The individual facing retirement faces the daunting choices of investment pathways taking them to various destinations , none of which are “obvious choices”. About one in ten people who have the freedom to take these pathways chooses an annuity. But we learn today that many people are choosing an annuity without taking the uplift in pay that comes from asking questions about health and lifestyle. In an age of consumer duty, we must ask how this can be.

To quote from Emma’s article

A staggering 47% of annuitants surveyed did not know that enhanced annuities existed, only 4% of the retiring public considered they might be candidates.

This must change

The Government want the great DC pension schemes (including master trusts) to offer a pot to pension facility for those looking to turn their savings into income they can spend.

There are three ways to do this.

The first is through collective DC (CDC) where people collect together and insure themselves through mutual pooling. In this case, the pool should provide the enhancement of rate, since longer livers and shorter livers cross subsidise each other. This is the deal you enter into in CDC. As with occupational pension schemes , collective experience ensures fairness though there will be individual winners and losers.

The second is the annuity, in my opinion, no one should take out an annuity without disclosing lifestyle and medical decisions. That should be as integral to the application process as revealing these facts when buying life insurance. The only difference is that disclosure with life insurance increases the amount you pay for it (you disclose against yourself) while annuity disclosure increases the pay you get. Whether the annuity is being bought directly from the provider or through a broker, disclosure should be necessary, under the annuity provider’s and broker’s consumer duty. That nearly half of annuitants did not know they might have got a better rate is a disgrace.

The third way of getting a pension is by swapping a DC pot either for added years accrual in an occupational pension or through a capital backed pension – such as Pension Superhaven. Very few employer sponsored occupational schemes will offer added years accrual (but you can buy extra years credit to the state pension). Purchasing added years is at the same rate whether you are sick or well – the concept of mutual pooling applies.

However, a new type of pension scheme is emerging called the capital backed pension, where the security comes from the pension scheme backers – who put up a capital buffer to offer equivalent security to an annuity. I am involved in establishing and marketing such a scheme

People who use Pension SuperHaven , exchange all or a part of their DC pot for a scheme pension paid for life (or on a joint life basis). We invite everyone who inquires about Pension SuperHaven to submit medical and lifestyle details so that they can ensure they get the best conversion rate available to them.

Often , a reduced life expectancy can convince those offering the pension to consider you as years older than you actually are, substantially improving your wage for life. This safeguards savers from having regret risk (like the 47% annuitants who missed the chance). It also safeguards the trustees of Pension SuperHaven of being accused of profiteering by taking in savers’ money and under-paying pensions.

Is the Government serious about “pots to pensions”?

Currently only 10% of people choose annuities, annuities are not proposed as the default solution to most occupational pension schemes because a past Chancellor deemed that from Budget 2014 onwards “nobody would ever have to buy an annuity again”. Many annuity businesses shut up shop.

But the new Government is threatening to change this by mandating a “pot to pension” default culture within DC schemes. Unless master trusts and DC schemes intend to convert to CDC or have a CDC back-end (decumulation only), it looks certain that schemes will have to offer either an annuity or capital backed pension (we suggest both).

If the Government is serious about pensions rather than pot, any annuity or capital backed pension offered as a choice or as the default must offer and indeed promote the disclosure of lifestyle and medical conditions so that nobody gets underpaid their wage for life.

We should all get the best annuity or pension we can.  The consumer and fiduciary duty demands no less. Everyone who chooses to buy an annuity or into a pension needs to disclose their physical and mental fitness and their lifestyle.