Annuities have been demonised in the press ever since they were thrown under the bus by the chancellor during this year’s Budget, but now the regulator has confirmed that they are in fact good value for money.
In what must be a very busy week for the regulator, today (11 December) the Financial Conduct Authority published two papers on the retirement market; one a thematic review on annuities and the other a market study on retirement income.
Contrary to what many were expecting, the regulator actually found no evidence of widespread mis-selling of annuities.
Firms have been asked to carry out further work, but crucially this is not a review of all relevant sales since May 2008, they just been asked to gather more evidence to determine whether customers missed out on a higher retirement income.
In fact, the FCA endorsed annuities as good value for money for the right person.
Its economic analysis showed that for people with average sized pension pots, the right annuity purchased on the open market offered good value for money relative to alternative drawdown strategies and may therefore be a good option for those with low risk appetites.
Annuity providers, who have seen individual annuity sales plummet by half since the Budget, must be breathing sighs of relief.
The FCA’s analysis showed that a 65-year-old male purchasing a standard annuity with a £50,000 pension pot in the open market can expect to receive back as much as 94 per cent of the premium paid.
The regulator stated: “This suggests that annuities can represent good value for money, particularly if consumers shop around effectively on the open market. Our analysis shows that obtaining the best quote (as opposed to the average quote) on the open market can significantly improve the money’s worth of an annuity.”
But therein lies the problem; people are not shopping around.
The FCA laid some of the blame with firms’ sales practices, stating that it found evidence that this contributed to consumers not shopping around and switching.
It had particular concerns in the enhanced annuity market, stating that consumers may be missing out on a potentially higher income as a result of providers’ failing to encourage their customers to look around for the best deal.
The FCA’s thematic review findings suggested that providers’ verbal communications with their customers did not go as far as they should to encourage shopping around. It also found that even when consumers are aware of shopping around, in practice they don’t know how to do it and others didn’t think it was worth it.
But it is; the statistics prove it.
Around 80 per cent of consumers who bought their annuity from their existing provider could get a better deal in the open market and for enhanced annuities this rises to a whopping 91 per cent.
So what constitutes shopping around? looking for information online about annuity rates, calling individual providers, etc. Sounds like a lot of work to me.
In order for people to shop around, all this needs to be in one place - yes I know about the ABI’s annuity window - but do others know it exists?
The FCA also said that it will be working with the government to develop an alternative to the current lengthy wake-up packs which will be “behaviourally trialled” to assess the impact on consumers’ awareness of their right to shop around, and the proportion of people who switch.
While this is great, people need to be told how to shop around and where to go. This is the only way people will achieve better outcomes if they don’t want to pay for advice.
donia.o’loughlin@ft.com
