Pension firms need to be clearer in their communication with clients and are guilty of not using “plain English” when selling annuities to consumers, the Financial Ombudsman Service has said in its response to the Financial Conduct Authority’s thematic review into annuities.
The FCA’s thematic review, published today (14 February), found that the annuity market is “disorderly” and “is not working well” for consumers. It exposed a profit imbalance that sees providers take more profit from sales to internal customers, 80 per cent of whom could get a better rate elsewhere.
At the end of the year-long probe, the regulator has announced it will now use its new remit to launch a ‘competition market study’ to “get to the heart of the issue and make recommendations that will have wider implications as to how the market operates”.
Fos said that it currently receives around 40 to 50 complaints about annuities each month, and upholds around a third of them.
It added that “the crux of the matter” in most cases is that the pension firm failed to “explain in plain English how the annuity works and what it is”. It said if this was the case, many of the complaints could have been avoided.
In particular, many people often do not realise that it’s “rarely possible” to change an annuity once bought, the Fos said.
It added that the common complaint themes centre around administration of the plan, from delays in paying out to failing to send out a ‘wake-up’ pack which gives the consumer details of their options prior to retirement.
The Fos said some people are sold an annuity that are not suitable for their needs or not what they wanted, for example not including death benefits for partners or ‘enhanced’ terms based on their health, echoing the FCA’s own findings.
Other complaints are about advice given around annuities. For example, clients are not being advised to switch a pension pot to a low-risk or secure fund to avoid reductions in its value whilst the annuity was being arranged, Fos added.
Complaints also stem from advice to transfer the value of the existing pension plans to other pension providers and losing ‘guaranteed annuity rates’. Annuity providers will only guarantee to hold an annuity rate for a limited period of time, usually two to four weeks.
The Fos also receives complaints from consumers who have received incorrect information about the value of the pension pot or the level of annuity available.
Last month, Fos complaints’ data revealed that annuity complaints had fallen from 125 in Q3 2013 to 111 in Q4 2013. Despite the fall in annuities claims, the Fos newsletter featured an update on annuities that described a wide range of complaints received about the product.
Martyn James, Fos spokesperson, said: “At the ombudsman, we know picking the right annuity can feel like a minefield. Many of the people we speak to find the whole subject of pensions and annuities confusing. With confusing terms like Sipps and Gars, it’s inevitable that people rely heavily on the advice they get from big businesses.
“We’d like people to feel empowered to speak up if they don’t understand what they’re getting in to. After all, an annuity is one of the most significant financial commitments you’ll ever make - and getting it wrong can have a huge impact on the rest of your life.
“So be less British. If you don’t understand what you’re buying, speak out.”
