A review by the Financial Conduct Authority (FCA) has found that the Annuity market is not working for consumers. The regulator will now launch a further review, which will recommend changes to the market.
An Annuity is the most popular way of turning a pension pot into an income at retirement. Whilst it provides a guaranteed income and is often seen as a relatively simple option, there has been increasing criticism of Annuity providers and brokers over the past few months, with claims of unfair practices and poor value products.
Shopping around for the best Annuity rate
The FCA report, which looked at 25 Annuity providers covering 98% of the market, highlighted the benefits of shopping around for the best Annuity and not simply accepting one of the options offered by the existing pension provider.
The FCA report found that:
- Of the 420,000 Annuities taken out each year, 60% are bought from the existing pension provider
- The average pension fund of £17,700 would provide an income of £1,030 per year, if an Annuity was bought from the existing pension provider
- However, shopping around for a better Annuity rate could yield an extra £71 per year, an increase of 6.8%
- Of those people who bought their Annuity from their existing pension provider, 80% of people could have got a higher income by shopping around and choosing a different Annuity provider
- 60% of people could get an increase of more than 10%; the figure could be even higher for those people with medical conditions which would qualify them for an Enhanced Annuity
Despite the obvious benefits of shopping around for the best Annuity rate, the FCA report identified a number of factors stopping pensioners from doing so. These included:
- A lack of confidence amongst consumers to shop around
- Poor understanding of the various decisions which need to be made
- Inertia from consumers
Commenting on the report, Martin Wheatley, the FCA’s Chief Executive Officer 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.” (Source: FCA)
Small pension funds
The report found that people who had very small pension pots, of less than £5,000, were particularly poorly served by the Annuity industry.
Martin Wheatley again: “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.”
Following the review, the FCA will now start a Competition Market Study to assess competition and better understand why many consumers do not shop around at retirement. The FCA will also look at pension providers and how they sell Annuities to existing customers.
The interim findings will be available in the summer of 2014; the FCA hope to publish their final report within 12 months.