Annuity providers must do more to help customers
Enhanced annuity providers are failing customers by not encouraging them to shop around for the best rates available, the Financial Conduct Authority (FCA) has found.
Some of the companies involved also fail to inform customers other providers may offer enhanced annuities for medical conditions that they do not underwrite.
These are some of the findings of the regulator's market study into annuity sales practices and the retirement income market that was launched earlier this year. When releasing its preliminary findings, the FCA earlier said that the annuities market was "not working well for most consumers".
While the FCA has found that for people with average-sized pensions and low appetite for risk "the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies", it continues to have serious concerns about the annuity market.
In a statement it said: "We found evidence indicating that firms' sales practices are contributing to consumers not shopping around and switching. At times, consumers are potentially buying the wrong type of annuity, in particular not purchasing an enhanced annuity when they may be eligible for one. As a result, consumers may be missing out on a potentially higher income in retirement."
The regulator is specifically concerned about poor communication from annuity providers to their customers concerning their options. Its research found that 40% of consumers purchase an annuity from their existing pension provider and only 45% of them recall receiving information about their right to shop around when buying a retirement income product.
The FCA has recommended several ways communication can be improved, including requiring firms to make it clear to consumers how their annuity income quote compares relative to other providers on the open market.
Longer term it would like to see the creation of a 'Pensions Dashboard' that would enable consumers to view all their lifetime pension savings in one place.
Given the reforms announced in the March Budget that give retirees greater freedom to decide what to do with their pension funds from April 2015, more information for consumers is vital, said the regulator.
Christopher Woolard at the FCA said: "In order for the pension reforms to work and for people to have trust and confidence in the products they are buying firms need to act now."
Andrew Tully, pension technical director at MGM Advantage, added: "The FCA evidence shows annuities have provided good value when people have used the open market to shop around, and are receiving a higher income through enhanced annuities, which take into account health and lifestyle.
"Unfortunately the vast majority of people buying from their holding pension provider do not benefit from these higher rates, and there is typically a 30% gap between standard and enhanced annuity rates. Given up to 60% of people can benefit from a higher income from an enhanced annuity, this affects a huge number of retirees and equates to a significant difference in income over a typical retirement."
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "The FCA has not found any evidence of widespread mis-selling of annuities; there is no smoking gun. In fact they have gone further than that by explicitly endorsing annuities as good value for money, but only if customers shop around on the open market."
He agrees, however, that significant changes need to be made to the way the pensions industry helps its customers get the best value from their retirement savings.
"Improvements to the shopping around system are urgently required - everyday thousands risk being disadvantaged."
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.