New plans announced by the Financial Conduct Authority will require annuity providers to make consumers aware of rival deals before they purchase an annuity, and some experts say there should be similar rules for other retirement products.
Annuities have been overshadowed by exciting new options following the introduction of 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 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, editor of investment life and pensions at data provider Moneyfacts, said the low numbers of retirees that take advantage of the annuity open market option to secure a better annuity rate had long been a worry, and that there was evidence that it had deteriorated even further since pension freedoms were introduced.
Source: Citizens Advice, 'Drawing a pension' report
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.
“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 conscious.”
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.
Find a similar solution for other retirement products
Stephen Lowe, group communications director at annuity provider 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 would likely not include enhanced annuities, for example.
To tackle this problem, Lowe said the FCA “could quite simply” make it a requirement for all purchases to be made via the open external market so 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.
Philip Brown, head of policy at insurer LV=, said the proposal is encouraging in terms of helping consumers find the best deal.
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However, he noted: “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. “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 product, and what differences in the rates they receive mean to them as well”.
