New plans announced by the Financial Conduct Authority will require annuity providers to make consumers aware of rival deals before they purchase an annuity, but some experts say there should be a similar solution for other retirement products.
Annuities have been overshadowed by the exciting new options offered in light of the pension freedoms, but the ability to access a regular income for life still appeals to many people.
However, the FCA has previously found that 60 per cent of customers were not switching providers when they bought an annuity and up to 80 per cent of these people could get a better deal elsewhere.
If this new approach does not encourage a greater number of retirees to shop around for their annuity then making the open market option compulsory may be the next move
Richard Eagling, Moneyfacts
By not shopping around for the best annuity quote, many savers could be losing out. Consequently, the FCA has recommended that an annuity comparator be established.
The watchdog said that this will come in the form of a link contained in an information prompt, and will “show the difference between the provider’s own quote and the highest quote available to the consumer from all other providers on the open market”.
The proposed rules should come into force in September 2017.
Shopping around
Richard Eagling, head of pensions at Moneyfacts said that “the low numbers of retirees that take advantage of the annuity open market option to secure a better annuity rate has long been a worry and there is evidence that it has deteriorated even further since pension freedoms were introduced.”
He said that putting pressure on the provider to ensure that the customer is aware of how competitive or uncompetitive their annuity quote is, “is a little bit like walking into a shop and seeing a product being marked up as cheaper elsewhere”.
“There has long been a cloud of mystery over annuity rates as far as consumers are concerned so this is a big step forward,” noted Eagling.
He said: “For consumers the FCA’s new rules are undoubtedly good news and could help to drive up annuity rates, or at least sustain them, as providers will need to be more price conscience.”
Source: Citizens Advice, 'Drawing a pension' report
Eagling added that more consumers may return to annuities if they feel they can be confident in getting the best deal.
“If this new approach does not encourage a greater number of retirees to shop around for their annuity then making the open market option compulsory may be the next move,” he said.
A positive step forward, but weaknesses remain
Stephen Lowe, group communications director at Just Retirement said that, although the watchdog’s announcement is a positive step forward, “there is a fairly material hole and weakness in the proposal”.
This relates to the fact that the provider generating an annuity quote will only have to use their method of collecting data.
He said that, consequently, “a firm that only provides standard annuities will only effectively have to compare against other standard annuities” and does not include enhanced annuities, for example.
To tackle this problem, Lowe said that the FCA “could quite simply” make it a requirement for all purchases to be made via the open external market so that customers get the best possible deal.
The regulatory body has made it clear that the proposal’s principal aim is not to help consumers who are eligible for an enhanced annuity, which gives someone a larger income if they have suffered from a medical condition.
Instead, the FCA argues that the objective is to show the gain that a customer could realise from buying the same type of annuity that they have already chosen on the open market.
What about other retirement products?
Philip Brown, head of policy at LV=, said that although the proposal is encouraging in terms of helping consumers find the best deal.
However, he said: “What about people buying products that aren’t annuities?”
Following the introduction of freedom and choice, many more people are “going down the drawdown route” rather than opting for an annuity, so “I think we probably need a remedy in that market too”, Brown said.
Shopping around can be overwhelming for consumers. “There are a number of different products available, albeit less than there was a couple of years ago,” said Brown.
He said that, as a result, “it’s overwhelming for them to understand the differences between products and also what differences in the rates they receive mean to them as well”.
