Don't take a 20% pay cut in your retirement, says Fidelity

Pension savers could be throwing away over 20% of their retirement savings, simply by failing to shop around for the best retirement income option, says Fidelity Worldwide Investment.

To help its customers make the most of their retirement, Fidelity's corporate pensions business has partnered with Annuity Direct, the leading retirement income specialist, to design a new service. This will incorporate a whole of market shopping around solution, ensuring that the best rates in the market are available to Fidelity's pension scheme members. It will focus on educating members in the full range of retirement income options - from annuities to income drawdown, and equipping them with tools and guidance to make sensible choices to provide for their retirement income. For customers that feel they need formal advice Annuity Direct will provide independent financial advice on their retirement needs. The new service will be available from July 2012.

Analysis done in conjunction with Annuity Direct has shown that making the wrong decision can have devastating consequences. For example, a male aged 65 with a retirement fund worth £100,000 the worst annuity rate currently available would give them an annual income of £4,013 versus the best annuity rate of £5,020. This difference of £1,007 per annum equates to a total loss of retirement income of £25,175 over 25 years.

Another important factor affecting people's retirement incomes is their state of health. What might seem like only a minor medical condition could result in a meaningful increase in income. Simply through declaring a medical condition, at least 40% of the population will be entitled to an enhanced or lifestyle annuity which could provide them with a higher income in retirement. The question is without shopping around how will they know what potential there is?

And shopping around is particularly important for enhanced annuities. Annuity Direct found that one annuity provider gave a 19% higher income to a regular smoker than a non-smoker would have got while another gave a rate 16% below the non-smoker rate. Similarly, somebody who has had a stroke might see anything between a 6% and 21% increase in income.

It is not just the rate of the annuity that is important to consider when shopping around, the shape of the income is just as important. Many retirees fail to make adequate provision for loved ones after their death or to protect themselves against the effects of inflation. The Annuity Direct service ensures these important issues are considered before any product purchase.

Fidelity believes that whole of market choice should become the industry standard and the default option for all members of DC pension schemes in the UK, ensuring that everyone has the opportunity to shop around for the best retirement income option. In the spirit of the ABI Code of Conduct for Consumers in the Retirement Income market, the new service will be structured to help members find the right shape and level of income for them, whether they make their own financial choices, need guidance or prefer full advice. The new service will see Fidelity meet and exceed the requirements of the ABI Code at least six months ahead of the Code's implementation deadline of 1 March 2013.

Julian Webb, Head of DC & Workplace Savings Business, Fidelity said: "The insurance industry has come a long way recently in improving customer awareness of the benefits of shopping around but human behaviour and inertia means that many won't shop around if left to their own devices. We believe that by offering our customers this service as the default option we can make sure they all get the best value from their retirement savings.

"Falling interest rates and poor stock market performance have already resulted in retirement incomes falling. This makes it even more important that people find ways of maximising their retirement income."

Alan Higham, Chairman of Annuity Direct said: "I'm absolutely delighted that Fidelity has chosen to partner with us. There is no doubt that they are leading the way in making sure that their members get every penny that they are entitled to in their retirement. Most people don't suddenly become experts in retirement planning and want to make a decision on their own that affects the rest of their lives. Annuity Direct has the best in class capability to look at all the annuities available in the market so they can pick the best possible option for every individual. We also have a team of qualified advisors who can guide Fidelity's customers through the process if they get stuck at any point."