4th February 2011
Why is the Open Market Option missed by so many?
When a scheme member reaches retirement they receive a pack from their pension provider advising them of the possible annuity available along with the fact they can take the money elsewhere to obtain a higher income. However 67% do not take advantage of this valuable option, primarily due to a lack of understanding and guidance through the issues.
Rob Tinsley, Head of Retirement Strategy at AnnuitĂ£s explains what AnnuitĂ£s is doing to help scheme members improve their retirement.
In recent weeks, we have seen annuity rates sink to their lowest level for 20 years, thanks to increased longevity, falling bond yields and concern over impending Solvency 2 regulations. If Solvency 2 legislation does come into effect, which could be as early as 2012, annuity rates could plunge even further, with estimates being given at between 10 to 15 per cent.
Background to Solvency 2 If Solvency 2 legislation, in its current formatcomes into effect, life companies will be required to value their annuity liabilities using government gilt rates, rather than using corporate bonds, which they currently favour as they give a higher yield. This means life companies will need to hold more capital to meet their annuity pay-out liabilities - and this in turn could lead insurers to reduce the annuity rates they pay. |
This makes it even more vital that pension scheme members take advantage of the ability to go to the market and obtain the best possible terms for their circumstances. If they are fortunate enough to benefit from an enhanced or impaired rate this could add 40% to their retirement income.
The Open market Option simply means that you ‘shop around’ for the best annuity rate available, rather than taking the rate offered by the provider of your pension fund. Rates can vary enormously from provider to provider, so although it is often far simpler to take the annuity offered by your pension provider, you can often get a much better rate by shopping around.
AnnuitĂ£s are committed to helping as many retirees as possible benefit from the open market option and so we are launching a new communication programme designed to inform members approaching their retirement of all the things that may change in their lifestyle, how to cope with retirement, the options they face and an easy way to use our annuity service to improve their income.
Case study Mr Walker retired at age 65. His pension fund size was £100,000 and he was looking to purchase an annuity. His pension provider was offering him an annuity of £6,790 a year. Mr Walker came to us to see if we could source a better rate. Through our research, we discovered that although his provider was not offering the lowest rate available, there were a number of providers offering significantly more. We ended up securing him a rate of £7,191 a year, £400 more than his existing Provider and £900 more than the lowest on the market. If Mr Walker had have been a smoker, his annual rate would have been £2000 higher than he was originally quoted. |
Our programme will commence 5 years before intended retirement providing information on how lifestyle could change, managing more time on your hands and making sure pension funds are in a safe haven in the last 5 years. This will also look at how many may continue working in some capacity and the impact and structure of finances should this happen.
As retirement approaches we will provide more specific information about the options and choices members face at retirement and the best ways to ensure the right decisions are made based on personal circumstances and objectives.
One such option that is well worth investigating that could provide members with a significantly increased annuity rate, and that is to see if they are eligible for an enhanced or impaired annuity.
Many people do not appreciate the benefit they can gain from enhanced annuities, but it is estimated that 50% of those retiring are eligible for some form of enhancement. Currently only 16% of the annuity market is on an enhanced basis, therefore many are missing out on better annuity rates than they are currently receiving.
A number of factors are considered when assessing eligibility for an enhanced annuity, including health, lifestyle, smoking habits and in some cases the postcode area in which people live. Insurers consider whether these factors have an impact on perceived life expectancy and this could mean receiving a significantly higher income, in some cases, a 30-40% increase is achievable.
We are committed to helping as many of our clients as possible in achieving the best annuity rate on the market for their circumstances. 40% of our clients have benefited from these increased rates, but if an enhanced annuity isn’t available everyone should still exercise their Open Market Option as in the majority of situations this will lead to increased income throughout retirement.
With annuity rates unlikely to improve and product choice becoming more complex, seeking advice is crucial at and during retirement. For more information about our Retirement Service, click here Or contact Rob Tinsley Head of Retirement Strategy Tel: 0844 209 3160 Email: robtinsley@origenfs.co.uk |
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