Call for reform of annuities market
Hundreds of thousands of pensioners face being ripped off when investing in the UK's £12 billion annuities market unless regulation is tightened urgently, an official advisory panel has warned.
Retirees choosing where to invest their pension pots may face poor deals if sticking with insurance companies with whom they have saved their funds but face a bewildering variety of options if shopping around on the web, according to a report.
They may be attracted by deals offered by so-called "non-advice" options without realising they forfeit the right to consumer protection services - or that they may carry hidden charges, the Financial Services Consumer Panel found.
Some online and offshore providers have an "unclear" regulatory status, with evidence of poor conduct including unsolicited emails and telephone calls, according to the report.
The confusion can result in customers deciding to "shop but stop" and going back to the "rollover" product offered by their original insurance company - an area of the market where regulation is "extremely weak".
Annuities provide the main means by which ordinary people turn their defined contribution pension savings into retirement incomes.
New annuity business - which currently sees 400,000 sold each year - is expected to double over the next few years due to the impact of maturing pension plans and the introduction of auto-enrolment for private sector workers.
The panel found that while product complexity had increased, professional advice was harder to find, and retirees were increasingly buying annuities on the open market through "non-advice" websites and "losing valuable consumer protection".
"Irreversible mistakes affect retirees for the rest of their lives," the panel warned.
It concluded: "The chances of mass consumer detriment are, in our judgment, too high to trust to current market-driven solutions alone: hence our recommendations for further regulatory and Government-led structural reform."
Sue Lewis, chair of the panel, said: "The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand.
"We urgently need to reform this market, particularly for those with smaller pension pots, who usually can't get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward."
The panel recommends that the Government should set up a service guiding retirees through the process of buying "non-advice" products for those with small pots.
Other measures include a call for the Financial Conduct Authority to set up a code of conduct for the non-advice market and a study into the "possible exploitative pricing" of annuities sold by insurance companies to customers who have saved with them.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "For many people, the retirement process and in particular the purchase of an annuity is one of the most significant financial transactions they will undertake.
"The challenge is to make that process as effective as possible."
Mr McPhail said shopping around at the retirement for the best rate and the best income "should be the default option for everyone".
He said more than half of pension pots were worth less than £20,000. Customers with smaller funds find it difficult to obtain paid-for financial advice. Advisers can instead direct them towards a non-advice product which may pay the advisor a commission.
Pitfalls can potentially include pensions offering good retirement incomes but stopping at death meaning a spouse is left without an income - a drawback which may not be spotted without advice.