New ABI tool provides snapshot of best and worst annuity rates

The Annuity Window reveals cross section of annuity rates ABI members are offering – with differences of up to 47% between the best and worst.

A new tool dubbed the ‘Annuity Window’ has been launched by the Association of British Insurers (ABI), which aims to give those approaching retirement an insight into the annuity rates its members offer.

All 27 ABI members that provide annuities will have to reveal the rates they would quote based on 12 different scenarios every two months.

The tool forms part of the Retirement Choices Code which ABI members have had to follow since March earlier this year. Providers have to send out regular, clear and consistent information about the choices pension investors have at retirement and now the league table of annuities will also be provided.

Best and worst rates

The ABI says that the 12 scenarios it uses will change each time it updates the Annuity Window, but the figures released for July are based on a 65-year-old with an £18,000 pot to convert.

The tool allows you to alter where the person lives, their health and lifestyle as well as the type of annuity to see how the rate he or she is offered changes from provider to provider.

The biggest difference on the best and worst rates for a conventional annuity is 31%.

If the person lived in Manchester, had no health problems and wanted a single annuity the best yearly income he or she could get stands at £1,099.92 from Reliance Mutual, while the worst would have been £839.52 from Scottish Widows/Clerical Medical/Halifax.

Over a 25-year period that would amount to a loss of £6,510 if the worse rate was chosen.

The disparity is even greater between the best and worst rates for an enhanced annuity (for those who already have some health problems) where the difference is an extraordinary 47%.

If you adjust the Annuity Window to show what is available if the person smoked and had lung disease the best rate came from Prudential with an offer of £1,778.23, while the worst was from Friends Life for £1,213.59.

Over a 25-year period this amounts to a staggering £14,116 loss had the worst rate been picked.

How useful is the tool?

Over 400,000 people opt for an annuity each year, but an estimated £1 billion is wasted by people going for the wrong one.

The ABI thinks the problem is down to people not shopping around. In its Retirement Choices Code it has banned providers from including an annuity signup sheet when contacting pension savers, to prevent people taking the easy way out and converting their pot with the same firm that has invested it.

The Annuity Window is meant to show people what to expect, and it is hoped that lifting the lid on annuity rates and forcing providers to become more transparent will expose those that continually offer the worst rates into changing their ways.

But critics say that rather than making things clearer the tool could cause more confusion.

That's because the the tool doesn't have live information on rates, so the prices shown are several weeks old. Also it can't be customised to an individual and only covers 95% of the market. Plus some providers shown only offer quoted rates to existing members. Reliance Mutual for example doesn’t offer its non-smoker rates on the open market.

But the ABI says the Annuity Window  is meant to encourage retiring pension investors to shop around rather than act as a price comparison service.

Shopping around

As you approach retirement you will need to decide what you want to do with your pension savings.

Some will buy an annuity where you are able to guarantee a fixed income for the rest of your life. But there are other options like income drawdown that might be more suitable.

When shopping for an annuity it is important to remember that you don’t have to stick with provider that has invested your pension. Taking the easy option could end up costing you a fortune.

More on pensions:

Be a pension millionaire!

How to top up your State Pension

Government to cap pension charges

George Osborne brings forward State Pension and care reforms

More than 90% of employees happy to stay in a workplace pension