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Making the right retirement choices

Ref: PN10-20
Tuesday 2 November 2010

The Pensions Regulator has today published an updated leaflet ‘Making your retirement choices’, available on the regulator's website, to help members make good decisions about their retirement income.

This follows publication of The Pensions Regulator’s analysis ‘DC Trust: A presentation of scheme return data’ which shows that the DC trust-based market has reached maturity – the over-50s make up 20% of all DC trust-based scheme memberships.

Many pension scheme members face a steep learning curve in the period before they retire, following low levels of engagement with pension saving throughout their working lives.

The Pensions Regulator believes that trustees and providers could do more to issue clear calls to action which encourage members to shop around for the best annuity deal.

It is a legal requirement that members are offered the open market option (OMO). Disclosure requirements state that schemes must provide basic information to members six months before retirement. However, the regulator’s research shows that standards are mixed, even amongst literature which is technically compliant with legal requirements.

Despite 98% of literature reviewed by the regulator including information on the OMO, only 23% of members exercised their right to shop around to get the best deal.

Pensions Minister Steve Webb said:

"The choices we make at retirement are amongst the most important of our lives.

“You don't have to buy an annuity from your pension scheme provider. Shopping around can provide better value for money and significantly boost retirement income.

"I want to see trustees and providers really encourage members to make good choices."

Exercising the OMO could add upwards of 17% to a member’s retirement income. Members may also find they are eligible for an enhanced annuity if, for example, they smoke or have encountered health problems. This could boost income by 33% or more.

Bill Galvin, The Pensions Regulator’s acting chief executive, said trustees and providers have an important role to play in enabling better member decision-making:

“Members could miss out on a higher retirement income because they are not well-supported in making good choices.

“Our research shows that standards of information are mixed. Retirement literature should grab members’ attention, and motivate them to take action, rather than putting people off with jargon or legalese.

“Whilst the legislative requirements provide an important safeguard, we want to see trustees and providers delivering simple, readable information that helps members to maximise their retirement income.”

Editor's notes

  1. ‘Making your retirement choices’ is a leaflet published by The Pensions Regulator for trustees, providers and administrators to give to members. This guide demonstrates good practice in delivering clear and comprehensive information. It is also available to members directly through our website and as a resource for trustees to send to their members.
  2. The increased rates available under the OMO are illustrative only and are based on the Consumer Financial Education Body (CFEB) Moneymadeclear pensions annuity comparison tables as at 1 November 2010. The figures are based on a £50,000 retirement fund for a 65 year old male purchasing a joint life level annuity with his 65 year old female spouse on a two thirds pension including a 5 year guarantee. Lowest quoted non-smoker rate is £201 pm. The highest non-smoker rate is £236 pm. The highest smoker rate is £269 pm. The lowest and highest rates do not include those of in-house providers who are not in the market to receive funds under the open market option, nor those who offer individual quotations for the OMO based on other factors such as postcode.
  3. The Pensions Regulator last year carried out a survey of retirement literature from 97 trust-based DC schemes. It was assessed on adherence with legislative requirements and good practice. Of 97 schemes who submitted literature:
    • 98% offered the open market option (OMO), although take up of the OMO was viewed as remaining low, at 23% of DC members retiring
    • 57% of schemes had some scope for improvement in the standards of the retirement information sent to members
    • 30% had alleged legislative breaches of retirement disclosure regulations
    • 6% were referred to regulator casework teams to follow up the substantial changes required to their retirement literature or processes. The regulator has spoken to these schemes and all have taken appropriate remedial action to correct the breaches identified.
    • A letter was also sent to all 4,500 DC schemes with over 12 members, highlighting the findings of our investigation and encouraging trustees to review the pre-retirement literature sent out to their members.

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