Exploring options

The measures proposed by the government following its review of the annuities market and the open market option process should be welcomed by both consumers and the pension industry but they should not be viewed as a substitute for proper point-of-retirement advice.

In more recent years, much of the focus on providing people with the right planning advice has been on the establishment of a retirement savings plan and what the best types of plan might be for different individuals. With cost seemingly being the main driver, as far as the government was concerned, the industry first had stakeholder pensions thrust upon it and personal accounts are due to follow in a few years time.

However, up until now the government has paid very little attention to making sure people buy the “right” retirement income. It has been largely left to the independent or whole of market sector to provide people with the most suitable arrangements, at the best price.

With differences between the best and worst annuity rates being up to as much as 20pc, it is entirely possible for someone who has made savings into a low cost savings plan to end up with a lower level of income than someone who has saved in a more expensive plan, simply because they have not had access to the best rates.

Public guidance
Arranging the most suitable source for income in retirement is not simply a question of finding the best rates but also understanding the most suitable way to set up the annuity. Many people will have little or no idea how inflation might affect their pension income, how much provision they should consider making for a spouse, what sort of guarantees they could be asking for, or indeed whether an annuity is the most suitable way for them to generate retirement income from pension savings.

For many people an annuity is an excellent way of generating retirement income but there will always be those for whom that route is not suitable, and they may need to look at alternatives, such as investment-linked annuities or income drawdown.

What is clear is that the vast majority of people approaching retirement will simply not know what is likely to be best for them, or be aware of all the options available to them (of which an open market option annuity is just one).

A guidance tool, such as that proposed to be provided by The Pensions Advisory Service, will no doubt be helpful, as will the steps to be taken by the DWP, FSA and the ABI. However, the basis on which an annuity is established is, in most cases, irreversible and unchangeable. Therefore the best way forward for the vast majority of people will be to seek advice from professionals who can advise them on all their options at retirement and provide them with the best solution available at the time, according to their needs.

In terms of annuity income – based on the Annuity Bureau’s own experiences and ABI figures for annuity purchases in 2006 – it is estimated that collectively, retirees in the UK miss out on some £53m of income every year by not exploring all their options.

If the government’s measures based on the open market option review can help to address that situation then that will be very good news for people converting pension savings into pension income.

Michael Thraves is technical consultant at Alexander Forbes Financial Services