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Don’t miss out on the best annuities
Pension providers will be required to inform savers that they might do better with an enhanced annuity. David Prosser explains.
It has proved one of the toughest nuts to crack: despite a series of regulatory reforms, 80% of pension savers who buy an annuity each year still do so through the firm with which they built up their pension fund, even though shopping around will often secure a substantially higher income. And now the latest attempt by the Financial Conduct Authority (FCA) to tackle this issue has come under fire, with advisers and pension providers arguing that it could lead to more people missing out.
Last month, the FCA announced new rules for pension providers and financial advisers dealing with people who are in the process of converting pension savings into a guaranteed lifetime income.From next March, savers will have to be told if a better annuity rate is available elsewhere, including details of how much extra annual pension they might be able to secure, though not the details of the providers offering better deals.
The FCA hopes that providing savers with cash figures showing how much they might be missing out on will shock people into taking action, with providers required to refer them to the government-backed Money Advice Service's annuity comparison tool to locate the best deal.
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However, the FCA's rules only require pension providers and advisers to give savers quotes based on standard annuities, even though sizeable numbers of them will qualify for enhanced annuities that pay out higher incomes to people who have lifestyles or health conditions that are likely to reduce their life expectancies. The omission of enhanced annuities from the new rules reflects the difficulties for providers of sourcing accurate information; securing such quotations requires the provider to have detailed information on each saver's personal circumstances, while to comply with the FCA's new rules, providers will only need to access standardised comparison tables.
However, groups such as the Association of British Insurers warn the FCA's decision could mean that large numbers of pension savers miss out either because they decide the higher income apparently on offer from shopping around isn't worth the bother, or because even when they do look elsewhere for a quote they do not consider enhanced products. The detriment could be widespread. Although annuity purchases have declined since the pensions freedom reforms of two years ago made it easier for people to draw pension income down directly from their savings, some 50,000 people a year are still buying annuities.
Moreover, as many as two-thirds of these savers could be eligible for enhanced annuity rates by some estimates. That reflects increasing sophistication in the pensions market ten years ago, enhanced annuity rates were only offered to savers with very serious health conditions; now, however, providers use detailed underwriting techniques to offer better rates to people from particular professions and those who are overweight. Where savers are in particularly poor health, the annuity rate on offer could be anything from 50% to 100% higher, but even in less clear-cut cases, many savers are missing out on uplifts of 10%-20%.
For its part, the FCA points out that pension providers will be required to inform savers that they might do better with an enhanced annuity, even if they don't have to provide quotes. Currently, however, the majority of enhanced annuity products are sold to a small minority of savers who buy through an independent financial adviser.
Pension Protection Fund sweeps to Hoover's rescue
Some 7,500 members of the pension scheme at Hoover are to see responsibility for their benefits transferred to a rescue scheme, even though the household goods company continues to trade. The Pension Protection Fund (PPF) has agreed to take on the Hoover scheme after accepting the company is likely to go bust within a year unless it is able to rid itself of its pension liabilities.
The PPF was set up to take on the pension schemes of companies that have gone out of businesses, but has the powers to intervene if it believes a company that is still solvent would otherwise inevitably fall into insolvency. The Pensions Regulator, which must approve such transfers, said that given an assessment of Hoover's finances, the PPF move was in the best interests of members. Before it transfers the pension liabilities, Hoover is to pay £60m into the pension scheme. It will also hand the scheme a 33% stake in the company, which would allow it to benefit if Hoover's prospects improve in the future.
Nevertheless, the transaction is not without controversy. Hoover, which has a £250m deficit in its pension fund, largely closed its operations in the UK after being bought more than 20 years ago by the Italian group Candy, though it continues to operate a sales and distribution subsidiary here. Candy has no legal obligation to provide Hoover's pension scheme with additional funding and the Pensions Regulator says it has declined to do so.
Moreover, the switch to the PPF means more than 2,100 members of Hoover's scheme who have yet to retire will see the value of their pension benefits reduced immediately by 10%. And while the pensions of more than 5,300 former Hoover workers already receiving benefits should be protected in full, the PPF rules allow for smaller future pension increases.
The PPF said transactions of this nature were relatively rare, with the regulator keen to ensure that companies can't simply offload pension promises. However, while there have only been a handful of similar cases over the past decade, the increasing size of the deficit in many employers' pension schemes could see the regulator come under pressure to sanction more such deals.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
