Are insurers letting their customers sleepwalk into the wrong retirement choices?

Next to buying a house, choosing what to do with your pension when you reach retirement is probably the most important financial decision you’ll ever make.

If you’ve been saving all through your working life, you my have amassed a six figure sum. And if you decide to hand it all over to an insurance company in return for a fixed income (ie buy an annuity), it’s a one-way ticket: once you’ve signed your money away, you’re locked in for life and have no option to renegotiate.

One of the biggest scandals of the past couple of decades has been insurers’ willingness to allow customers to sleepwalk into retirement plans that are not necessarily the best value for them. In recent years, only around a third of people bothered to shop around for the best deal when they reached retirement, with the rest simply buying an annuity from their existing pension company – and in doing so, they often obliviously sacrificed hundreds or even thousands of pounds of income every year.

Insurers’ willingness to profit from their customers’ lack of understanding about pensions was, to my mind, morally reprehensible. And while the industry was given several chances by government and regulators to improve transparency, and to help customers make better decisions, very little progress was made.

Radical reform

Finally, at this year’s Budget, the Chancellor announced a radical set of reforms that will turn the retirement market on its head. By giving people more choice about what they do with their pension, the Chancellor removed people’s dependency on annuities, and paved the way for a new retirement market where people will have many more options. The result should be the end of sleepwalking customers, and a more healthily competitive insurance market.

Although these changes were a bolt from the blue for the industry, it’s been shocking to see how slow companies have been in updating the literature that they send to customers when they are about to retire.

Working with the Sunday Times, Fairer Finance looked at the wake-up packs that are being sent out by the largest pension companies to their customers. Only one company had updated the main letter that it sends out – with companies such as Legal & General and Friends Life doing very little to talk to people about their options beyond buying an annuity.

In a couple of cases, companies were enclosing Money Advice Service guides with their wake-up packs – but these hadn’t been updated either.

Although all of the providers had drawn up a one pager, pointing out that there had been some changes in the Budget – most of these were riddled with jargon, and did nothing to help people better understand their options.

Lack of investment in IT is a crime

The industry often defends itself in these instances, by saying that it can’t make changes to its literature in a hurry – as its systems don’t allow it. But if you operate in a field that is subject to sudden changes in regulations and rules, you need to be able to change your product literature at a moment’s notice as well. Lack of investment in your IT systems is not a reasonable defence.

Before the Budget changes were announced, the industry’s record on transparency was poor. But in the new reality, where people’s options in retirement are very different, the packs that customers are receiving look worse than ever.

If customers are still receiving packs which push them towards an annuity, I’d suggest that the regulator forces companies to write to these clients again – to clarify their true set of options.

In the meantime, thousands of people are continuing to receive information that is out of date and could lead them to make the wrong choice as they enter retirement.