Choosing an annuity is one of the biggest financial decisions anyone will make, so it's concerning to hear that the market isn't working as well as it should for consumers. This is exactly what the Financial Conduct Authority (FCA) said earlier this year, but happily, thanks to an in-depth review, reforms could be on the way.
In February this year, the FCA found that the annuities market wasn't working well enough for most consumers, so launched a full-scale review of the entire retirement income market. The pension reforms announced in March's Budget slightly changed the scope of the study to include an analysis of how the market develops, but the core purpose – to analyse the market, how it works for consumers and where improvements could be made – remained the same.
The outcome? Well, the study confirmed that competition wasn't working as well as it could, something that's led to many consumers missing out on a higher income by not shopping around. This just shows how important heading to the open market can be – an annuity is a financial product much like anything else, and the only way to be sure you're getting the best deal is to compare the options.
However, despite the growing popularity surrounding drawdown products following the new pension flexibilities, the FCA's analysis also found that, for those with average pension pots and low risk appetite, the right annuity bought on the open market – i.e. after shopping around rather than going straight to your pension provider – offers good value for money relative to drawdown strategies.
the reforms announced in the Budget are of course of vital importance to the market and to individuals themselves. The increase in at-retirement choices, while welcome, has also increased the complexity of the decision-making process, and the study reiterated the importance of consumers being properly supported to ensure they make the right choice. Christopher Woolard, director of policy, risk and research at the FCA, said:
"The Budget reforms are a game changer for the retirement income market. People will be given more choice and many will want some support to ensure they make the right decisions for them. The Government's new Guidance Guarantee, with the standards we have already proposed, is a vital part of this; now firms need to play their part.
"We want to see firms improving the way they communicate with their customers. In order for the pension reforms to work and for people to have trust and confidence in the products they are buying, firms need to act now."
Following the review, a number of proposals have been suggested to address the concerns and ensure retirees get the income they're entitled to throughout retirement. These proposals centre on improved communications between firms and their customers, and include:
These recommendations aren't yet set in stone and are still open to consultation, but it's hoped that minimal changes will be made to the current format.
Richard Eagling, editor of Investment Life & Pensions Moneyfacts, commented: "The FCA's detailed Retirement Income Market Study once again stresses the fact that competition in the annuity market is not working as well as it could for consumers. The development of a 'Pensions Dashboard' to enable individuals to view all their lifetime pension savings in one place is an excellent idea that has long been craved, but it is likely to be a while before this sees the light of day, leaving today's retirees still vulnerable to making the wrong choices.
"It is imperative that the pensions industry and the regulator deal with the vast number of individuals that are still missing out on a higher retirement income by not shopping around, as the forthcoming pension reforms due to come into effect in April 2015 will widen the choices for retirees and give them even more to think about."
A closer look at annuity sales practices
The FCA also conducted a separate review into annuity sales practices, something that has a significant impact on consumers. The investigation found evidence that firms' sales practices were directly contributing to the lack of shopping around and switching, and as such, significant improvements have been demanded.
The regulator noted particular areas of concern in relation to enhanced annuities, where customers were often not informed of shopping around and nor were they encouraged to do so to get a higher income. Some firms also failed to tell customers that other providers may offer enhanced annuities for medical conditions that they don't underwrite, which could have a significant impact on future income.
As such, the FCA is asking the majority of firms involved in the review to undertake further work under supervision, in order to determine if the issues to do with enhanced annuities are indicative of a more widespread problem. Specifically, the work will involve firms gathering more evidence to determine if customers with certain medical conditions or lifestyle factors could have received a higher retirement income had they been told about alternatives. Following this, the FCA will decide whether further action is needed.
Other shortcomings were also discovered, with some firms failing to meet the required standards or follow the codes set by the Association of British Insurers (ABI). The FCA is therefore consulting on rules that could potentially replace the ABI Code to cover all firms that sell annuities, not just ABI members, and that in itself could have a dramatic effect on the market and the outcome for consumers.
What does it mean for consumers?
All rules and proposals are still subject to consultation, so in the short term, not a whole lot will change. However, in the long term, it could have a huge impact on the income of retirees – being encouraged to shop around and being given clear information about the quotes they receive will hopefully mean far more people are left with a higher income for life, and it could have an even bigger positive impact if the issues surrounding enhanced annuities are addressed.
It's ultimately hoped that this will lead to improved competition in the sector, and once this has happened and providers feel the need to offer better rates to attract customers, incomes would ideally follow suit.
Approaching retirement? Consider your income options with our annuity planner
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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