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Nudge people towards a better pension

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 03 February 2011  |  Comments 4 comments

Plans to change people's behaviour when they buy an annuity make a lot of sense.

Nudge people towards a better pension

Plans to change people’s behaviour when they buy an annuity make a lot of sense.

I’ve just read a very interesting interview with Labour’s Shadow Pensions Minister, Rachel Reeves.

She suggests a significant change to the process when people buy an annuity at retirement. Under the current system, too many people take the first annuity that is offered to them and don’t shop around for a better deal from other companies.

The technical name for shopping around is the Open Market Option (OMO). Around a third of annuity buyers don’t take advantage of the Open Market Option and just buy their annuity from the company that has managed your pension pot. As a result, their retirement income could be as much as 20% lower!

Reeves sensibly suggests that the Open Market Option should become the default approach for the annuity-buying process. Purchasers could still say that they’d rather not bother if they wished; the Open Market Option wouldn’t be compulsory. However, this change would ‘nudge’ people towards the better approach.

‘Nudging’ is a trendy word in political circles at the moment thanks to a book called Nudge by Richard Thaler. I’ve not read the book, but I definitely think this approach makes a lot of sense when it comes to annuities.

More:  How to have a secure retirement |  Check out more of my blog posts in Bowsher’s Blog.

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Comments (4)

  • JoeEasedale
    Love rating 174
    JoeEasedale said

    The solution is clear if HMG actually gave a dam. Simply ban the company that operated the savings plan from even quoting for the annuity. Simples

    Report on 07 February 2011  |  Love thisLove  0 loves
  • riblo123
    Love rating 18
    riblo123 said

    Whilst the OMO is the percieved or peddled route, not all OMO options make sense depending on the individual circumstances.

    I recently looked at this option on one of my pensions but the figures did not stack up. 4% of the pot initialy in fees plus 1% a year of the remaining fund and no guarantee the remaining sum would not fall in value.

    There was no doubt in my mind which route to take

    Report on 07 February 2011  |  Love thisLove  0 loves
  • DP130132
    Love rating 20
    DP130132 said

    Until the scandalous "conditions", "rules" decided and imposedby by Annuity providers, many times not even hidden in the small print, the UK private pension schemes will ba scam and joke, if it was not so serious.

    I have today received my WITH PROFITS ANNUITY YEARLY statement from Prudential. My annuity monthly incme will be REDUCED BY APPROXIMATELY 7% FOR 2011 Included with the statement are 5 glossy pages of Gobbledegook.  I quote from the start - "This time last year, we wrote to you about the worst stock market conditions in 70 years in 2008. Whilst markets have recovered, the economic situation remains uncertain, both inUK and overseas. For this reason, our investment experts are managing the Fund with a realistic balance of caution and optimism. We willnot be declaring any Regular Bonus this year, or FOR FORESEEABLE FUTURE, (my highlight!) in accordance with previous declarations - (last year, LESS 5%!!!). in accordance with our investment policy to protect the financial strength of the Fund ------"  

    I cannot read, or type any more of this hypertension building gobbledegook, but will quote from near the end - "we will benefit from the potential of long term returns as the result of Prudential With Profits Fund's greater equity investment, and our more active approach to managing our assets..

    Fat Cats abound!!  Never put your money where you have no control!!!

    Report on 07 February 2011  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Hello DP,

    I'm sorry you're having such a stressful and disappointing experience with your annuity.

    I think there's a clear lesson for other readers: never take out a with profits annuity. In fact, it's probably best to never take out any with profits product whatsoever. I certainly never will.

    I realise this advice is of no use to you. I wish I could be more helpful.

    Ed

    Report on 08 February 2011  |  Love thisLove  0 loves

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