It’s one of the most important financial decisions any of us ever make and yet we barely give it a thought. That’s the frightening conclusion of research carried out by the Financial Conduct Authority (FCA), which says that 60 per cent of customers do not switch providers when they buy an annuity, even though as many as 80 per cent could get a better deal on the open market.
However, that’s all about to change.
Shopping around – without the slog
From September next year new rules will come into force that require annuity firms to tell customers how much more they could get by shopping around. They will have to tell the potential customer what their quote is but also the highest quote available from all other providers on the open market. It’s almost like the checkout staff at the supermarket telling you where you can buy your groceries for less.
Firms will also be required to give specific information about the annuity, such as whether it’s a single or joint life product and whether the rate will be guaranteed. It will provide a wealth of information to investors before they hit the "go" button.
That’s good news for customers, who may find themselves with a bewildering array of options at retirement. New pension freedoms have relaxed the way we access our retirement funds and mean that no one is compelled to buy an annuity any more. But there are still many people who want a guaranteed income in their retirement and making an informed choice can be hard. The market is in turmoil since the greater freedoms were introduced with rates falling and some providers are even leaving the market completely.
Christopher Woolard, executive director of strategy and competition at the FCA, says it is important that annuities work well even if fewer people are using them. He says: “Although sales have declined since the pension freedoms were introduced, annuities still play a significant role in retirement provision. It’s important that consumers shop around to get the best deal for them, yet our previous work found that very few people actually did so.
“We believe that the proposals we have outlined… will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market.”
However, there is ongoing concern that the increased pension freedoms may have caused more problems for the annuities market than can be fixed with some tinkering of the rules. LV= just announced it will exit the enhanced annuity market following a review of its business, making it the latest major provider to do so.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, says the dwindling number of providers makes it more essential than ever that investors shop around before they commit to a retirement income decision.
“Annuity rates have recovered in recent weeks from their historic lows and are now around 7 per cent higher than they were back in September. The majority of retiring investors want at least some guaranteed income. Unfortunately the combination of the pension freedoms, monetary policy and the capital reserving requirements imposed on insurance companies have driven up the cost of buying a secure income for life through an annuity.”
He argues that the new rules will solve “half the problem” by showing annuity purchasers exactly how much better off they could be by shopping around, adding: “The bit still to be dealt with is the fact that 75 per cent of annuity purchasers could get an enhanced annuity and that won’t be reflected in this proposed disclosure. The good news is that the FCA knows this and will soon be taking steps to address that too, through revisions to the pre-retirement ‘wake-up’ packs.”
Pensions commentator at Old Mutual Wealth, Jon Greer, said there are some real concerns about the changes. “It is hard to think of another market where a company is forced to promote a cheaper product from a competitor at the point of sale. The fact we have reached this stage illustrates the degree of frustration at the apparent lack of progress in increasing competition in the annuity market."
He worries the new comparison rules will drive a “race to the bottom, where price becomes king and service is secondary”.
Certainly in the short term the changes will be welcome to investors who could find themselves hundreds of pounds better off as a result. However, what this means for an industry that is already struggling to cope with unprecedented changes to its business model remains to be seen.
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