It says the market isn't working and eight out of ten pensioners could have had a bigger pension if they'd shopped around
The financial regulator, the Financial Conduct Authority (FCA), says that the annuity market isn’t working well and it wants to investigate it further. An annuity is the product that converts your pension fund into an income when you retire. The FCA said that by not shopping around for an annuity, people lost out the equivalent of £1,500 over their lifetime, while those with small pensions struggled to shop around because very few companies bothered with this end of the market.
What’s an annuity?
An annuity is simply a product that converts a lump sum (such as a pension fund) into a regular income. Most annuities are guaranteed to pay out for as long as you live. The amount you will receive every month depends on factors such as your age, your health and your lifestyle.
SAVVY TIP:It’s so important to get the right annuity for you because buying one is generally a once in a lifetime decision.
What’s the problem?
If the word ‘annuity’ has put you off reading any further, please stick with it as it’s an important subject! Unless you have a final salary (or other salary-related) pension, you’ll probably buy an annuity to convert your pension fund into an income for life. The FCA found:
• If you looked at a pension pot of £17,700 (which was the average size of pot when the FCA was investigating), it would generate an income every year of £1,030.
• By shopping around for a better deal, that income increased by 6.8% (or £71 a year). One in six people could increase their retirement income by more than 10% if they changed provider.
• Currently 60% of people buy their annuity from the same company that they’ve had their pension plan with (ie the same company they paid their pension premiums to while they were working). That works out at 420,000 annuities every year.
Why don’t people shop around?
We’re quite used to shopping around for car insurance, savings accounts and mortgages, but many people don’t shop around for an annuity because:
1. They are ‘first time buyers’. Buying an annuity is typically a one-off decision so it’s not something you can practice and become more confident in. The FCA said that many people simply didn’t feel confident enough about shopping around for an annuity.
2. The choices are too complicated. There are lots of different variations of annuity and the choices can be baffling.
3. Inertia. Many people, even if they’ve heard of shopping around aren’t convinced of the benefits or feel it’s all too complicated to take on.
Price comparison sites
The FCA also looked at 13 annuity price comparison websites, sites that let you compare different annuity rates. Currently around 6% of people buying an annuity do so via one of these price comparison sites.
SAVVY TIP: The regulator says it would have expected the websites to make it ‘unavoidably clear’ that when you buy an annuity, the decision can’t be reversed.
The FCA found what it called ‘poor practice’ on all of the websites, and it’s forced three of the sites to make changes. It also said that all but one of the 13 sites had information that was not fair or clear but which was misleading.
What happens next?
The FCA is going to carry out a fuller investigation into annuities, including checking up on how pension companies talk to existing customers who are thinking of buying an annuity. It will report on its findings later this summer.
If you’re about to buy an annuity
Read my guide on shopping around to maximise your income. Alan Higham, of Annuity Direct says that if you’re taking advice, you should ask your broker or adviser:
1. Will you look at the whole range of choices for taking retirement income?
The answer should be a clear ‘yes’.
2. How can you help me decide when is the best time to buy an annuity?
3. When I buy an annuity, will you look at all the rates available on the market or do you miss some firms out?
Insist on dealing with firms who are ‘whole of market’ so they can look at all rates on offer.
4. Will you make sure my full medical and lifestyle information is properly collected and given securely to every insurer to provide their best, guaranteed quote?
5. Will you check the small print of my current pensions to make sure I'm not missing out on any extra benefits or will be caught by a penalty that I wasn't aware of? Will I have to pay you extra to check that?
6. If you are not giving me formal advice: will you still check what I choose and tell me if you think I might have made a mistake?
7. How much is this going to cost me?
If you’ve bought an annuity
If you’ve already bought an annuity and you think it may not have been the right one for you, you may be able to take a complaint to the Financial Ombudsman Service (which is free to use). It is able to investigate complaints and, if it agrees with your complaint, it can make the pension company pay you compensation.
Getting the most from an annuity - maximising your retirement income
VIDEO: Shopping around for a pension income - the basics
Flexible retirement - how to get more from your pension
SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.
SAVVY HELP: Why not ask Savvywoman's panel of experts a question about your finances by clicking here? The answer will be displayed on the website but your surname will never be used.