Buyers must weigh up before they pay up
Nobody will be able to buy an annuity with their pension pot without first being encouraged to “shop around” for a better deal, the Financial Conduct Authority (FCA) said on Friday.
However, its proposals came under fire for not requiring insurers to include a quote about an “enhanced” rate they could be eligible for if they have any sort of health complication or a lifestyle issue such as smoking.
About 60% of people who buy an annuity — an income for life — do so from their own pension provider, making no attempt to find a better deal, according to an FCA report published last year. Up to 80% of these customers could have got more money if they had gone to a rival insurer.
Christopher Woolard, director of strategy and competition at the FCA, said: “Although sales have declined since the pension freedoms were introduced [in April 2015], 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.”
The FCA will consult on its proposals until February and hopes to implement its proposals in September.
While a proposal to make providers spell out in pounds and pence the difference in annuity income between their offer and the best offer has been welcomed, the FCA has ruled out requiring providers to include enhanced annuity rates, which can be given to people with poor health or lifestyle.
It is thought that up to 75% of people buying an annuity could qualify for an enhanced rate but that most of them do not know these rates exist.
According to data from the Association of British Insurers, only 30% of annuities purchased last year had an enhanced rate.
Depending on the severity of a health condition or the type of lifestyle issue, enhanced annuity rates can be significantly higher than standard rates. They can be awarded to people who have a serious illness, suffer from diabetes, high cholesterol or obesity, or who smoke, for example.
In order to ensure all those who are entitled to enhanced rates get them, many in the industry have called for individual underwriting of each customer who buys an annuity. The FCA said it would not consult on forcing the industry down this road, however.
A standard annuity will pay a 65-year-old with a £100,000 pension pot up to £4,824 a year. The average payout is £4,582 a year, according to the figures from the pensions firm Retirement Advantage.
Yet when you compare standard annuity rates with enhanced rates, a big difference is apparent. A person of the same age with the same pension pot could get up to £5,544 a year on an enhanced annuity, an extra £720 a year.
Andrew Tully, pensions technical director at Retirement Advantage, said: “Any attempt to encourage more people to get better value from their retirement savings is welcome, although I fear this may not be enough to solve the issues with the market.
“We will be advising the FCA to include enhanced rates for annuities in illustrations because most people do not know they could qualify for them,” said Tully.
“Given that up to three-quarters of all customers might qualify for enhanced annuity rates, it does not make sense to exclude them. This is a huge missed opportunity.”