorts of things may help you qualify to receive a higher income in retirement. so it's always work making providers aware of your state of health because it may well result in a higher income for you.
For instance they may receive an increased annuity due to health conditions. As an example a 60 year old man who's had a heart attack, with a £50,000 pension fund may end up with £500 a year more than somebody who hasn't had one. If you're going to live 20 or 30 years that adds up to a lot of money.
The benefits of the Open Market Option are not limited to enhanced providers, there are standard providers who produce very competitive rates as well.
Which? says: Follow these tips to get the best annuity for you.
Choose the best option: Shop around for the best annuity rates using the open market option and don't just accept what your pension company offers.
Get good advice: It is important to talk to an independent financial adviser who specialises in annuities before you make your decision.
Think about inflation: You can make your annuity ‘inflation-proof' by having it increase in line with price rises, although you'll start off with a lower income than if you'd chosen a level rate.
Be honest: Tell your IFA about you and your partner's health problems. You may be in for an enhanced annuity. Smoking, being obese, having high blood pressure or a heart bypass could all help you retire on more money.
Your other half? Decide who you want the annuity to benefit after you die - a jointlife annuity looks after your partner if they outlive you.
Choosing An Annuity
Questions that people need to think about at retirement include basic decisions to be made in terms of what type of annuity:
- Do you want an annuity that's just payable on the life of the first individual so they when they die the income stream ceases single life annuity or do you want a joint life annuity so one that would carry onto the surviving spouse on the death of the first person?
- Do you want an annuity that's going to remain level, or increase? If so at what rate - 3 per cent, 5 per cent, Retail Price Index linked?
If you have funds more than about £150,000 it may even be that you want to consider some alternative to an annuity.
Choosing A Provider
Look for a provider that is competitive in this marketplace, giving good rates, who will give you the highest possible income. Check that the provider has efficient processing so it's not slow and going to lose you money.
All insurance companies that are licensed to issue annuities are protected in the normal way so there's no reason to be worried in terms of financial strength and those sorts of issues.
Preparing Your Pensions For Retirement
Once you start getting towards retirement you need to get all your pension details together. Start the process early. If like me you have lots of bits of paper stuck in files all over the place that are half forgotten about, a good piece of housekeeping as you are starting to think about retirement is to get your records out and find out what you've got. Get up to date information and contact details.
Often people have lots of pension pots and what they may not realise is that we can amalgamate them together to set up one income stream. There are two reasons for doing this:
- You might find that you get lots of different bits of income coming in at different times of the month from different providers which makes life a little bit messy.
- Rates tend to change according to the size of the purchase price. So if you have lots of £15,000 pots for instance you might not get very good rates for any of them, but if you put them all together with one provider you may end up receiving a significantly higher income - for example if you put a £100,000 pot into the market rather than lots of £15,000 pots.
So it's always worth looking at all your pension records, however old, and getting all the details ready well in advance of retirement so that when you reach retirement you know what you've got.
Where To Get Advice
People spend an awful lot of time every year on comparison websites trying to find cheap insurance, holidays and so on, but may not shop around for an annuity. Yet this is such an important decision that impacts your income for the rest of your life, so it's worth devoting at least as much time to it as you devote to shopping around for all your insurances, because it can make a huge difference.
Once you know to look for it, there's plenty of information out there to help. There's lots of places you can go to get help, even if you don't have a financial adviser.
The FSA website gives daily updated quotations for annuities so you can see who's most competitive at any moment in time, and there's also various other sources of information online.
It isn't complicated, and if you get stuck there's lots of very good financial advisers out there who can help.
www.partnership.co.uk - specialist provider of ill-health financial solutions for retirement and long term care
www.moneymadeclear.fsa.gov.uk - compare annuities and find other information from the UK's financial watchdog
Find An Independent Financial Adviser - search for independent financial advice in your area
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