Around 420,000 annuities are sold each year in the UK, yet after an extensive review UK watchdog the Financial Conduct Authority (FCA) has concluded that the market is not working for consumers.
Annuities turn pension pots into income during retirement, but as noted by Martin Wheatley, the FCA’s chief executive, the market is “disorderly.”
As a result of the findings, the FCA is launching a competition market study to take place over the next year to understand why pensioners do not shop around for their annuity – as if they did, on average they could increase their yearly income by 6.8%.
Those who save into a defined contribution pension (and not a final salary of state pension) are almost certain to buy an annuity with their fund, making it the second most common form of retirement income (after the state pension).
In its study of the 25 most popular firms offering annuities – which cover 98% of the market – the FCA found that six out of ten retirees simply bought their annuity off their existing pension savings provider.
Yet a staggering 80% of these individuals could have found a better deal by shopping around the market and purchasing a different annuity from another provider.
“Once you’ve bought an annuity you can’t change your mind,” Wheatley pointed out.
“But for most people getting the right one could mean the equivalent of an extra GBP 1,500 in savings.”
In an interview with the BBC’s Today programme, Wheatley stated that the annuity market simply too confusing for those who need to buy an annuity.
“Information is not provided in a way that allows people to make simple choices,” he said.
To this end, the FCA found that most of the price comparison websites which formed part of the survey did not offer clarity on the packages and different annuities available.
Closing the door on smaller pensions
The review also highlighted the scarcity of options for those with smaller pension pots.
“For those people who need to make every penny of their pension count, the market has closed the door on them,” Wheatley stated.
Whilst the FCA has pledged to launch a study to highlight the best options for those who have saved under GBP 5,000 in their pension pot, many experts are stating this process is too slow.
“It is disappointing that after a full year we still have to wait many months more for a second stage investigation by the FCA before regulatory action of some description can be initiated,” noted Barnett Waddingham consultant Malcolm McLean.
As well as sourcing options for smaller pension pot holders, the FCA’s second round of investigation will determine who pension provider sales teams sell annuities.
Sales have been criticised across the board in the UK, again leading critics and campaigners to state the haste with which the study needs to undertaken.
UK pension expert and campaigner Ros Altmann noted: “We need immediate action as more than 1,000 people every week are buying annuities and the transactions are irreversible.”
The FCA has stated its initial findings will be reported in the summer, and the findings from the competition market study report within the year.