The annuities market is not working, according to a review by the Financial Conduct Authority (FCA).
Its Thematic review of annuities, which is part of the first stage of the FCA’s review into retirement products, gathered information from 25 organisations representing 98% of the annuities market.
The review found that, for a pension pot of £17,700, buying an annuity from the current pension provider would return an average annual income of £1,030.
However, by shopping around for a better rate and switching provider, that annual income would increase by 6.8%, or £71 to £1,101.
The review found that one in six people could increase their retirement income by more than 10% if they changed provider.
The FCA also reviewed existing research about the challenges people face when buying an annuity and concluded that, despite the various efforts to encourage people to shop around, there are still significant barriers preventing them from doing so.
These barriers include:
- People lacking the confidence to switch provider.
- People not fully understanding the decision they need to make.
- Behavioural biases, such as inertia.
The FCA also looked at 13 annuity price comparison websites. These sites compare different annuity rates and allow people to buy directly from a provider, but there has been concerns about a lack of clarity in the information provided, including underplaying the significance of buying an annuity.
Poor practice was found on all websites and the FCA has already required the organisations running these sites to make changes.
The FCA will now undertake a competition market study into retirement income to assess competition and gain an understanding of why people do not shop around. It intends to publish interim findings from its study in the summer of 2014.
As part of the study, it will also undertake further supervisory work looking at how pension providers’ sales teams conduct themselves when selling annuities to existing customers.
The FCA has set out three operational objectives:
- To secure an appropriate degree of protection for consumers.
- To protect and enhance the integrity of the UK financial system.
- To promote effective competition in the interests of consumers.
Martin Wheatley (pictured), chief executive officer of the FCA, said: “The need to get an income in retirement unites us all. But once you’ve bought an annuity you can’t change your mind.
“For most people, getting the right annuity could mean the equivalent of an extra £1,500 in savings, so we need to understand why they aren’t shopping around and switching.
“But this isn’t true for everybody; our research showed that there is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.
“There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers.
“This is a very significant piece of work for the FCA.”