80% failed by existing pension providers
A whopping 80% of retirees who buy their annuity from their existing pension provider would get a better deal if they shopped around, a major industry review has found.
The Financial Conduct Authority (FCA) found that for a pension pot of £17,700 (the average size in the review), the benefit of switching to another provider is equivalent to having an extra £1,500 saved into a pension just before retirement.
Buying an annuity from their current pension provider would return an average annual income of £1,030, but shopping around for a better rate and switching provider results in a 6.8% increase in annual income to £1,101.
“In fact one in six people could increase their retirement income by more than 10% if they changed provider. For people with severe health conditions the figure is potentially much higher,” the FCA added in a statement.
And for people with small pension pots – which it defined as less than £5,000 saved at retirement – things get even worse as “only a handful of providers offer them annuities” at all, meaning there is even less incentive for them to seek competitive deals.
Martin Wheatley, the FCA’s chief executive officer, said: “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.”
The interim results of the study are expected this summer with the full report due within 12 months. Depending on the findings, the FCA could implement rule changes designed to stimulate competition in the market and/or constrain the behaviour of certain firms.
The Financial Ombudsman is currently receiving around 40 to 50 complaints about annuities every month and upholding around a third.
Common complaints include delays in paying out, people being sold an annuity that was not suitable for their needs or what they wanted, or not being made aware it’s seldom possible to change an annuity once bought.
“But numbers don’t often tell the whole story,” the Ombudsman said. “Though many of the complaints we see are very complex, when we get to the crux of the matter, it becomes apparent that if the pension firm had made more of an effort to explain in plain English how the annuity works and what it is, many of the complaints could have been avoided.”
Pensions expert Tom McPhail, from Hargreaves Lansdown, added: “We can wait another year for the FCA to complete its review, however there is much that can be done today to help the hundreds of thousands of investors reaching retirement every year.”
McPhail said he had five suggestions for how to improve the retirement income industry, including:
1. Make pensions easy to understand, with no more gobbledy-gook. “Clear, simple messages are required, so we’d like to see annual pension statements with very clear messages about how much income investors are likely to get in retirement.”
2. Make shopping around easier to understand, using a 'pensions passport'. Instead of the lengthy and impenetrable ‘wake up packs’ which insurers companies send out and investors don’t read, everyone should be sent a simple one page pensions passport statement to trigger the shopping around process.
3. Help investors make the right choices: the 3Ts of retirement. The retirement income journey should be about Timing, Type and Terms. Every investor should be able to decide when they draw on their savings, what type of retirement income plan they use (such as annuity or drawdown) and finally they should shop around for the best possible terms for their specific needs.
4. Reform the Small Pots rules (known as Trivial Commutation in the industry). For investors with pension pots below around £10,000 there simply isn’t a competitive market. The government should make it easier for them to just have their money back as a lump sum.
5. Minimum standards for the retirement industry. Some of the companies looking to take a slice of investors’ retirement pots aren’t even regulated and just act as lead generators (a problem highlighted by the FSCP in its report last year). Intermediaries and product providers should conform to minimum standards. For example by offering guaranteed deeply underwritten quotes only, with no indicative figures, offering trained and knowledgeable staff on a helpline; not just offering annuities but drawdown too; offering regulated advice if required.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
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.