The Association of British Insurers (ABI) has admitted that it cannot produce figures to show the percentage of people who use the Open Market Option and shop around at retirement for the best Annuity rate.
Benefits of the Open Market Option
The Open Market Option, or OMO as it is sometimes called, allows retirees to shop around for the best Annuity rate by using an online pension Annuity calculator or by taking advice from an Independent Financial Adviser.
Shopping around has real benefits, an Annuity rates comparison between the best and worst provider can show a difference of up to 40% in the annual income payable.
However, despite industry campaigns to encourage shopping around not all retirees use the Open Market Option to get the best Annuity rate. Opinions vary as to why retirees do not use the Open Market Option, however many industry experts believe that inertia, the complexity of the paperwork and general distrust of the financial services industry are all possible reasons.
Whilst the ABI produce figures to show the percentage of people switching from their current pension provider to buy their Annuity, these include retirees who are forced to make this switch because their current pension provider do not offer Annuities.
For example Skandia do not sell Annuities and have tied up with Legal & General, the same is true of Royal London, who recommend Prudential Annuities.
The ABI figures show that 44% of people bought their Annuity from an insurer different to their current pension provider, however because the figures include retirees who are forced to switch they do not give an accurate picture of the take up of the Open Market Option.
Simply put the number of people switching is not the same as the number of people using their Open Market Option.
Industry experts believe that getting an accurate figure for the number of people using the Open Market Option is vital to assess whether the message about the benefits of shopping around is getting through to retirees.
Larger pension pots
The ABI figures show that the percentage of retirees switching rises for larger pension funds, this is likely to be a result of people shopping around for the best Annuity rate, however this cannot be confirmed due to the way the ABI produce their figures.
60% of people with a pension pot between £50,000 and £200,000 bought their Annuity from a different company to their current pension provider; the figure rose to 77% for pots between £200,000 and £250,000.
Use the Open Market Option
Retirement specialists recommend that retirees always shop around for the best Annuity rate and exercise the Open Market Option if a different company can provide a better Annuity rate than their current pension provider.
It is also important for retirees to shop around to see if they qualify for an Enhanced Annuity due to health issues or lifestyle factors such as smoking.
Using an online pension Annuity calculator is a simple way to demonstrate the benefits of shopping around and the higher incomes which can be achieved.
Scottish Widows re-enters the Annuity market
In a separate development Scottish Widows announced yesterday that they are to re-enter the Annuity market.
Lloyds Banking Group director of insurance Toby Strauss said: “We are committed to providing customers with products that reflect their changing needs and with people living longer and rapid growth in demand for annuities we feel this is the right time to signal our move into this market.”
Industry experts and Independent Financial Advisers alike welcomed the news, citing increased competition in a market dominated by a relatively small number of Annuity providers.