FSA to review the annuity market
The Department for Work and Pensions and the Pensions Regulator have expressed concerns about the lack of information given to people about the rights to shop around for an annuity - the so-called open market option.
Personal pension providers are required to inform their customers that they have the right to choose the best annuity for them from the open market. However, only around 40% of customers actually shop around for the most competitive rate so many pensioners are not receiving as much retirement income as they could.
The FSA review will look into pricing and communication across the annuity market to find out if customers are being made aware of their options.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "The open market option agenda has always been about improving investors' incomes and the FSA is right to scrutinise this area of market failure.
"With auto-enrolment under way it is essential that investors get the best possible value from all stages of their retirement saving. Important steps are already being taken to improve the open market option sector.
"However, this announcement from the FSA serves notice to any insurance companies which aren't looking after their customers that the regulator has its eye on them."
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.