From Ros Altmann:economist and pensions,
    investment and retirement policy expert

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    Annuities – now FCA Consumer Panel calls for urgent reform

    Annuities – now FCA Consumer Panel calls for urgent reform

    9 December 2013

    • Financial Services Consumer Panel slams annuity market
    • Calls for urgent regulatory reform – this is long overdue
    • Fears that annuities don’t offer value for money and insurers making excessive profits

    Annuity consumers need better protection:  A report just released by the Financial Services Consumer Panel (FSCP) calls for urgent regulatory reform of annuity sales, in order to protect consumers.  http://www.ifaonline.co.uk/ifaonline/news/2317942/fscp-demands-change-in-the-non-advised-annuities-market The FSCP is the consumer body of the FCA – the financial services regulator – and its study highlights the risk of mass consumer detriment in the current annuity market.

    Poor value annuities and excessive profits?: Many of the findings of the FSCP have been highlighted in the media in the past.  Having investigated the sales processes and consumer understanding of annuities, the Panel concludes that annuities may no longer offer good value and that insurers may be making excessive profits from their captive customers who simply buy from their existing pension company.

    Customers don’t realise they pay commission even if they have no advice:  The report explains that annuities are complex and confusing, with customers failing to understand why they need advice, nor realising that they pay for advice even if they do not receive it. The Panel points out that the sale of annuities can be extremely profitable, especially for those selling without advice.

    RDR has resulted in worse consumer situation:  The sharp practices that mislead people into buying the wrong type of annuity and getting a very poor rate are explained, and the fact that the financial services reform of commission (the RDR Retail Distribution Review) since January 2013 has actually worsened the consumer position.  Consumers are being offered a non-advice service that they are told is ‘free’, but which they then pay significant sums in commission when buying an annuity.

    5%-6% charges for enhanced annuity sales:  The Panel highlights particular problems with enhanced annuities that are supposed to offer better rates to people with impaired health.  It explains that some non-advice enhanced annuity sales will take between 5% and 6% of the customers’ pension fund, just for selling them the annuity (the average is 1.5% to 3%), yet these non-advice services often offer only a limited number of annuity suppliers, do not ensure proper assessment of medical conditions for the enhanced annuities and offer no regulatory protection.

    Pushy sales tactics confuse consumers who do not realise restricted panel or tied agent risks: The panel warns that those buying from non-advised services are often subjected to pushy sales tactics and confusing information which prevents them realising that the annuities they are being offered are only from a restricted panel, or even from tied agents, rather than from all the providers in the whole of the market.

    FCA and Government should urgently introduce reforms:  The Panel recommends urgent structural reform is needed, led by the FCA regulator and the Government, to ensure people are clearly told the difference between advice and non-advice services and that a full inquiry into value for money and excessive profits should be undertaken.

    Annuity reform is long overdue – can’t leave it to the industry to self-regulate:  This cannot come soon enough.  More than one thousand people a day are buying annuities and risk getting very poor value pensions, which they will be stuck with for the rest of their life.  As we are automatically enrolling millions more people into workplace pension schemes, it is essential to ensure good value pensions at the end of the process.  As the FSCP rightly says, the ABI Code of Conduct and online automation of annuity sales may end up just confusing people even more, rather than helping them make better decisions.  Because of the risk of mass consumer detriment, when making this irreversible purchase, the Panel is right that current market-driven solutions cannot be relied on to ensure good value, so urgent regulatory reform is required.  Allowing non-advice services to charge more than full advice cannot be in the customer interest.  Consumers deserve proper protection when buying this unique financial product.

    2 thoughts on “Annuities – now FCA Consumer Panel calls for urgent reform

    1. The top rate of commission for a non-advised enhanced annuity sale is 4.25%, not 5% or even 6%. You can’t just make up statistics to make your blog a bit more scandalous

    2. Having saved for 30 years I now find that annuity rates are derisory. It is futile to try to fix the financial disservice industry. Their default position is to try to rip off the rest of society.
      Please change your campaigning to press for an option at retirement to return a pension fund to the investor (with payment of the deferred income tax to HMRC). With my pension fund back in my own hands I can make my own decisions about how to invest it.
      Financial ‘advisers’, brokers and insurance companies all want to take their slice. A few minutes with a calculator shows that you can easily match the best annuity rate simply by investing in 2 or 3 year cash bonds with a building society.

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