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Annuity market 'like a minefield'


Britain's "disorderly" annuity market is depriving many pensioners of a fair retirement income, the FCA said

Britain's "disorderly" annuity market is depriving many pensioners of a fair retirement income, the FCA said

Britain's "disorderly" annuity market is depriving many pensioners of a fair retirement income, the FCA said

Pension providers should do more to spell out how annuities work to help consumers through the "minefield" of picking the right retirement deal, the ombudsman service has urged.

The service, which resolves disputes between consumers and financial businesses, said that many of the complaints about annuities could have been avoided if the pension firm had made more of an effort to explain "in plain English" exactly what an annuity is.

Common complaints it sees are from people who bought a deal that turned out not to be suitable or that they were unaware they could not go back on their decision once it had been made.

The call came as the Financial Conduct Authority (FCA) announced an inquiry into the market after finding that in around eight out of 10 cases it looked at where people have stuck with their existing pension provider to buy an annuity, they could have been better off financially by shopping around and switching.

Around three-fifths of people stick with their current pension provider when buying an annuity, but on average the benefit of switching equates to someone having saved an extra £1,500 into their pension before they retired.

Annuities are a one-off purchase that people make when they retire to convert their pension pot into a fixed yearly income that usually lasts for the rest of their lives.

There are many different types of annuity and people in ill health such as smokers, for example, could be thousands of pounds better off over the course of their retirement if they opted for an "enhanced" annuity rather than a standard one.

But Martyn James, spokesman for the Financial Ombudsman Service (FOS), said picking the right annuity "can feel like a minefield".

He said that, with the confusing terms and conditions used, "it's inevitable that people rely heavily on the advice they get from big business. We'd like people to feel empowered to speak up if they don't understand what they're getting into."

The ombudsman gets about 50 complaints a month about annuities and upholds around one third of them. Complaints levels have remained steady in recent years, but the service acknowledged that recent publicity about annuities could prompt an upswing in the figures.

Many complaints brought to the ombudsman revolve around people saying their annuity was unsuitable, perhaps because their ill health was not taken into account or benefits for their partner were not included.

Ros Altmann, an independent pensions expert, said: "Insurance companies often make it impenetrably difficult to move to another company.

"Reams of paperwork, full of jargon means that most ordinary people have no hope of really understanding the complexities of annuities, buying from their existing provider is far faster, easier and saves much form-filling and chasing up of information."

She said some of those who try to switch "end up giving up because they need the money quickly and the process is so time-consuming or difficult".

From its research, the FCA estimates that 80% of those purchasing an annuity from their existing pension provider would benefit from shopping around and switching. For standard annuities around 79% of people could get a better deal on the open market, and for enhanced annuities the proportion is 91%.

The FCA found that people buying a standard annuity could boost their annual income by as much as £200 by buying on the open market.

People buying an enhanced annuity could be up to £290 a year better off by buying on the open market.

The regulator also found that people with smaller pension pots of under £5,000 have little choice if they try to shop around.

The FCA's report will be published in the next 12 months, which could come up with remedies such as changing rules to shake up competition and placing curbs on the behaviour of some firms.

It will look for any signs that sales techniques designed to hang onto customers involve putting them off shopping around. If it uncovers any poor practice it will ask firms to make immediate changes.

The Association of British Insurers (ABI) pointed out that the FCA's review excluded certain customers who stick with their provider because they are getting a better deal than they would elsewhere. It said that when those not included are combined with the 40% of people who already switch providers, overall, 40% of annuitants could benefit from shopping around.

Otto Thoresen, director general of the ABI, said: "W e are finalising a new package of measures to enable people to engage and to shop around for better deals.

"This would include ensuring customers have the right to a conversation to help them understand the difficult decisions at retirement; and how all customers can get a comparison of rates."

Will Aitken, a pensions expert at Towers Watson, said: "Retirement income choices can be daunting but, as with any major purchase, annuitants need to do their research or risk getting a bad deal.

"People who would not dream of booking a holiday without comparing prices or looking up the hotel on TripAdvisor are leaving themselves permanently poorer in retirement by not looking into their options."

Mr Aitken said that while annuities are not the right product for everyone, people should also bear in mind the benefits they can have.

He said: "Annuities insure people against the risk of running out of money if they live for longer than expected: amongst annuitants, the people who end up needing an income for longest will be the ones who receive it for longest."

Shadow pensions minister Gregg McClymont welcomed the FCA's action to tackle the " broken annuities market".

He said: "The figures which the FCA have released today are stark and finally set out the scale of the problem for savers."

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