More must be done about the 'annuities scandal'
The government's older workers' champion has called on more to be done to help thousands of pensioners who might have been the victim of annuities mis-selling.
Dr Ros Altmann said the Financial Conduct Authority could likely announce its findings from its review into the annuities market to coincide with the chancellor's Autumn Statement, which will take place on Wednesday.
Ahead of the FCA report, Dr Altmann said that many pensioners have been sold the wrong type of annuity, leaving them up to £8.5 billion out of pocket. Those with poor health are entitled to a product known as enhanced annuity that delivers a higher income to reflect their lower life expectancy.
But according to Dr Altmann, around 900,000 have missed out on an enhanced annuity in the past decade, at a total cost of £5.4 billion, while 530,000 widows have been left with nothing because an annuity assumes you do not have a partner at a cost of £2,6 billion – something many pensioners do not realise. Another 90,000 small savers could be in line for a refund totalling £450 million due to the mis-selling.
In November, Britain's biggest insurer, Aviva, revealed it had found 250 cases where annuities had been mis-sold following an internal review.
Speaking about the FCA review, she said: "I am hoping that the review will recommend measures to properly protect customers who are at risk of buying unsuitable annuity products. At the moment, there is no duty on insurers to explain in plain English how annuities work, what their risks are and to ask a few relevant questions that would identify potentially unsuitable sales."
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the proportion of pensioners qualifying for an enhanced annuity through them is now over 60%, while more than 80% selected some form of death benefits.
"The FCA is investigating the retirement income market because competition has demonstrably failed many retirees," he said.
"Annuity brokers and advisers help customers to find the best terms for their particular needs; the problem is that far too many people do not benefit from a shopping around service."
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
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.