Annuities: Time for action

Take the following paragraph: “Buying an annuity is usually the culmination of a lengthy savings process. Given its importance it would be helpful to encourage people saving for pensions to think in advance about the choice they will have to make when they convert their saved pension fund into retirement income.”

It could well be from the recent FCA Thematic Review of Annuities (TR14/2) but is, in fact, from Modernising Annuities– a DWP and Inland Revenue Consultative Document from 2002.

What about the following: “Given the projected increase in demand for annuities, it is all the more important that the annuities market is working efficiently, and that consumers understand the choices open to them. Only around half of people take up the so-called ‘open market option’ (OMO) of shopping around for their annuity to get the best deal.

Article continues after advert

“The government intends to work with stakeholders to review the working of the OMO. It will also publish a long-term strategy for increasing financial capability in the UK which, among other things, is intended to boost consumers’ understanding of the financial issues arising from pension saving and decumulation.”

This must be from the recent thematic review? Again, you would be wrong – this is a paragraph from a Treasury Paper published in 2006 entitled The Annuity Market.

Look at these two papers from 12 and eight years ago and you will see that many of the issues raised today have been around for a long time, with solutions sought but perhaps not realised.

Aside from these papers we have had a report from the NAPF in 2012, and research carried out by the Financial Services Consumer Panel as recently as late 2013 (although they had perhaps pre-empted themselves with their presentation in 2010 entitled Annuitisation Process and Consumer Detriment – An Initial Investigation of Issues).

A quote from this work – be warned, it is not pretty: “The presentation highlights some key conclusions about the nature and scale of consumer detriment relating to annuities. Of particular interest to the panel are what the presentation says about the Open Market Option and the value for money associated with annuities.

“The estimates indicate that there is significant detriment associated with the lack of shopping around, which is seen as too complex by many (30 per cent of annuitants do not use the OMO or shop around at all), particularly those with smaller funds.

“Research suggests that one in five may not get the best annuity rate, with an average detriment of £200 a year in reduced income.

“Perhaps of greater significance is the failure to get what might be the most appropriate type of annuity. The point is made in the presentation that the perceived poor value of annuities may lead to poor choices. Failure to get the right product for the individual consumer’s circumstances would seem to be a difficult barrier to overcome.

“While advice services such as CFEB and TPAS work hard to educate, the innate complexity of annuities – issues such as longevity and inflation can be difficult for consumers to comprehend – means that finding ways of better informing consumers needs to be a priority for government and regulators alike.”