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Brief overview of the new ABI Pensions code

November 19, 2012

New rules are being introduced (and come in effect in March 2013) to help ensure that pension providers give their customers all the information required to help them buy the most appropriate annuity with their retirement funds.

For a while now the current arrangements that are in place are not deemed to be working. As everybody who saves into a defined contribution or money purchase scheme must change and convert their retirement fund into a lifetime income. This is largely done via the purchase of an annuity.

 


However, unlike some financial products, once an annuity is purchased it cannot be changed or switched to something else. The problem with this is that just too many people are buying annuities that don’t give them real value for money or are simply inappropriate. Therefore, this new code hopes to resolve these problems.  

It appears the reason that people are buying inappropriate annuities is because of the pension providers. As when people reach retirement, the pension companies write to them indicating what kind of income they can expect from their retirement fund. And because of this it is being said that the information given is sometimes incomplete. And also deemed to be one-sided to persuade the person buying the annuity to buy the annuity the pension company is keen to sell them. The annuity being offered is seen to be poor value for money.

I read that shortly, all pension fund providers will have to give those customers close to retirement an information pack that provides and includes all the key information on the annuity choices they can make. As currently, this information is not provided to their customers. This annuity information pack will spell out their opportunity and right to shop around for a pension annuity that could be perhaps be provided by another industry pensions provider. As fewer than 50% of retirees actually shop elsewhere, and in doing so deny themselves the opportunity to improve their lifetime retirement income by as much as 40%. But my thinking is that, even if it is only 15-20% more, it is better being in your pocket than somebody else’s pocket.

It appears from what I understand the information pack will also explain the importance of providing an income for a partner via the purchase of a joint life annuity and the availability of annuities that pay an enhanced income that recognises ill health or certain, shall we say, harmful habits, such as smoking. Pensions companies will also have to make their customers aware of their alternatives to traditional level annuities such as:

Annuities that increase payments in line with inflation. And short-term annuities that allow you to buy another annuity at the end of their term and drawing an income whilst keeping your pension fund invested.

Also an application form can only be sent out if the pensions provider has created and included a personalised illustration such as a graph for instance that takes into account key facts such as: Their health and Marital status.  So for example, if the pensions company doesn’t offer a product such as an enhanced annuity it must say so.

Pensions companies will also have to guide and direct their customers in the direction of retirement specialists who can offer the impartial retirement income advice or via websites such as www.financial planning.org.uk.  

The new code will apply to 50+ companies, and as yet I have not yet sourced who these are. But once I know I will add them to this article, if of any help that is.

For more information on this area, please click here