The Panel, an adjunct of the City regulator, the Financial Conduct Authority, has criticised some insurance companies for making “excessive” profits out of annuities, and says urgent reforms are needed to ensure retirees don’t lose out.
An annuity is a financial product that guarantees to pay an income until the death of the holder or, in some cases, the holder’s spouse. Most people buy an annuity with the bulk of the pension fund they accumulate during their working life.
Tom McPhail, head of pensions’ research at adviser Hargreaves Lansdown, said: “The FSCP is right to identify that the market doesn't work for investors at retirement. Everyone has unique needs so the solution has to revolve around making it much easier for them to find the retirement income solution which meets their particular needs. At the moment the system is so impenetrable it is hardly surprising that over half of retiring investors don't even shop around for the best deal.'
Here, we explain how the annuity system works, and look at some of the reforms the FSCP is proposing…
What exactly is an annuity?
Around 400,000 people each year use their pension savings to buy an annuity to provide themselves with a retirement income for life. This number is expected to double over the next few years, partly due to the introduction of auto-enrolment, whereby employees are automatically enrolled into company pension schemes, unless they decide to opt out.
Although annuity rates have improved recently, they have fallen in recent years due in part due to longer life expectancy (which means they pay out for longer), and because of low gilt and bond yields, on which annuity providers - usually insurance companies – rely.
This makes it more important than ever for people to ‘shop around’ for the best annuity rates possible, rather than simply opting for the deal offered to them by their pension provider.
Shopping around can get you a significantly better rate, particularly if you have any sort of health issue, as this could make you eligible for an ‘enhanced’ annuity. Enhanced annuities pay a higher income than conventional annuities because people with health problems are considered to have a shorter life expectancy.
Hasn’t the ABI taken steps to improve things?
Yes, the ABI has drawn up a new code of conduct which it published in March, which providers have 12 months to put into practice. Under this code, pension providers must make it clear that consumers have the right to shop around by exercising what is known as an ‘Open Market Option.’
The ABI also introduced a new online ‘Annuity Window’ initiative to encourage people to shop around. This provides a snapshot of sample annuity rates offered by ABI members.
That said,, there are a number of companies offering annuities who are not ABI members, so the deals shown on the ABI tables can’t be considered ‘best buys’. Another problem with them is that the rates shown are also not ‘real-time’ and so may be different from the rates consumers are actually offered.
What does the FSCP want to happen?
The FSCP is calling for all firms to adhere to the ABI’s code of conduct. It is concerned that increasing numbers of people are buying annuities without advice, which could lead to them making the wrong decision.
The FSCP believes companies offering annuities should offer full fee-based, regulated advisory services as well as non-advised commission-based services. It also wants all companies to outline on their websites the difference between fee-based services, where commission is rebated to the fund, and commission-based services, where commission is deducted from the fund, with this being factored into the annuity rate offered
Where can I go for help?
If you are approaching retirement and need help to make decisions about your financial future, you can reach an independent adviser via MoneySuperMarket.
The FSCP report is calling on the government-back Money Advice Service to launch a targeted education campaign to help explain annuities, and for it to fully develop its proposed annuity advisers’ directory to help consumers find the advice they need.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct