The £3.2bn pension boost

A new online portal has been launched that aims to combat the vast pension income lost over the past decade because of poor value annuities...

Filling out forms is no one’s idea of fun. But if that form could boost your income, you’d hope that you would think twice before chucking it in the bin. Yet millions of people don’t – and as a result collectively lose millions of pounds every year in possible income.

It’s all to do with enhanced annuities, a pension mechanism that provides a higher level of income for those with below average life expectancies. This is because the provider doesn’t expect to have to pay out at this level for as long as they would for other retirees.

The problem is that to be eligible for this pension boost, you have to apply for it. And many people who should – don’t.

Enhanced annuities

Retirement specialist Partnership estimates that £3.2 billion in income has been lost over the last decade because of unclaimed enhanced annuities. 40% of retirees are eligible for enhanced annuities due to health or lifestyle issues, yet only 10% will shop around to get the best deal. When you consider that enhanced annuities can boost a pension by 37% in some cases, it’s not hard to see how this £3.2bn black hole has accumulated.

Eligibility criteria for enhanced annuities are wide ranging and can significantly influence the rate you are given. Among the factors that will affect your rate are...

Smoking
High blood pressure
High cholesterol
Diabetes
Stroke
Emphysema
Heart attack
Obesity

As a result the application process can be very lengthy, complex and intrusive, meaning that many retirees will not bother with it.

It’s this hassle that the Leeds-based financial advisory firm Heath Lambert is attempting to combat through the use of a new online annuity tool.

Online portal

The online portal is similar in layout to our insurance and mortgage tools and allows users to quickly calculate a personalised annuity rate. From here retirees can process and purchase annuities; if their pot is over £40,000, providers available include Aviva, L&G, Canada Life, LV=, Prudential and Aegon. And if a customer’s pot is less than £40,000, standard annuity quotes will be taken from Canada Life.

But what’s really different about this new tool is that it also includes a simplified medical questionnaire designed to identify those eligible for enhanced annuities. This questionnaire is just 10 questions long and there is no need for a GP assessment. Customers can then go on to purchase enhanced policies, underwritten by Partnership.

Find out why it’s crucial to keep your pension contributions up even when money is tight

As well as vastly simplifying the process of applying for enhanced annuities, Heath Lambert has also made sure that the medical questionnaire is as non-invasive as possible. The advisory firm found that in addition to the lengthy process, many people were put off applying for enhanced annuities on account of the personal and uncomfortable nature of some of the questions. This was especially true for retirees who had suffered a traumatic injury in their life that they did not wish to recount.

In addition, the somewhat sinister nature of enhanced annuities may also immediately put some off applying.

By simplifying the process, Heath Lambert, along with Partnership, are hoping that more people apply for enhanced annuities and boost their pension, recouping some of the £3.2bn that has been lost in the last decade.

£7bn of lost income

The new system also aims to encourage retirees to shop around when looking for an annuity; especially if they have a larger pot. Partnership estimates that on top of the £3.2bn enhanced annuity black hole, a further £3.8bn of standard annuity income has been lost in the past decade, simply because pensioners have not shopped around for the most competitive rate.

That makes a total pension boost across the market of £7bn, just for shopping around a bit and filling out a simple questionnaire. And no, you’re not alone in thinking that this is almost certainly too good to be true.

The immediate question that begs to be asked of this new portal is quite simple. Why has no one thought of this before? After all, online insurance tools have been around for years.

Well, as it happens, online annuity calculators and quote centres have also been lurking around for years. But still, an air of passivity has seeped across the annuity-buying population. Public apathy for shopping around combined with the sinister nature of annuity products can be part blamed for this. But it’s also hard not to find some fault in the way that providers market and sell annuities to existing pension customers when they reach retirement age.

This tip is absolutely vital to know if you want to make the most of your pension pot at retirement.

It’s estimated that around three-quarters of retirees will stick with the pension provider they have saved with when it comes to buying an annuity. A statistic like this is proof not only that the public are not shopping around, but that the pension industry is taking advantage of this widespread apathy.

Yes, pension providers are businesses and hence cannot be criticised for aiming to turn a profit. But when it comes to something as important as buying annuities, it’s extremely worrying that so many people are getting such poor value. Factor in the possible implications on annuity rates of the recent ECJ gender ruling primarily concerning insurance and it becomes essential that annuity rates are made as detailed and specific as possible.

Any attempt to personalise annuity quotes and encourage retirees to shop around for their rest-of-life income product should be applauded.

Will this work?

Is this new online tool a good idea? What are your tips on getting the best annuity?

Let us know by using the comment box below.

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