How inflexible insurers are making it difficult to get the best return from your pension savings
Hundreds of thousands of pensioners are being prevented from getting the best return from their investments by life insurers who are letting them down at retirement, advisers claim.
Some of Britain’s biggest pension companies seem to be using every obstacle they can to prevent savers from getting a good deal, while in other cases simple incompetence is to blame.
The damaging consequences could have repercussions for decades to come. For hundreds of thousands of people retiring every year, choosing how to use their pension pot is one of the biggest financial decisions they will make — one that will affect their standard of living for up to 20 years or more.
Penalties applied to savers mean that anyone who does not want to buy an annuity could find that the value of their pension is reduced by thousands of pounds. In other cases, savers who want an annuity, which pays an income for life, are suffering financial loss because of administrative bungles. Many other providers are failing to give clear advice, leaving customers in the dark about how to maximise their income.
These actions seems to fly in the face of the Government’s stated ambition to give savers greater choice at retirement. Since 2002 the regulator has insisted that insurers tell customers that they can buy an annuity from any provider. But latest figures indicate that only 37 per cent of people are taking advantage of the so-called open-market option (OMO) to get the best deal for their circumstances.
A separate overhaul of the rules in 2006 — A-Day — introduced more flexibility. Among the changes was the introduction of the ability to unlock tax-free cash in your pension without having to retire or take an income. However, many companies stuck with the old, inflexible rules.
Tom McPhail, of Hargreaves Lansdown, the independent financial adviser, says: “Everyone knows that the system is not working. Only about a third of people are shopping around for the best solution. Unless this is dealt with, the country will be storing up social problems for 20 years down the line.”
Here we highlight the problems that advisers believe need to be addressed urgently.
Pension penalty
Standard Life, Britain’s fifth-biggest insurer, has caused anger by penalising customers who do not want to use their with-profits pensions to buy a conventional annuity. Other providers, such as Equitable Life, Prudential, Co-operative Insurance and Windsor Life, also have the power to impose these penalties, called market value adjustments. Advisers say that this makes a mockery of a system that is meant to offer flexibility.
Jeffrey Warrilow, of Stoke-on-Trent, is one of the victims of Standard Life’s uncompromising stance and may be prevented from retiring by its actions. The 55-year old, who runs a bone china business, wants to move his with-profits pension into a fixed-term annuity from Living Time, the retirement income specialist. This is a halfway house between a full annuity and a risky income-drawdown plan. He has been told, however, that he will lose almost £8,000, or 9 per cent, of his retirement pot if he goes down this route — a penalty that would not be applied if he bought an annuity.
Mr Warrilow says: “The plan was to take some of the tax-free lump sum to pay off the mortgage, which would have allowed me to retire. I think it is appalling that Standard Life has put the block on this for, what seems to me, no good reason and completely against the spirit of the rules. What is the point in having flexibility to use my pension money in the way that I want if Standard Life can turn around and say no?”
He does not want to buy an annuity because he has enough income from other sources, such as property investments, to cover his day-to-day expenses. A fixed-term annuity would allow him to leave his fund invested without taking an income but allow him to lock in to an annuity at a later date if he wishes.
His independent financial adviser, Tony Castrey, of ASC Financial Management, says: “It seems amazing that he can have a penalty-free exit if he wants to buy an annuity but is penalised for choosing an alternative that better suits his circumstances. A-Day introduced the option of taking tax-free cash without taking an income, yet here is a big insurer stopping that from happening.”
Standard Life argues that the penalties are fair.
Advice gap
Pension providers are required to send “wake-up” packs at least four months before a person is due to retire and a reminder six weeks before retirement. This is supposed to set out the options clearly and explain the potential benefits of using the open-market option.
But last year, the Financial Services Authority (FSA) issued a warning to the industry after finding that 40 per cent of insurers were failing to advise customers of their right to choose an annuity from another company. The investigation found that two in five pension providers did not meet even the most basic criteria for providing guidance on how to buy an annuity. David Harris, of Living Time, says: “Retirees are not being presented with the full range of options, meaning that they end up enslaved in an annuity with no opportunity to change their decision. The OMO should be the default option. Retirees who stick with their pension provider should have to actively sign away their rights to shop around.”
There are instances where people are unable to use the OMO. Most insurers will not accept small pensions of £10,000 or less, for example, leaving savers with no choice but to purchase one from their pension provider.
In other cases, it makes sense to stick with your pension provider. Some pensions come with valuable guaranteed annuity rates than can provide a retirement income up to 40 per cent higher than a standard annuity. They were sold mainly in the 1970s and 1980s, usually alongside retirement annuity contracts.
However, advisers and the FSA agree that more people should be shopping around for the best deal at retirement.
Transfer delay
Some of Britain’s biggest insurers are making investors wait ten weeks for their pension pots to be transferred to annuity providers. This allows insurers to earn extra interest. Investors, however, could lose vital income as annuity rates fall — in most cases quotes are valid for only 14 days. Savers are also starved of cash until the transfer is complete.
Steve Hunt, managing director of the Annuity Clearing House (ACH), the retirement specialist, says: “The delays endanger the retirement income of many people and will often cause significant difficulties at an already very stressful time of their life.”
The Association of British Insurers has said that its introduction of Options, an electronic transfer system, in December has cut transfer rates from an average of 31 days to only eight. Advisers say that a transfer should take no more than seven working days.
However, research by ACH suggests that Windsor Life and Phoenix are taking an average of 51 working days to carry out transfers. Winterthur Life, which takes 41 days on average, Scottish Mutual (40 days) and Co-operative Insurance (39 days) are also guilty of dragging their heels. Zurich Assurance was found to provide the quickest service, with average transfers of 18 days, followed by Abbey Life (19 days) and Virgin Money (21 days).
Maximise your pension income
• When you convert your pension pot into an annuity, take the open market option. By choosing the best option from the entire market, you can boost your retirement income by as much as 20 per cent Defer your state pension. Laith Khalaf, of Hargreaves Lansdown, says that if you delay taking it for a year the Government will increase your pension by 10.4 per cent. This should allow you to recoup the lost year within ten years.
Put some money in a personal pension and cash it in immediately. You can put in £2,880 a year and the Government will top this up to £3,600 with basic-rate tax relief (with a further £720 for higher-rate taxpayers). You cash in, take a 25 per cent tax-free lump sum of £900, and a pension of about £150 a year.
Consider income drawdown if you have a pot of more than £100,000. You have more flexibility on the size and timing of withdrawals.
Reinvest your tax-free lump sum in an individual savings account and take the income while retaining the capital.
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