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Retirement

‘Trust’ costs Brits over 20% of their retirement income

Tahmina Mannan
Written By:
Tahmina Mannan
Posted:
Updated:
04/12/2013

Almost half of people take an annuity from their pension provider because they ‘trust’ the company, despite potentially losing out on as much as 20% in retirement income.

Partnership, the specialist insurer, surveyed more than 2,000 over-55s. It found that 37% of people who had already bought an annuity had simply accepted what their pension provider offered them.  

Only 12% carried out any research before deciding that their pension provider would offer them the best annuity deal.

Of those who had yet to annuitise, 31% said they would take the annuity offered by the company they had saved with for retirement.

Of these, 19% said they would do some research but probably take the annuity offered by their pension provider and 12% said they would simply accept the offer that they were given by their pension fund.

When asked why they had chosen, or would choose, to remain with their existing provider, 41% said that they ‘trusted their pension provider’ and 27% claimed that they had done their research and the company that they had saved with for retirement offered them the best deal.

However, the study revealed that failing to shop around for an annuity could cost the typical annuitant £5,106 over 20 years (17% of their income) or £7,180 (23% of their income) if they had a common condition such as Type 2 Diabetes.

Andrew Megson, managing director of retirement at Partnership, said: “This research clearly illustrates that blind trust can cost people a significant proportion of their retirement income so it is vital that consumers play an active part in their own at-retirement planning.

“Rather than trusting that they are going to get the best rate from their existing provider, they need to speak to an adviser or use one of the many online tools to ascertain whether what they are being offered is fair.

“It is arguably even more important if you have a medical condition or have made lifestyle choices which may make you eligible for an enhanced annuity. Making the right decisions around retirement income can take time but if you weigh this against the benefits you can derive, it is clearly worth it.”

Meanwhile, Fidelity Worldwide Investment, which has launched a new at retirement service to its personal investing customers, has highlighted the common pitfalls during the annuity buying process:

 

 

• Focusing on immediate cash benefits rather than long-term income: The tax-free cash sum available from pension savings is a highly-valued benefit. The natural desire to get hold of this money quickly can lead to people not taking time to identify the right retirement options or, in extreme cases, buying an annuity far too early. Planning ahead and getting help in understanding the pros and cons of the options available is essential.

• Buying an annuity too early: Age 55 is the third most popular age to buy an annuity potentially locking people into low income levels for around 30 years. Most annuities are irreversible contracts and once purchased the terms cannot be altered. Improved life expectancy means somebody buying an annuity could be receiving that income for 20-30 years or more. Income needs will inevitably change over such a long period and the fixed income payments offered by an annuity may not to be the best match for these.

• Buying the wrong type of annuity: Even when customers shop around for annuities, they still may make inappropriate decisions when doing so. Seek advice to make sure you are making the right decision.

• Assuming an annuity is risk free: Annuity purchase is considered a risk free option. Inflation risk is becoming more understood, but still not enough consideration is given to this. An annuity paying £10,000 a year today may easily be worth as little as £6,000 in today’s prices after 10 years. There are also increasing number of marriages and divorces happening in later life, these changes in circumstances can have significant consequences to income needs, but also plans for any death benefits.

• Not making the most of purchasing power: More and more people will be getting to retirement with a number of pension pots. Taking benefits from each separately is likely to be inefficient. Bringing these together ahead of retirement can significantly increase purchasing power if buying an annuity but, can also allow alternative options to be considered.

• Making poor investment choices in retirement: Investment-linked retirement products such as pension drawdown and investment-linked annuities offer the potential for flexibility and increased growth but do have risks. In particular, poor investment decisions in the early years can significantly reduce income levels later on. Those considering these products should take professional advice to ensure they manage these risks effectively at the outset and on an ongoing basis.


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