Jeff Salway: Shop around to avoid pension disaster

Published on Sunday 5 February 2012 00:00

IT COSTS retiring workers around £1 billion in pension income, a figure set to treble over the next decade, and those on the lowest incomes are the hardest hit.

It’s little short of a scandal and, while it’s nothing new, the financial and human cost of failing to ensure that people get the right advice when deciding what to do with their hard-earned pension pot is growing all the time.

Yet despite the overwhelming need for a change in tack, half a million people retiring this year will be shortchanged on pension funds that have already been hit by two bear markets in the past decade.

The problem is that when workers with defined-contribution pensions come to retire they have to take perhaps the biggest financial decision they will ever face: what to do with their pension funds.

Millions make the wrong call – one for which they pay the price for the rest of their lives – largely because they are given insufficient information or access to advice.

The simple fact is that if everyone took advantage of their right to shop around for the best annuity available to them, far fewer people would face poverty in retirement.

There’s never been a better time for the insurance industry to act. With annuity rates at a record low and investment returns hit by volatility, retirees must be given every chance to get the best deal for their lifetime savings.

Although there is a difference of some 20 per cent a year between the income paid by the best annuity on the market and the worst, more than half of people automatically take the deal offered by their existing provider.

On Friday, the Association of British Insurers (ABI) ended the latest in a long line of consultations aimed at improving the annuity process. It wants members to do more to encourage customers to shop around for their annuities.

All very well, but when millions of people risk poverty in retirement it’s just not good enough. The National Association of Pension Funds yesterday estimated that around 500,000 people retiring each year needlessly miss out on up to £1 billion in pension income because of the dysfunctional annuity system.

And with automatic enrolment into workplace pensions coming into force from October, it is set to become an even more expensive failure that will cost millions dearly unless more decisive action is taken.

Taxing times for HMRC

YOU have to feel sorry for the tax office. All right, you don’t, but I’ve always wanted to write that. However, I did feel a tiny twinge of sympathy for HM Revenue & Customs (HMRC) when it was criticised last week for failing to update its adverts to reflect an extended self-assessment deadline.

Those running it close with their tax submissions have been given an extra two days to file their returns after a strike by HMRC call centre staff threatened its ability to deal with the volume of queries expected. No-one filing on 1 or 2 February will be hit by an automatic late fine.

Tax commentators have complained that by failing to change their adverts to reflect the new deadline, HMRC risks causing confusion.

For the tax office it’s a no-win situation. It claims it can’t afford to change the ads and that it won’t get its money back if it withdraws them.

Yet if it had done either of those things it would have been slammed for wasting taxpayer money. Its decision to leave the ads as they were should be welcomed as evidence that HMRC has finally realised the extent to which it is out of touch with the times.

Revelations over the tax-saving deals cut with blue chips such as Vodafone and Goldman Sachs have stretched public patience to breaking point at a time when it is cracking down on small-scale tax evasion like never before. In giving people extra time to file and refusing to pay tens of thousands for new adverts, HMRC has for once got it right.

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