Cde of conduct will require insurers to provide clear information to help people who retire get best income from pension pots
Hundreds of thousands of people who retire could benefit from an average rise of 20% to their pension income after the launch of a code of conduct for annuity providers and a new annuity service to ensure pensioners are sold the right product.
The Association of British Insurers, the trade body for insurance companies, has developed a new code designed to ensure insurers provide clear information to help people get the best income possible from their pension pots.
The code requires insurers to redesign their information packs to highlight the importance of shopping around for an annuity – an insurance policy which converts a pension fund into retirement income.
When an insurer sells an annuity to one of its own pension customers, it must ask a series of questions to match the right type of policy to the customer's needs. In particular, it must identify whether the customer could qualify for an enhanced annuity, and tell the customer where he or she could buy one if the insurer does not provide this product.
All insurers selling annuities will be required to publish their rates: currently those who only sell to their own pension customers – including Scottish Widows and Friends Life – are not required to publish their rates in the open market. Opening up the rates to comparison will enable customers to gauge whether their existing pension company is offering them a good deal.
The announcement of the ABI code coincides with the launch of a branch-based annuity service by Nationwide building society, which bases its recommendations on products from a panel of six leading annuity providers: Aviva, Canada Life, Just Retirement, Legal & General, LV= and Partnership. The society's annuity service is available on a non-advised or advised basis to people with a pension pot of £18,000 or more.More than half of those approaching retirement do not shop around for the best rates for an annuity and may potentially lose tens of thousands of pounds over the course of their retirement. Research by one annuity provider, Just Retirement, indicates that up to 70% of people could be entitled to an enhanced annuity because of medical conditions or lifestyle choices, such as smoking, resulting in their income rising by as much as 50%.
But Stephen Lowe, director of Just Retirement, says: "Currently 12% of all people buying annuities get an enhanced one. Of the 66% who buy an annuity from their existing pension provider, just 1% end up with an enhanced annuity."
The ABI has already compelled its members to remove their own annuity application forms from the retirement packs sent out to their pension customers to reduce the danger of them going for the easiest, but not necessarily best option.
However, those approaching retirement in the next year must still ensure they are fully informed. Although the code comes into force with immediate effect, insurers need only implement it by 1 March 2013.
Laith Khalaf, pensions expert with the independent financial adviser Hargreaves Lansdown said the code did not automatically apply to non-ABI members, including trust-based, defined contribution occupational pension schemes, which have about 1 million contributing members and 1.2 million non-contributing.
He said: "These schemes are regulated by the pensions regulator, which does have a code which is similar in substance, but it's a statement of practice – something that should be aspired to rather than saying 'this must happen'."
Some occupational schemes have failed to provide sufficient information to members about their annuity options: research conducted by the pensions regulator in 2009 indicated that although 98% of defined contribution occupational schemes offered members the choice of shopping around for an annuity, some 30% had made alleged legislative breaches of retirement disclosure regulations.
Khalaf said this problem could be solved through the planned development of a directory of annuity brokers, which could be available in retirement packs.