The UK’s Pension Policy Institute (PPI) is urging savers to “shop around” before choosing an annuity provider.
This is because its research, sponsored by Retirement Line and Canada Life, showed that around £130m ($177m, €151m) could have been lost in the first year if people had not looked at what was on offer on the market.
This translates to around £7,000 in income for each £100,000 pension being gained over retirement, the PPI said.
As a result, remaining with their current provider and not looking at external firms is likely to hurt them in the long run.
The institute also discovered a general lack of engagement with defined contribution (DC) pensions as well as a low level of trust in the industry, which are big influences in the choices people make in retirement and might limit the use of annuities.
But for those that bought an annuity product, worryingly, nearly half (44%) did so without any financial advice or guidance from Pension Wise.
Situation ‘getting worse’
Nick Flynn, director of retirement income at Canada Life, said: “The annuity market is worth £4bn annually, and yet customers are not getting the most value from their pensions due to inertia or simply not understanding the importance of shopping around.
“Despite the introduction of pension freedoms and information prompts, the situation appears to be getting worse. People don’t know what they don’t know, and it isn’t simply about securing the best deal, it is equally important to buy the right shape annuity. Without professional assistance or advice, this is at best difficult.
“The PPI is right to shine the spotlight back on the market and start a debate. Just as the furlough scheme winds up, many thousands of over 55s will be considering their working futures. Many may find it hard to return to the workplace and seek the security of replacing their salary in retirement.
“An annuity is the only guarantee in town, so it’s important anyone considering their retirement options seeks guidance and advice to make the right decisions for their circumstances.”
A mistake for life
Mark Ormston, director of propositions at Retirement Line, added: “In recent years, approximately half of all lifetime annuity customers have potentially missed out on higher annuity income. This means lower income for the remainder of their lives, having a direct financial impact throughout later life.
“This additional income could also have provided the flexibility to improve the protection of the annuity, by adding a partner to the policy, guarantee periods or capital protection.
“There are no second chances with a lifetime annuity. It is so important for those considering a lifetime annuity to make sure all their relevant health and lifestyle information has been accurately collected and that they have ‘shopped around’ for the highest annuity income available.
“The annuity market is expected to grow in the future and, as a result, this is not an issue that will simply go away. The annuity market must aim to meet customers’ needs, delivering clear and accurate communications throughout the customer pension income journey.
“Above all else, they must ensure customers have easy access to the highest annuity income available to them.”