Purchasing an annuity is one of the biggest financial decisions anyone will have to make, with it determining the amount of income you receive for the rest of your life. However, a review into the annuities market by regulators has revealed that the current system isn't working, which could leave a lot of retirees suffering from pitiful returns – and a less than comfortable retirement.
The Financial Conduct Authority (FCA) has reviewed 25 pension firms, which represent 98% of the "disorderly" annuities market, and found that six out of ten retirees bought an annuity from their current provider. However, 80% of those who stayed put could have got a better deal elsewhere, with figures showing that their income could have increased by 6.8% per year had they shopped around.
In fact, one in six people could see their income rise by more than 10% if they switched to a different provider, and even more for those who take out an enhanced annuity.
Over time this could easily add up. On average, switching could mean the equivalent of having an extra £1,500 saved at retirement, and that's on a relatively modest pot of £17,700. Essentially it means that failing to shop around could leave retirees missing out on thousands of pounds worth of income, a significant amount over the course of a retirement.
Further analysis found that those with particularly small pension pots – typically less than £5,000 – were even less well served, with the market being virtually shut to them. The FCA has therefore urged there to be competition across the industry, not just to those with larger pots, and is set to launch a further study to assess competition in the annuities market.
Some, however, have argued that the process is too slow, with potential remedies to the issues identified not due to be published for around 12 months.
"The FCA is right to conclude that the annuity market is not currently working for consumers and the extra time it is seeking by launching a further competition market study will hopefully enable it to implement some effective remedies," said Richard Eagling, head of pensions at Moneyfacts.
"In the meantime, without any immediate changes to the annuity purchasing process the major concern is that a significant number of the 420,000 retirees who purchase an annuity each year will still fail to secure the higher retirement incomes that they are entitled to."
As the report highlights, the key is to shop around. Heading to the open market and comparing the available options is the only way to make sure you're getting the best you can from your pension pot, thereby giving the best possible chance of securing a decent retirement income.
Increase your income in retirement by up to 40% - Use our online annuity planner
Looking to speak to somebody direct about annuity rates? Call our partner Premier Retirement Services on 01737 233 435
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.
Moneyfacts.co.uk will, like most other websites, place cookies onto your computer’s
hard drive. This includes tracking cookies.