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