FSA to investigate pensions annuity market amid fears

Watchdog acts as pensioners lose out on thousands in income each year

The Financial Services Authority will announce an investigation today into the multibillion-pound pensions annuity market amid fears that many people are losing out on thousands of pounds of income a year when they retire.

The regulator will say it has concerns that consumers are not shopping around between pension providers for an annuity, where a pension fund is converted into an income for life.

It will look at whether insurers are doing enough to encourage pension savers to exercise what is called the open market option at retirement, the right to take their savings and shop around for the best annuity.

At present six out of ten savers choose to accept the annuity offered by their pension provider. The difference between the best and default annuity rates could mean a £100,000 retirement pot buys an annual pension of £5,700 rather than £4,700.

The FSA review of the market will take up to 12 months and will look at whether annuities are fairly priced and marketed to the public. Following the review, the FSA may take the step of naming and shaming firms which are offering poor deals to savers or those that are seen as putting barriers in the way of people looking to exercise the open market option.

"This is a timely review of the annuity market as we need more consumers shopping around for the best possible deal. Oxford Economics estimates that up to £7bn could be lost by pensioners not shopping around," Stephen Lowe, the director of the leading annuity provider Just Retirement, said.

The insurance industry is already under heavy political pressure to improve its handling of annuity customers. The Pensions minister, Steve Webb, is believed to have given the insurance industry an ultimatum to reform itself and how it sells annuities or face legislation.

One industry insider said the FSA investigation marks a "last-chance saloon" for insurers, while Tom Mcphail, the pensions expert at Hargreaves Lansdown, said: "This announcement from the FSA serves notice to any insurance companies which aren't looking after their customers that the regulator has its eye on them."

In response, from 1 March, the Association of British Insurers is introducing an annuity code of conduct which is meant to improve transparency in the market. The code will force insurers to publish their annuity rates – previously many firms kept what they offered to individuals secret.

In addition, the code will ensure that individual savers will be quizzed about their health before signing up to an annuity. The idea is that savers will be better placed to take advantage of enhanced annuities which pay a bigger income to people with medical conditions that may shorten their life expectancy.

Insurance industry figures show that only 2 per cent of people who sign up to their own pension provider's annuity deal enjoy an enhanced annuity, whereas 60 per cent of those who shop around for an annuity but using an independent financial adviser see their income boosted.

"This review not only has to look at people moving away from their current pension provider but also ensuring that more people buy the right annuity product for them. After all, annuity rates have been falling in the past few years, meaning that many do not get back what they put into their pension," Billy Burrows, the director of the Better Retirement Group, said.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
News
Approved Food sell products past their sell-by dates at discounted prices
i100
Sport
Jonny Evans and Papiss Cisse come together
football
News
Life-changing: Simone de Beauvoir in 1947, two years before she wrote 'The Second Sex', credited as the starting point of second wave feminism
peopleHer seminal feminist polemic, The Second Sex, has been published in short-form to mark International Women's Day
News
i100
Arts and Entertainment
The beat is on: Alfred Doda, Gjevat Kelmendi and Orli Shuka in ‘Hyena’
filmReview: Hyena takes corruption and sleaziness to a truly epic level
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Guru Careers: Executive Assistant / PA

£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis