The annuity market does not work well for the majority of retirees according to the findings of research into the consumer experience of purchasing an annuity, published by the Financial Services Consumer Panel.
In its report, the panel recommends urgent regulatory and government-led structural reform in order to prevent millions of pensioners from losing out.
The panel’s main recommendations are for the government, the Financial Conduct Authority (FCA) and the Money Advice Service (MAS).
It recommends the government should:
- Require employees and trustees to establish a non-advice service for members of workplace pension schemes, and ensure this adheres to the Association of British Insurers’ (ABI) code of conduct.
It recommends that the FCA should:
- Embody in regulatory rules and mandatory standards the equivalent of a code of conduct for the non-advice market, which emphasises the need for high professional standards, the transparent disclosure of charges and a clear explanation of the implications of non-advice for consumer protection.
- Address the causes, including light-touch regulation and non-transparency of commission, of the current regulatory arbitrage in which non-advice services are expanding at the expense of the professional advice market.
- Undertake a rigorous market study to examine, among other things, the possible exploitative pricing of annuities sold by insurance providers to their defined contribution customers who have saved with them for a pension.
- Strengthen the definition of the open market option.
It recommends that the MAS should:
- Develop an annuity adviser website and require member firms to adhere to the code of conduct.
Sue Lewis, chair of the Financal Services Consumer Panel, said: “Four hundred thousand annuities are sold each year. This will increase significantly as those who have been auto-enrolled into pension savings reach retirement age.
“The open market option has been around for a long time, but still isn’t working for many people, who are getting less income in retirement than they could.
“We are seeing a shift towards purchasing annuities via non-advice routes, which means reduced consumer protection if things go wrong. The increase in non-advice sales appears to be driven by light-touch regulation and higher profit margins, not consumer demand.
“We urgently need to reform this market, particularly for those with smaller pension pots, who usually can’t get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward.”
Fincn
We published a joint report with the Pensions Institute in February 2012, which found that millions of people saving in defined contribution (DC) pensions for their retirement are stuck having to navigate through an unfair and opaque annuity system. This system lops off up to £1 billion pension incomes every year as people buy annuities that do not match their circumstances. It also uncovered evidence of murky pricing in the annuity market, putting unsuspecting consumers at a huge disadvantage.
We welcome the FSCP’s report on the annuities market. The issues it highlights are particularly important, given that an annuity purchase is irreversible and determines a person’s income for the whole of their retired life, which could be 30 years or longer. The FCA’s current thematic review should shed more light on the issues and we believe that strong and immediate recommendations are required to support savers.
Automatic enrolment will see five to nine million people joining workplace pensions. To maintain confidence in the pensions market and to ensure savers understand the options available to them and make sensible choices, it’s crucial that savers receive help from an independent source that meets agreed quality standards for advice.
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, much easier for them to find the retirement income solution that 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.
The proposals do not go far enough. Annuities and retirement advice should be treated in the same way as [independent savings account], bonds, pensions, etc. They should be brought in line with the retail distribution review (RDR). This means no commission and advice should be provided. RDR has effectively created a loop hole for annuities and urgent action is required to insure people get the best possible retirement solutions.
At-retirement specialists could and should take a lead in this. A voluntary code of conduct would raise industry standards and raise public awareness of the fact that good, professional help and support is available. Transparency of fees is paramount and we must work together to ensure everyone understands the differences between advice and non-advised processes, and that nothing is for free.
Aspire to Retire believes individuals should be engaged much earlier in their approach to retirement, at least five years before their intended retirement date. By planning at an earlier stage, people are much better equipped to make the right choices at retirement and do not lose out on thousands in lost income due to poor decision making.
At Aspire to Retire, our proposition is built around early education, encouraging people to shop around and providing access to specialist guidance and advice, including those with smaller pots. Our service already meets and exceeds the points noted in the suggested code of conduct and we strongly feel that customers’ needs should always come first.