Don't throw your pension away
To say the last decade has been unkind to pension savers is something of an understatement. Numerous company pension schemes have gone bust, while Equitable Life's dramatic collapse in December 2000 affected more than one million policyholders, effectively wiping out their lifetime savings in one blow.
The number of final salary schemes (the more generous and secure pension schemes) has also dwindled rapidly since 2000, when hundreds of schemes were open. Now just three FTSE 100 companies offer final salary schemes to new employees.
To make matters worse, poor investment performance by pension funds has become the norm, after stockmarkets around the world crumbled following the credit crunch.
Watch out moneywise TV episode: Get more money from your pension
However, while these events have delivered some heavy punches to pension savers, the knock-out blow, as far as I'm concerned, is the problem that occurs when you finally want to draw an income from your (minuscule) pot.
The fact is that you could end up with up to 70% more income every month once you've retired, without putting any more money into your pension fund. Improving your retirement income is legal and doesn't involve any extra risk to your money. But it's something the pension provider is unlikely to highlight. Why? Greed, of course.
Know your pension
If you've got a pension, you'll probably use it when you retire to buy an annuity (which pays a regular income for life). Not all annuities are the same, however, and the only way you can be sure to get the best deal is by comparing rates from different providers.
But two-thirds of pensioners take the annuity offered by their current pension provider - often because they aren't aware they can look elsewhere. And if you make the wrong decision, that's it, as once you've bought an annuity you can't change it.
This could have dire consequences, since there is a massive difference between the best and worst rates. On average, you could improve your annuity by around 15% to 20%, but it could be as much as 70% if you have health problems that entitle you to an enhanced annuity.
Part of the problem is that many of us are unaware we have a choice and that 'shopping around' could make a big difference. However, the main issue isn't ignorance but the fact that pension companies exploit customer apathy to the full, profiting massively from easy annuity sales to their existing pension holders.
They want to preserve the status quo so they don't have to worry about competitive rates - so much so that it's suggested many pension providers have 'conversion targets' (from pension to annuity customer) of around 60% to 70%.
Taking advantage of ignorance
In addition, many of the big players, including L&G, Aviva and the Pru, get a lot of reliable business from nice little 'strategic partnerships' with other companies (from Openwork, Equitable and Royal London to Saga, for example), which recommend a particular provider's annuities to their customers as the preferred choice.
Companies have also been trying to keep enhanced annuities a secret so they can pocket even more of our cash. No wonder then that only 10% of those eligible for enhanced annuities actually end up with one. I'd be happy to put good money on this being the next big pension scandal.
With final salary schemes (which don't require an annuity) likely to be a distant memory come 2020, more pension savings will end up in defined contribution schemes (which do) - so the problem is only going to get worse.
The retirement income market was worth £13 billion in 2009, according to the Association of British Insurers. Towers Watson, a professional services firm, forecasts this will increase to £23 billion by 2013.
It's time to call for an end to the exploitation of consumers by pension providers. Moneywise wants a new, fairer system that educates and encourages everyone to consider the best options for their retirement income.
Join our annuity campaign and sign our petition here
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.