An independent survey conducted by Oxford Economics on behalf of Pension Income Choice Association found that clients are giving away between £3 and £7 billion because of inertia dealing with annuities.
The research found that many clients fail to claim enhanced annuities despite qualifying for one due to their medical conditions or life expectancy reducing lifestyles.
The failure of customers to claim enhanced annuities showed the current Open Market Option (OMO) was not fit for purpose, said Tom McPhail, head of pensions research at Hargreaves Lansdown and chairman of PICA.
“The research shows the potential gain that can be achieved if people shop around at the point of retirement”, he said.
Out of all annuities purchased in 2010, roughly 20 percent qualified for an enhanced annuity, said pension provider Just Retirement.
The additional income that can be attained by qualifying for an enhanced annuity can be anywhere between 10 and 50 percent, depending upon the severity of illnesses.
“Across the market around one in five customers get the benefits of additional income by selecting an enhanced annuity”, said Stephen Lowe, director of Just Retirement.
Just Retirement had commissioned a survey by teaming up with a network of IFAs to pilot a trial scheme called tele-underwriting, which involved potential clients talking to a medical professional over the phone before they met an IFA.
“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”, he said.
“Tele-underwriting is a way to take the problem off the IFA. It is an example of not sitting around waiting for the the law to change but starting something practical”, he added.
“The tele-underwriting scheme illustrates that the industry is developing innovative solutions to help people shop around”, said Mr. McPhail.
However, time was a constraint with tele-underwriting, said Philip Brown, head of retirement products at the firm Partnership. “The tele-underwriting scheme illustrates that the industry is developing innovative solutions to help people shop around”, he said. Agreed Vince Smith-Hughes of Prudential with Mr. Brown. Customers may not be willing to share their medical details with multiple companies, said Mr. Smith-Hughes.
“I think we will see over the next couple of years underwriting become more popular. It is a step in the right direction. But if it really does take off people are not going to want to go to half a dozen companies so there needs to be a central pooling of information, said Mr. Smith-Hughes.
“There is a downside to all this as well as the more people that get underwritten and receive a better deal, the people who remain healthy will receive a worse deal as the unhealthy people will get taken out of the insurance”, he added.