When it comes to choosing an annuity, consumer apathy has always meant the majority does not get the best deal.
Whether because of ignorance or lethargy, most of those reaching retirement will simply select an annuity from whichever provider has managed their pension pot, securing an income for life irrespective of whether they could do better elsewhere.
Legislation was introduced more than a decade ago enforcing the advertisement of the open-market option to all approaching retirement, but take-up has remained low.
However, against this backdrop of inaction, one area that has seen a slight upturn is the enhanced annuity market.
Enhanced annuities offer those retiring the option of a higher annuity rate on the basis of their lifestyle if, say, they smoke or are obese, while impaired life annuities pay more to those who have suffered specific medical conditions. In short, people who are likely to have a reduced life expectancy can, as a rule, achieve a higher retirement income. In some cases, an increase of 30 to 40 per cent is realistic.
This means that many of those who could get a better deal by shopping around for their annuity, could get an even better deal by choosing a more relevant type of annuity, even if they stay with the same provider.
Benefits of advice
Slowly the at-retirement market has realised the benefits and enhanced annuities have seen a decisive upturn in sales. At the time of writing, enhanced annuity business has seen a compound increase in volume of 28 per cent since the start of 2007, but there is much further to go.
Graph 1, which shows total sales as a proportion of the entire UK annuity market, illustrates this point. The trend is clearly upwards, but many believe the growth is slow in relation to what the products are capable of offering.
Still, as the graph shows, each of the past four years has seen a steady rise and, according to Towers Watson’s figures, the second quarter of this year saw sales of enhanced annuities top £1bn for the first time.
A closer look at these figures shows a clear distinction, though. Chart 1 reveals the results of research from the Association of British Insurers (ABI) into the impact of advice on annuity sales. Among the 7.2m using a whole-of-market or independent adviser while choosing an annuity during 2011, just under 40 per cent (2.9m) ended up with an enhanced annuity. Of the 3.4m non-intermediated sales during the same year, just 148,624 – 4.4 per cent – did.
Dr Yvonne Braun, head of savings and retirement at the ABI, is reluctant to be drawn on what is an appropriate number to be recommended enhanced annuities. She says the 40 per cent estimation may be too high or too low, but that the 4.4 per cent figure is definitely too small.
The ABI’s focus is part of a wider drive to ensure everyone gets the best annuity available. The organisation is currently putting together an initiative to hammer home the benefits of shopping around for an annuity. Dr Braun is keen to point out that the ABI is not necessarily pushing those approaching retirement to automatically switch providers, but rather to ensure the annuitant has at least looked around before buying. There are, of course, situations where they would be better off purchasing an annuity from their existing provider, such as when they have valuable guarantees in place.
