A new report conducted by the NAPF – National Association of Pension Funds says that upto £1bn of retirement income is lost each year because of the way annuities are sold in the UK. They described the current system has ‘hugely unfair and opaque‘ and accused annuity providers of ‘sharp practice and murky pricing‘. When reaching retirement those who pay into a defined contributions pension scheme face a number of options. Most convert their pension pot into an annuity, which pays an income each year for the whole of their retirement. However, not all providers offer the same products and rates, which is why it is vital to shop around for the best deal, known as using the Open Marker Option. Unfortunately, most retirees are unaware of this necessity and take the first offer they are made from their existing provider. The research estimated that some retirees could be upto 30% better off by shopping around, with some being as much as 50% better off.

Joanne Segars, chief executive of the NAPF highlighted the problem of retirees not shopping around arguing that…”…lower and middle income workers are especially vulnerable – too many end up stuck with the wrong annuity at a bad price.” Most retirees retire with a fund of less than £50,000, with the average being under £30,000. Often this is not enough for insurers to make any money from consultation over which annuity provider is the best for them. The NAPF says ‘few people’ know enough about annuities to find the best deal themselves. Previous research by MGM advantage would substantiate this claim, as they found that only 3 in 10 of those questioned have a ‘vague idea’ of what an annuity is. The truth is that most of us will only learn about the annuity market at the point when we need to buy one.

Tom McPhail, a staunch advocate of the Open Market Option says that…..”…the pensions industry and the government have a responsibility to ensure that the information sent to investors in the run up to retirement makes it as easy as possible to shop around.” Although providers have to inform retirees about shopping around for an annuity, many people fail to realise that this is critical in obtaining the best deal. There have been some improvements to the literature sent out to retirees, known as their pre-retirement ‘wake-up’ pack. They no longer includes an application form for their product (s), but this has been ineffective in terms of getting more people to use OMO. Mr McPhail said the problem of small pension funds could be helped if more people used annuity brokers, but that not all people are persuaded to do so.

The NAPF also found what it described as “sharp practices” such as having rate bands where as little of £1 more would get an annuitant a better rate, so-called ‘cliff edges’. Otto Thoresen from the industry body the Association of British Insurers (ABI) said the claims were…”….wrong and based on anecdotal evidence only” but conceded the point that all retirees should be shopping around for the best annuity. He claimed that…”…70% of our customers already shop around with 44% switching provider, but this is a critical decision for our customers so we need to do all we can to improve this further.” He said the ABI was working on a compulsory code of conduct that would help ensure the people who were not shopping around would be encouraged to do so.

An increasing number of people in the UK are opting for property investments and savings accounts as a means of funding their retirement. Pension saving has hit an all time low, with just 38% of the working population saving into a pension in 2009/10, a fall on 8% on a decade earlier. Experts are warning that if pension saving levels don’t improvement soon, thousands of people will have to delay their planned retirement date. Despite recent falls in property prices and rock bottom interest rate levels, many still see property investment and savings accounts as a better option compared to pensions. And it is not hard to see why this is so, according to the website pensioncalculator.org….” ….buy-to-let has still grown better than most other assets in the last decade.”

Those who decide to go for these alternatives may point to the fact that rates are at rock bottom, pension fund values are falling and that should you pass away prematurely with a single-life annuity the insurer keeps the rest of your fund. On the other hand property can be bequeathed and so can savings, although they would be subject to inheritance tax. In fact pension saving is often more tax efficient than property or regular savings. Also it is worth noting buy-to-let property acquisition has it’s own risks. Firstly if you are looking for a buy-to-let mortgage it is more difficult to get one nowadays. The rental market is on the whole doing well but there is oversupply of private flats in many major cities such as Manchester and Leeds – the places where flat rentals are generally the most popular. Interest rates are low at the moment but they could rise should the economic outlook worsen, it only takes a quarter of half percentage rise in rates to really hit the pockets of mortgage payers. Moreover as buy-to-let mortgages are generally a higher risk than conventional mortgages the providers of the finance often ask for a minumum deposit of 25%. This means you could sink a large sum of money into a property that either falls or at best remains the same value, whilst the mortgage payments may start to rise. If you are in an area of oversupply you may find you have month (s) with no tenancy or you have to drop the rent. On top of this is the issue of maintenance and letting fees. A pension is much more ‘hassle free’ in this respect.

No one can predict the future but while rates are low and funds are dropping, many of us will continue to look at alternatives to pension saving.

This week saw the grim news that enhanced and conventional annuity rates have fallen by 4.7% and 2.45% respectively in the past three months alone, according to the MGM advantage Annuity Index. Since the summer of 2009, rates for annuities have fallen by nearly 10%. This all comes at a time when prices and inflation have been increasing, with steep rises in commodity prices. Food, fuel and energy costs have risen steeply, for example gas prices have risen by 67% and electricity has gone up by 38% since 2007. For those aged over 50′s and particularly those people who are retired, there is the difficult dilemma of the cost of living rising while incomes are fixed.

Aston Goodey from MGM advantages says that…”…these findings are shocking and will put even more pressure on those people in or approaching retirement.” My Goodey added that there was the additional problem of increasing levels of life expectancy which means that annuity providers are having to pay out income for longer and longer periods. The MGM advantage Annuity Index has reported falls in rates in 8 out of the 9 reports it has published to date, showing just how bad it is financially for retirees at the moment. Experts says would-be annuitants need to shop around to see which provider has the best deal. Evidence in the past has shown that a majority of those retirees who buy an annuity are actually eligible for enhanced annuities which pay a better rate than standard annuities. The difference in income for the top enhanced annuity versus the bottom standard annuity rate can be as high as fifty percent.

Although insurance companies have to make their clients aware of the Open Market Option, many retirees fail to realise the absolute necessity to do so and therefore take the first offer from their current provider.

Over 50′s in the UK are having to endure an inflation rate substantially higher than the rest of the UK according to research undertaken by SAGA. Their data revealed that over 50′s inflation is 5.5% (RPI) while as for the rest of the population it is 4.8% (RPI). We have reported previously about how the older generation are hit disproportionately harder by rising prices in energy, fuel and food which leads to an increase in so-called ‘grey inflation’. Although fuel and energy prices have come down since the summer, this high level of inflation is still having a damaging impact on spending power.  According to SAGA Diretory General Ros Altmann…”…Inflation remains over double the Government’s 2% target and older people are suffering worse than anyone“. Since 2007 it is estimated that inflation for the over 50′s has been above 20%, while for the rest of the population is has been 15.1%. Whilst high unemployment grabs the headlines and is a tragedy for those involved, this only impacts on 7% of the population, e/g those people out of work. On the other hand inflation impacts on everyone.

As mentioned prices for electricity and gas prices have fallen slightly of late as the wholesale prices have fallen. But since the start of the economic downturn in 2007 gas prices have gone up by 67.2% and electricity prices by 38.6%. For those who are on fixed incomes, such as retired people, paying for fuel bills often means cutting back in other areas. This can mean eating less or in some extreme cases, not eating at all. The situation is exacerbated by the bewildering number of tariffs offered by energy companies, over 300 in total. This means that often people are not getting the best deal as they cannot fathom which tariff is best for them. The government says it is working with OFGEM to see if the process can be simplified. However, this issue has been going on for sometime already. Inflation is predicted to fall in the next 12 months, but whether it will fall back to pre 2007 levels of under 2.5% seems unlikely.

Improvements in healthcare as well as changing attitudes to old age are part of the reason why many over 75′s do not ‘feel old’. In fact a new survey of over 75′s conducted on behalf of SAGA has shown that of those questioned, a majority (68%) said that they did not ‘feel old’. This number rose to 86% when the question was put to those aged over 50. For those who campaign for the older generation this will come as welcome but not surprising news as many argue that older people are merely classed or stigmatised as ‘old’ by their younger counterparts. Changes in government legislation have also helped to fight ageism, such as the abolition of the compulsory retirement age which was scrapped in April of 2011.

Campaigner for the elderly and former government advisor Dr Ros Altmann says that…”….people who are generally considered old by society do not feel so and attitudes to old are clearly undergoing a major societal shift – and about time too. Saga has long recognised that people now stay fit and active much longer than in the past and medical advances have done wonders for our quality of life.” Life expectancy has also been rising steadily which means that retirement spans are significantly longer than they were 40 years ago as people are in better health when in retirement. We have reported on dozens of stories where those aged over 50′s are increasingly seeing their activity levels rise, such as attending rock concerts, playing on computer consoles or even embarking on daredevil pursuits on holiday.

What is clear is that the term ‘old age’ or ‘elderly’ is meaningless in so far as it really is down to the individual. Many people can be offended if they feel they are being included in these kind of generalisations and point to examples such as the picture of an elderly couple doddering across the road to indicate a warning that elderly people maybe crossing the road.

According to data which has been recently published, there has been a significant rise in the number if over 50′s involved in road accidents in North Yorkshire, amidst a steep rise in the number of pensioners. The statistics show that the number of people aged over 50 involved in a motor accident in North Yorkshire rose by 15% in 2010. And with the number of elderly people living in North Yorkshire set to rise over the next few years, there are concerns that this trend could continue. For example, by 2015 it has been predicted that the county’s overall population will reach 607,000. Of this number around 273,000 are likely to be aged over 50 with nearly 20,000 being aged over 85. Compare this to 2001 when there was just 217,000 people aged over 50 in Yorkshire. Over 50′s now account for 41% of the population in North Yorkshire.

Tim Madgwick, North Yorkshire Police’s Deputy Chief Constable explained the problem commenting that…”…people are living longer and the older population is increasing which naturally means we can expect a rise in casualties involving this age group.” He added that skills and confidence behind the wheel could also be affected as older drivers tend to do less driving than they perhaps used to.

The council is making efforts to try and reduce the number of accidents by running a number of road-shows which provide help and advice for older drivers after a series of similar events were run last year in towns across the county. Local councillor Gareth Dadd said… “...the fact that we have seen such a significant rise in the number of people aged over 50 being injured on the county’s roads is obviously a matter of significant concern. Obviously one casualty or fatality on the roads is one too many, and we are making every effort we can to ensure all motorists are given road safety advice to prevent accidents in the future.”

Although overall road accident numbers are down on three years ago, there has been a 3% rise in the number of fatalities, with many blaming ‘rogue’ motorcyclists. North Yorkshires country roads which go through the Yorkshire dales and the North York moors appeal to those with motorbikes. However, country roads are often the most dangerous type of road because they are windy and driver view can be obscured by hedges and blind bends. Other problems can be a slippery surface as well as the danger of slower moving vehicles. If it is icy or snowing, often it is only main roads that get gritted increasing further the danger of an accident.

Normally associated almost exclusively with the younger generation, video games are now becoming an increasingly popular past time for those aged over 50, according to a new survey conducted by SAGA. They found that one in 25 over 50′s are using the Nintendo WII as a means of keeping fit. Even those that have been retired for sometime are partaking in a game or two, with one in fifty over 75′s reporting that they also use the console. It seems awareness of the need to keep fit is also more prevalent in the over 50′s as the poll showed that 80% were more conscious of the need to keep fit now, than they were in their 30′s.

Ros Altmann, Director-General at SAGA says that…”…It’s really beginning to dawn on the older generations that the retirement age is not a countdown to the nursing home, but the start of the ‘bonus years’. To make the most of the opportunities in work and play, they need to have a decent standard of fitness – so more older people are spending more time exercising.”

And it is not just keeping fit that attracts over 50′s to video games as according to a number of respondents they decided to do more exercise in order to improve their sex lives. A survey earlier this year found that people in their 50′s rate sex as a more popular past time compared to those in their thirties who rated going to the gym and watching television as more preferential.

A startling new report from retirement income specialists MGM Advantage has shown than 3 in 10 of the over 55′s have never heard of the Open Market Option, while 7 in 10 do not fully understand what an annuity is. While many inside the pension industry will be fully aware that a lack of understanding clearly exists by the mere fact that so many retirees fail to shop around for the best annuity offer, this is the first time this has been equated into raw figures. With annuity rates at record lows and personal pension funds dropping due to poor stock market performance, now more than ever is it vital that people use the Open Market Option to find the best annuity on offer. To illustrate just how important this is, MGM state that the difference between the top enhanced rate and bottom standard rate is 54% for a 65 year old man with a £50,000 pension pot.

Using OMO allows retirees to shop for not only the best deal on the market but also to get the right product, such as enhanced annuities. These pay a higher income compared with standard annuities. Although only around 10% of annuities purchased are enhanced, it is estimated that around two-thirds of annuitants are actually eligible.

Craig Fazzini-Jones from MGM Advantage says more needs to be done to raise awareness of OMO arguying that…”….it is grossly unfair that those who are most in need of additional income in retirement are unlikely to be able to afford the services of an IFA, or be aware of the benefit of shopping around for better annuity rates and higher income in retirement. By providing clear and simple educational messaging, the benefits of shopping around for an annuity are clear to see with those who qualify for an enhanced annuity benefiting from a considerable increase in income of over 50% throughout their retirement.”

The report also showed a lesser number (31%) of people questioned have only a ‘vague idea’ of what an annuity was. This underlines the need to provide better information and to educate people about what their options are. While most people understand the need to shop for other forms of insurance, annuities are still one of those products that people have very little understand of.  This has the net result of people missing out on thousands of pounds worth of income each year as most retirees accept the first offer from their existing provider, unaware they could have got more income elsewhere.

More bad news emerged this week for anyone about to retire with the news that December annuity rates have fallen to a record low as a result of lower gilt yields. It also seems highly likely that rates will also fall in 2012, according to industry experts Alexander Forbes Annuity Bureau. According to the data, insurance giant Aviva offer the best male single life annuity for a 65 year old, although they have reduced their rate by £130 to £5,590. Some providers have increased their rates, for example L&G who managed to increase their rate by £64 to £5,420. Hodge Life on the other hand held their rate at £5,390. Canada Life , another prominent provider, cut it’s rate in December.

Inflation-linked annuities remained largely the same and will look like an appealing option should the current level of inflation remain. Gemma Goodman from Alexander Forbes Annuity Bureau told IFAOnline the reasons behind the change in rates from providers arguing that…”…at least part of the price moves will be for purely commercial reasons, with providers either trying to increase their annuity books or reduce demand.” She added that UK annuity providers will have been looking closely at events in the Eurozone amidst continued uncertainty. Goodman says 2012 will see more volatility in the market but the overall trend for rates is likely to be downwards.

With rates projected to go down rather than up, it is even more important that retirees shop around for the best deal using the Open Market Option.

Those with small pension pots are set to benefit from a new government initiative designed to help them unlock the value of their fund with a lump sum. New regulations will come into force which will allow those with personal pension funds of £2,000 or less to get the total amount in one lump sum, rather than have to turn it into a regular income. From next April, those aged over 60 and in registered pension schemes will have the flexibility of receiving the full amount in one go. At present this is only open to people with funds of under £2,000 that are enrolled in occupational schemes.

Tom McPhail, from the financial advisor firm Hargreaves Lansdown says the the new regulations are…”…a welcome development which will mean investors with very small pension pots will no longer have to buy an annuity and will instead be able to take their savings as a lump sum.” He also made the point that the new rules will also help annuity providers deal with small pension pots, as often they do not make much money from them. To put things into perspective, a person with a £1,000 fund could expect a negligible income of just £5 per month. This being the case, it is clear to see that a lump sum amount of £2,000 or less is going to be much more desirable.

However there have been warnings sounded about possible loop holes that could be exploited. According to ThisIsMoney.co.uk “…a firm could ask an elderly customer for £1,600 and put this into a pension to get an automatic top up to £2,000 using the 20 per cent tax boost provided by the Government to encourage pension contributions. It could then use the new rules to withdraw it immediately, securing a £400 pre-tax uplift. The firm could repeat the trick, sticking within the HMRC’s two-time rule, to make around £800. It could then hand £400 to the customer and pocket £400 for itself – or a split even less fairly. Repeat 1,000 times, and a granny farming firm could be looking at a healthy profit.”

However, many industry experts believe HMRC will be well aware of this potential pitfall in the new regulations and that overall this has been perceived as a positive development.