Research suggests that customers are missing out on billions of pounds by failing to apply for an enhanced annuity and that advisers could be part of the problem.
Independent research commissioned by Oxford Economics, on behalf of the Pension Income Choice Association (Pica), found customers is giving away between £3 and £7bn because of inertia in relation to annuities. The research suggests that many clients are not claiming enhanced annuities - which pay a higher amount due to medical conditions or lifestyle reducing likely life expectancy – even though they would qualify for one.
The failure of customers to engage with enhanced annuities shows the current open market option (OMO) system is not fit for purpose and there is a potential gain that can be achieved if people shop around at the point of retirement.
Research by pension provider Just Retirement said that out of all annuities purchased in 2010, approximately one in five customers attained an enhanced annuity. The company said that in the occupational market this number dropped down to around one in 20.
The pension provider also claims that the additional income attained by securing an enhanced annuity could be anywhere between 10 per cent up to 50 per cent for very serious illnesses.
A trial conducted by Just Retirement involving financial advisers and medical professionals showed that seven in 10 of those approaching retirement should qualify for one of these products. They teamed up with a network of independent financial advisers to pilot a trial scheme called tele-underwriting, which involved those who wanted to purchase an annuity talking to a medical professional over the telephone before they saw an IFA.
Just Retirement claimed customers were very happy to disclose all their details but IFAs generally did not like spending lots of time collecting this information. Stephen Lowe, director of specialist annuity firm Just Retirement, said customers needed to specifically ask their financial intermediary or pension company whether they provided enhanced annuities and volunteer to disclose their medical and lifestyle information. He said: “Across the market around one in five customers get the benefits of additional income by selecting an enhanced annuity.
“Our research shows the number of people that could qualify is closer to three in five and in our recent tele-underwriting pilot the number of people qualifying was closer to seven in 10. “Tele-underwriting is a way to take the problem off the IFA. It is an example of not sitting around waiting for the law to change but starting something practical.”
