Few options available for those entering retirement with a small pension fund

Published on Friday 23 May 2008 21:13

INVESTORS approaching retirement with a pension fund of less than £10,000 have little chance of shopping around for a competitive annuity deal, according to Standard Life.

While annuity rates are at their highest level in five years, they have fallen 30 per cent over the past decade, new figures from Moneyfacts have shown.

Yet too few people approaching retirement shop around for the best deal, while the Financial Services Authority recently accused insurers of failing to inform their customers of the types of annuities available and how they can exercise the open market option (OMO), which allows investors access to other annuity providers.

But retirees with small pension funds do not have an open market from which to choose. Standard Life said that for the 28 per cent of its customers with a purchase price of less than 5,000, there is one alternative provider available.

And just five other providers will offer a price for the 22 per cent of its customers with a pension pot of between 5,000 and 9,999.

"For very small purchase prices, people have little to gain when they do shop around as prices available from the limited number of providers in the market are not significantly different," said John Lawson, head of pensions policy at Standard Life.

"There has been a lot of talk about the big difference between the best and worst annuities available, but that's only for pension funds of more than 50,000. Below that there's not much to choose from, even among the big names."

As the administration costs are the same regardless of the size of the policy, there is little commercial incentive for providers to offer small annuities.

Some of the biggest life offices, such as Legal & General and Standard Life, are the exception because they have the scale to run unprofitable annuities.

The issue will become more significant in 2012 with the introduction of personal accounts, into which employees not in occupational pension schemes will be enrolled automatically.

"Personal accounts will create more small pension funds that will have to be used to buy annuities," said Lawson.

"There will be a real issue as to how you get the money into the market, so the government may need to step in."