Pressure from consumer rights groups has led to the Association of British Insurers (ABI) adopting a new code of conduct governing the sale of annuities.
The new code of conduct follows a recent report from the National Association of Pension Funds (NAPF) which suggested that the current method of selling annuities was contributing to a £1 billion shortfall in pension income.
The main problem with the existing system was that it didn’t encourage people to shop around for the best deal for their pension pot. The NAPF report that the failure to shop around could cost a person up to half of what their pension could be worth.
Over half a million people retire each year and it is estimated that at least half of these do not shop around and instead simply buy an annuity from their existing pension provider. As an annuity provides an income for the remainder of a person’s life, the loss of income can amount to a great deal over time. Experts always recommend shopping around when it comes to buying an annuity.
The new code of conduct by the ABI will go some way towards encouraging people to change their behaviour when considering what annuity to buy with their pension pot.
Insurers usually send out a retirement pack when customers approach retirement age. The packs tended to include an application form for one of the insurers annuities. In the past, many people would simply fill in the form and return it, without considering shopping around. However, the new code requires these retirement packs to place more emphasis on shopping around, whilst banning the automatic inclusion of an application form. The packs will also include
guidance on how you can shop around.
Where insurers are selling an annuity to an existing customer, they will also be required to ask them about any medical conditions they have. Many people may be entitled to an enhanced annuity, depending on their circumstances, which lead to a much higher pension income. If the pension provider does not offer this type of annuity, they will be required to tell the customer how to find out who does.
Many insurers also do not necessarily publish their annuity rates, particularly those that are offered to existing customers. This can make it difficult to shop around, so the ABI code of conduct now requires their members to publish their annuity rates.
The code has been introduced, but it’s important to note that members of the ABI do not have to implement it until March 2013. Non-members have no requirement to meet the ABI code.
Otto Thoresen, from the ABI, said: “These changes are a big step forward for customers at retirement and were informed by extensive consultation and consumer research. Improved processes, better signposting and transparency will combine to make customers more confident and more able to make decisions about their retirement income.”
The new code of conduct has been welcomed by both the Treasury and consumer groups alike.