Concerns have been raised that some pensioners are being left out of pocket as buying an annuity has been likened to a ‘lottery’.
Some insurance companies and pension providers have been heavily criticised in a report on the sale of annuities, suggesting some people are getting less income in retirement than they could.
As a result, the Financial Services Consumer Panel (FSCP) has called for tighter regulation of the annuity market, particularly in relation to non-advised annuity sales where commission still applies, despite being outlawed for advised sales under last year’s retail distribution review (RDR).
Annuity advice ‘lottery’
In a wide-ranging critique of the annuity market, the FSCP report recommends tighter regulation of annuity sales. It calls on the Financial Conduct Authority (FCA) to undertake a ‘rigorous market study’.
About 400,000 annuities are sold each year and while FSCP research found some examples of high quality service in the non-advised market, it is concerned that ‘the many examples of poor practice mean that the general outcome for consumers can be akin to a lottery’.
FSCP chairman Sue Lewis said: ‘The Open Market Option has been around for a long time, but still isn’t working for many people, who are getting less income in retirement than they could.
‘We are seeing a shift towards purchasing annuities via ‘non-advice’ routes, which means reduced consumer protection if things go wrong. The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand.
‘We urgently need to reform this market, particularly for those with smaller pension pots, who usually can’t get independent advice.’
The report raises concerns that opaque pricing may confuse customers and impede consumer choice, concluding that ‘annuitants do not necessarily understand that non-advice services are not free.’
It is also critical of the restricted panels used by many non-advised services.
Code of conduct
Calling for a code of conduct for non-advised annuity sales, the report demands a ban on the use of the term ‘free’.
Other stipulations it suggests include:
- Adherence to the Association of British Insurers (ABI) code of conduct
- The facility to offer advised, fee-based transactions as well as non-advised, commission based sales
- Whole of market service
- All pot sizes accepted
- Deep underwriting for enhanced terms
- Clear information on non-annuity options