Pensioners lose out on extra income

The vast majority of pensioners are continuing to fail to shop around for the best rate when they buy an annuity, potentially depriving themselves of thousands of pounds of extra income for the rest of their lives.

The vast majority of pensioners are continuing to fail to shop around for the best rate when they buy an annuity, potentially depriving themselves of thousands of pounds of extra income for the rest of their lives.

According to figures from the Association of British Insurers (ABI), just 30.9 per cent of pensioners bought an annuity from someone other than their pension provider during the third quarter of last year, in spite of the fact that the majority would have been able to get a better rate elsewhere.

The continued apathy in the annuity market is bad news for the Financial Services Authority (FSA), which has implemented a number of policy initiatives during the past few years in a bid to persuade more consumers to shop around, or exercise the so-called "open market option".

In September 2002, the FSA introduced rules compelling pension providers to inform people of their right to shop around, by sending them a "wake-up" letter in the last few months before they retire.

But since the new measures came into force, the number of people shopping around appears to have fallen. Two years ago, about 38 per cent of pensioners bought an annuity from someone other than their pension provider. That has fallen by some seven percentage points.

Tom McPhail, the head of pensions research for Hargreaves Lansdown, the Bristol-based financial advisers, says most people are unaware they could get up to 25 per cent more income from their pension by shopping around for an annuity.

He believes the ABI and FSA need to go further to help consumers understand. "The way information is presented to investors needs to change," he says. "The letter from the provider tells you about how much you will get from various annuities with them, and then has one line at the bottom about your right to shop around. That's the wrong way round."

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