Too many people are signing away their investment freedom to buy an annuity with their pension funds, says the pension provider trade body chief executive.
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In an announcement that undermines pension provider efforts to sell annuities to around 480,000 retirees every year, Otto Thorensen of the Association of British Insurers (ABI) claimed he had ‘serious questions’ about the selling of the product.
His remarks follow accusations from the Financial Conduct Authority (FCA) that as many as 150,000 retirees would be better off financially if they shopped around for better annuity deals, but providers and comparison sites make finding the right products too difficult.
Annuities are insurance-backed investments providing a guaranteed income to death.
However, in recent years, the industry has faced criticism from regulators and the government about how the poorly the market place is run and the meagre returns and high fees pensioners face when choosing a deal.
Pensioners losing £11million a year
The FCA reckons investors are underpaid by around £11 million a year if they do not shop around for a better retirement annuity package than the one offered by their pension provider.
“Annuities were designed for another time when life expectancy was shorter and providers could pay higher retirement incomes to investors,” said Thorensen, who is an influential leader of the pension industry, writing in The Telegraph.
“Serious questions need asking about if people should buy such a low-risk, low return product as an annuity when they are living longer.
“We need some new ideas to design products that better serve future retirees.”
Pensions minister Steve Webb has taken on the pensions industry over the deal they offer retirement savers, threatening to legislate if giant financial firms failed to act to clear up the market place in better favour of the consumer.
Pledge to help pensioners
That pressure resulted in an agreement for all pension providers to tell retirees about their investment options.
These include pension drawdown, which leaves cash invested and still growing in value. Importantly, the investor remains in control of their cash and when and how it is spent and invested.
Thorensen admits not all pension providers share his views, commenting that the 300 firms in the ABI have a ‘wide range of views’.
However, he pledged the ABI would lead the way to improve retirement investment options for savers.
The FCA is also conducting a year-long review of the market, which the regulator claims encourages annuity providers to point their customers away from rival products in the hunt for more profits.
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