The Pensions Incomes Choices Association (PICA) have revealed the startling results of independent research they commissioned relating to annuities. They asked Oxford Economics to look at the annuity purchasing process and uncovered that UK retirees could be missing out on between £3 and £7 billion in retirement income. Another finding was that many retirees were not getting the maximum income as they were missing out on enhanced annuities.
According to Just Retirement, in 2010 only around 20% of annuities which were purchased had enhancements, but this figure falls dramatically in the occupational market to 5%. The company has previously claimed that up to two thirds of retirees could be eligible for enhanced annuities, although after a recent tele-underwriting trial with medical professionals and underwriters, they now claim the figure is 70%. This is because although the higher rates are paid for the most serious medical conditions such as heart attacks or strokes, there are over 1,500 conditions which can be considered. The company also said that the amount of additional income which an individual can attain varies between 10% and 50%.
Tom McPhail from Hargreaves Lansdown praised the trial involving tele-underwriting stating it…. “…illustrates that the industry is developing innovative solutions to help people shop around.” However the notion of tele-underwriting was not met with universal acclaim as Philip Brown, head of retirement products at Partnership says that we should be wary of… “….how complicated you make the transaction, if you involve third parties it can be difficult. To make tele-underwriting really efficient you really have to have a single source for a range of companies.” Vince Smith-Hughes from Prudential agreed and added that in order for tele-writing to become popular there needed to be a…”…central pooling of information.” He added that it would not be popular with retirees if they had to offer their medical details to several different companies on different occasions.
So there are arguments on both sides about the viability and merits of using tele-underwriting as a means of increasing retirement income and getting the best annuity rates. However, an alternative which has been backed by PICA is their ‘Pensions Passport‘ system which we covered in some depth when it was announced. Each retiree would complete sections relating to their personal financial circumstances, their preferred retirement product as well as brief outline of their past and present state of health. Arming retirees with this, it is argued, would make it much easier for them to then ‘shop’ between providers to see who has the best rates. Mr McPhail says that….”…Pica is advocating a pension passport to prompt people to proactively seek out a retirement solution. The passport is a catalyst and will provide them with certain key medical questions. This will help steer them to the sort of solution tele-underwriting offers.”
However, some in the industry have questioned the notion that every retiree needs to shop around for an annuity. Alan Bradbury from Phoenix said that it would “simply not work” for those with smaller pension pots. Tim Gosden from L&G said that…”…forcing people to shop around is counterproductive as some people are completely disengaged with their pension.” Despite these caveats regarding the Open Market Option, recent research from Xafinity Payment claimed that the majority of providers were in favour of legislation which would make OMO compulsory.