Retirees are being poorly served by the annuity market, according to a review of the sector by the UK’s financial watchdog, the Financial Conduct Authority (FCA).
The FCA’s report on the annuity market notes that “competition in the retirement income market is not working well for consumers”, with too many retirees “missing out on a higher income” by not shopping around for an annuity and not buying the best product for their situation.
The FCA found that many retirees – up to a fifth of those who buy an annuity from their pension provider – did not know they had a right to shop around, while many more were either put off by the length and complexity of the forms required or did not think the extra cash worth the effort.
It also found that providers “do not go as far as they should to encourage shopping around” when talking to customers.
A complex market
The knock-on effect of buying an annuity from the same provider is that they have little incentive to compete and provide better rates, the report argued. The FCA review also noted that a lack of competition has meant specialist annuity providers “find it difficult to attract a critical mass of consumers” and break through in the market.
However, the FCA argued that contrary to popular opinion and press reports, annuities purchased through shopping around for the best rates can be a good option for people with low risk appetites and average-sized pension pots compared to drawdown (taking money out of the pension pot like a bank account).
This is especially the case given the general tendency for people to underestimate how long they will live and the effects of inflation and the ups and downs of the stock markets on their savings.
In light of the new pension freedoms coming in from April, which mean retirees are no longer obliged to buy an annuity the FCA said it expected to see a raft of new and innovative products hit the market.
These include ‘hybrid’ products combining features of both annuities and drawdown products; although it warned that “greater choice and more complex products” may make it even harder for retirees to shop around, reducing competition further and making it more likely that retirees may be sold products that do not best meet their needs.
To mitigate this risk, the FCA called on firms to give a comparison of rates from other providers when giving an annuity quote.
“Savers reaching retirement will face a landscape that is more complex, and will need more support in making the right choices. At the end of the day, people should get the income in retirement that they have saved for,” the report stated.
The full report can be read online at the FCA’s website. Download it here.
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.