Annuities market isn't working for consumers, says FCA

The annuities market is not working for consumers, the FCA has concluded following an extensive review.

Related topics:  Retirement
Amy Loddington
14th February 2014
Retirement

The regulator is now set to probe pension providers after its review into the annuity market found that 80% of consumers could secure a more generous retirement income by shopping around. Despite this, the review found that currently 60% of people buy an annuity from their current provider

FCA chief executive Martin Wheatley said:

"The need to get an income in retirement unites us all. But once you've bought an annuity you can't change your mind. For most people getting the right annuity could mean the equivalent of an extra £1500 in savings -so we need to understand why they aren't shopping around and switching.

"But this isn’t true for everybody; our research showed that there is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.

"There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers. This is a very significant piece of work for the FCA."

Craig Palfrey, founder of independent pension advice website, Increaseyourpension.co.uk, comments:
 
"The real problem is awareness and education, or rather a lack of both. Most people simply don't know they have options when it comes to purchasing an annuity. The annuity decision is one that will affect someone for the rest of their life, so it's a massive decision to make with very little understanding of the options available and the impact of making the wrong choice. There needs to be better understanding that an annuity is typically a lifetime income arrangement.
 
"In a recent study we carried out, one in four people believed that they had to take out an annuity with their current pension provider. That is absolutely not true, but the fact that so many people believe it to be the case should set alarm bells ringing. When someone is approaching retirement, and is about to convert their pension into an annuity, the industry has a responsibility to ensure that person makes the best choice available to them. It's the government's responsibility to ensure that pension providers act in the best interest of their customers not their profit margins."

Steve Wilkie, managing director of the retirement specialist Responsible Life, comments:
 
"If proof were needed this is it - ignorance can be very expensive. Eight out of ten people who don't bother to shop around for an annuity could get a better deal elsewhere. Most of us who are saving for retirement spend our working lives paying into a pension without a second thought, but burying your head in the sand as you approach pension age can be disastrous.
 
"You only get one shot at choosing an annuity, and blindly accepting the one offered by your existing pension company is madness. Shopping around is quick and easy - and can make a huge impact on your retirement income."
 

Dave Miller, Head of Portal at IRESS UK, said:

“Shopping around is central to a healthy annuities market, and is in the best interests of the end user, so we welcome the FCA’s focus on this.  It’s clear that the ‘at retirement’ market cannot bank on consumers knowing to compare the rates of different annuity providers - and doing so unprompted.  As things stand, without comparing providers, a consumer may easily fall foul of their pension provider not necessarily offering the most attractive rate available to them. Without shopping around, this rate will not be seen as atypical, and consumers will not understand the range of products available.

“We would like to see a mandated comparison process, where pension providers must provide a selection of quotes from annuity providers from across the market, to ensure that consumers identify the best rates available. Several already do this, but if it became the industry norm, it would combat any consumer inertia or lack of awareness.”

Dean Mirfin, Group Director at Key Retirement Solutions, said:

“The FCA findings regarding the practice of some insurers will come as little surprise to those within the industry, and whilst the percentage of those retirees who are shopping around has improved, the levels of improvement are not significant enough. What we desperately hope is that consumers will now start to understand and believe the fact that shopping around is a vital part of retirement planning.

“The industry must work hard to deliver the best consumer outcomes. Some insurers have taken, and continue to take, further steps to achieve this but too many are still taking advantage of consumer apathy and their customers trust in them to do the right thing.

The work now should focus on two specific strands, the mechanism for directing consumers to the open market and to then look at how those consumers are best served be that in terms of product availability guidance/and or advice. The issue of smaller pots clearly must be addressed further but too radical a step in terms of addressing service delivery could damage access to whole of market services.”

Andrew Tully of MGM Advantage said:

"The review doesn't go far enough, or act quickly enough. This will potentially leave many thousands of retirees high and dry when navigating the annuity minefield."

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