Annuity providers have failed consumers according to FCA report
The Financial Conduct Authority (FCA) has released its latest paper, "Annuities sales practice", which has shown that consumers may have lost thousands in retirement income as a result of the sales practices of providers.
The FCA found that 60% of people remained with their existing provider when taking out an annuity. However, of those people:
- 80% could have secured a higher income on the open market
- 91% who took enhanced annuities could have found a better deal elsewhere
Staying with their existing provider led to a lower income for the vast majority of consumers, but the FCA "found evidence indicating that firms' sales practices are contributing to consumers not shopping around and switching, and at time to consumers potentially buying the wrong type of annuity, in particular not purchasing an enhanced annuity when they may be eligible for one."
It was also found that the majority of consumers were not informed different providers may cover certain lifestyle factors or medical conditions that their existing provider did not, which may have led to smaller incomes for those who would have qualified.
Arguably one of the biggest problems with this failing is that annuities have been the dominant retirement product, so huge numbers of retirees have been affected. For most people approaching retirement, purchasing an annuity has been the only realistic option, and even after the announcement of the pension freedoms in the Budget annuities remain the most appropriate option for many.
What happens next?
The FCA has stated that it is "asking the majority of firms to do further work to determine if our findings in relation to enhanced annuities are indicative of a more widespread problem and/or have led to poor consumer outcomes. We will not apply new standards retrospectively. ... Once we have reviewed the additional evidence gathered by the affected firms, we will consider what further action, if any, to take."
Although a lot of people have been let down by these sales practices, annuities are still the best product for some people and this report should not deter them from choosing one. The FCA stated that "for people with average-sized pension pots, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies and may therefore be a good option for those with low risk appetites."
What is important is transparency in the market about the available rates, as well as consumers exploring the market before making a final decision.
How do I get the best rate?
You can secure the best rate by comparing the offers from different providers. This can be a time-consuming process though, and does not take into consideration your personal situation - for instance, you may qualify for an enhanced annuity, or may be more interested in a different option entirely. From April 2015, there will be more retirement options than ever before, and talking to a regulated adviser will help you make the best decision for your circumstances.
At Portafina we offer a free pension review, which explains how well your fund has performed, and by discussing your situation and goals with you we are able to provide a tailored recommendation. If you decide to take an annuity, we look at the whole market to find the best rate for you.
Have you been affected by annuity providers? Let us know with a comment below.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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