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Millions of pensioners get poor deal, says FCA in damning report on annuity market Millions of pensioners get poor deal, says FCA in damning report on annuity market
(about 3 hours later)
Millions of older people are getting a poor deal from Britain's £14bn-a-year pension annuity market, and the biggest losers are those with the least money put aside for their retirement, according to a damning official report on Friday.Millions of older people are getting a poor deal from Britain's £14bn-a-year pension annuity market, and the biggest losers are those with the least money put aside for their retirement, according to a damning official report on Friday.
The Financial Conduct Authority (FCA) said the annuity market was not working well for consumers, and there was a risk that insurers were unfairly taking advantage of their existing customers to pump up their profits.The Financial Conduct Authority (FCA) said the annuity market was not working well for consumers, and there was a risk that insurers were unfairly taking advantage of their existing customers to pump up their profits.
The regulator was also highly critical of the price comparison websites used by some people to buy an annuity, saying that every one of the 13 sites it looked at was guilty of poor practices.The regulator was also highly critical of the price comparison websites used by some people to buy an annuity, saying that every one of the 13 sites it looked at was guilty of poor practices.
An annuity provides a regular income from the pot of money that a pension plan holder has accumulated during their working life. At retirement, an estimated 60% of people simply take the deal offered by their pension provider, even though they are entitled to shop around and make use of the so-called open market option.An annuity provides a regular income from the pot of money that a pension plan holder has accumulated during their working life. At retirement, an estimated 60% of people simply take the deal offered by their pension provider, even though they are entitled to shop around and make use of the so-called open market option.
About 420,000 annuities are sold by insurers and specialist firms each year, and this number will increase dramatically as millions of employees who have been auto-enrolled into workplace pensions reach retirement age.About 420,000 annuities are sold by insurers and specialist firms each year, and this number will increase dramatically as millions of employees who have been auto-enrolled into workplace pensions reach retirement age.
By shopping around for the best annuity, people can get more for their pension pot, particularly if they have health problems. The FCA found eight out of 10 people could get a more generous retirement income by buying from a different provider; it said they could be better-off by an average of £71 a year, and in a few cases by as much as £200 a year, assuming an average £17,700 pension pot. For someone living a further 30 years, an extra £71 a year adds up to more than £2,000. However, for those with health problems or "lifestyle issues" the potential gains are even greater: 91% could get a more favourable deal on the open market, and they could typically be better off to the tune of £135 a year for life.By shopping around for the best annuity, people can get more for their pension pot, particularly if they have health problems. The FCA found eight out of 10 people could get a more generous retirement income by buying from a different provider; it said they could be better-off by an average of £71 a year, and in a few cases by as much as £200 a year, assuming an average £17,700 pension pot. For someone living a further 30 years, an extra £71 a year adds up to more than £2,000. However, for those with health problems or "lifestyle issues" the potential gains are even greater: 91% could get a more favourable deal on the open market, and they could typically be better off to the tune of £135 a year for life.
The FCA said its findings painted a picture of a "disorderly market", and added that there were still significant barriers preventing people from shopping around. It said the situation was particularly bad for people with small pension pots –defined as less than £5,000 at the point of retirement – who often had very little money and needed to make every penny of their pension count.The FCA said its findings painted a picture of a "disorderly market", and added that there were still significant barriers preventing people from shopping around. It said the situation was particularly bad for people with small pension pots –defined as less than £5,000 at the point of retirement – who often had very little money and needed to make every penny of their pension count.
Martin Wheatley, the FCA's chief executive, said there was "virtually no market whatsoever" for people in this position because only a small handful of providers offered them annuities. "The market has closed the door on them. There should be competition across the entire market, not just for those with the most money."Martin Wheatley, the FCA's chief executive, said there was "virtually no market whatsoever" for people in this position because only a small handful of providers offered them annuities. "The market has closed the door on them. There should be competition across the entire market, not just for those with the most money."
The regulator is launching a year-long competition market study and a review of sales practices, after finding that annuities sold to existing customers were significantly more profitable than those sold on the open market. It said there was therefore a danger that insurance companies might try to prevent customers leaving. "The FCA believes there is a risk that providers may unfairly try to retain existing customers to maximise profits," said a spokesman.The regulator is launching a year-long competition market study and a review of sales practices, after finding that annuities sold to existing customers were significantly more profitable than those sold on the open market. It said there was therefore a danger that insurance companies might try to prevent customers leaving. "The FCA believes there is a risk that providers may unfairly try to retain existing customers to maximise profits," said a spokesman.
As part of its investigation, the regulator looked at 13 annuity price-comparison websites, and said poor practice was found on all of them.As part of its investigation, the regulator looked at 13 annuity price-comparison websites, and said poor practice was found on all of them.
Key information and risk warnings were often missing or insufficiently prominent, and some misleadingly described their service as "free" when, in fact, they were pocketing sales commission from the customer's pot. The FCA said it had already ordered the firms running these sites to make changes.Key information and risk warnings were often missing or insufficiently prominent, and some misleadingly described their service as "free" when, in fact, they were pocketing sales commission from the customer's pot. The FCA said it had already ordered the firms running these sites to make changes.
All told, the FCA said an additional 150,000 people a year could benefit from shopping around, and collectively stood to enjoy up to an extra £230m of income over their lifetimes.All told, the FCA said an additional 150,000 people a year could benefit from shopping around, and collectively stood to enjoy up to an extra £230m of income over their lifetimes.
This is the second official report in two months to criticise the annuities market. In December the Financial Services Consumer Panel recommended "urgent" regulatory and government-led reforms in order to prevent millions losing out, including the launch of a national annuity service.This is the second official report in two months to criticise the annuities market. In December the Financial Services Consumer Panel recommended "urgent" regulatory and government-led reforms in order to prevent millions losing out, including the launch of a national annuity service.
Responding to the report, Andrew Tyrie MP, chairman of the Commons Treasury select committee, said: "There appears to be quite a lot in the annuities market that can cause consumer detriment. The FCA is right to try and remedy any such issues."Responding to the report, Andrew Tyrie MP, chairman of the Commons Treasury select committee, said: "There appears to be quite a lot in the annuities market that can cause consumer detriment. The FCA is right to try and remedy any such issues."
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