Annuity providers have been failing to give consumers the right information, meaning that many have missed out on valuable extra income in retirement, a damning report from the Financial Conduct Authority has found.
People in ill health, who could have qualified for a higher income by buying an ‘enhanced’ annuity, have missed out on thousands of pounds in income thanks to poor communication and sales practices.
The regulator is now demanding that annuity companies provide it with information on sales of annuities from 2008 onwards, with the potential that fines and compensation could be paid to those who received a poor deal.
The FCA’s investigation has also found that:
- Annuity providers aren’t doing enough to encourage people to shop around for a better deal
- This means that, on average, consumers miss out on £67 a year in extra income
- Those who qualified for an enhanced annuity but didn’t buy one have missed out on £175 a year
- Communication to consumers must be improved
- Comparing annuity quotes needs to be made easier
- A ‘pensions dashboard’ should be developed, so you can see all your pension savings in one place
Poor practice rife in annuity telephone sales
Anyone looking to buy an annuity with their pension savings should be encouraged to shop around for the best quote, not simply taking the one offered by the current pension company. Pension companies follow an industry code to communicate this to customers.
The FCA report has found that while written communications to customers were deemed to be mostly adequate in promoting the benefits of shopping around, the information pension company staff provided over the telephone failed to do this.
Staff were not encouraging customers to shop around for an annuity, sometimes not mentioning the benefits of doing so at all. The FCA criticised the training material that was given to telephone staff.
It also found evidence of senior staff being paid bonuses based on the number of annuity sales to existing customers – suggesting a conflict of interest when staff are supposed to encourage customers to shop around.
Find out more: What is an annuity? – visit our video guide to these financial products
Ill customers getting a raw deal
The biggest area of detriment identified in the report is on the sale of enhanced annuities. An enhanced annuity pays a higher income to people in ill health, as they are perceived to have a lower life expectancy. Buying this type of annuity could boost annual income by as much as £175.
Although the FCA found that most pension companies explain the benefits of enhanced annuities well, many are doing a poor job of encouraging people to shop around for the best enhanced deal. By shopping around and switching, the FCA says that retirees could boost their annual income by £278.
It found that just 5% of people are sold an enhanced annuity by their existing pension company, compared to 50% buying one when they shop around. One firm had a strategy in place that told staff not to mention enhanced annuities at all unless customers raise it proactively themselves.
Find out more: Enhanced annuities explained – how people with medical conditions can boost their income
No fines or compensation to be paid… yet
The FCA has not issued any fines to annuity companies as a result of its investigation. It is also not asking companies to review all of their sales.
It has asked companies to gather evidence to determine whether or not its customers with medical conditions missed out on a higher income by buying a standard annuity or not shopping around for an enhanced annuity.
The FCA says that once it has this evidence, it will decide what action to take. This may result in fines or compensation being paid to customers – but it may not.
Other changes to the retirement market
In a separate study, the FCA outlined a number of changes it wants to see being introduced to help retirees make better financial decisions. It has four key proposals.
1. Comparable annuity quotes
The FCA wants to force pension companies to publish alternative annuity quotes alongside its own, showing how much more or less the customer could get by shopping around. This should appear in both written communication and over the phone.
2. Study consumer behaviour
It also wants both pension firms, and the pension guidance service that’s launching in April, to use studies of consumers’ behaviour when making financial decision, so that they are influenced to make the right decision for their needs. It is concerned that the way information is presented to consumers is designed to push greater product sales.
Find out more: Pensions guidance – how to get the most from your free session
3. Wake-up packs scrapped
‘Wake-up packs’ are sent to pension customers as they approach their set retirement date, containing information about the next steps they need to take. The FCA says these are full of jargon and aren’t as helpful as they should be. It wants to develop new communications that are easier to read and more useful, which promote the benefits of shopping around.
4. A pensions dashboard
In the longer term, the FCA wants to develop a tool that enables people to see their entire pension wealth, including state pension, in one place. This kind of tool exists around the world, in countries such as Sweden.
Consumers have been let down, says Which?
Commenting on the findings of the FCA’s report, Richard Lloyd, executive director at Which?, said: ‘Consumers have been repeatedly let down by the pensions industry, with years wiped off people’s hard-earned savings, so it’s welcome to see the FCA working with the industry to clean up mistakes from the past.
‘The regulator’s proposals to ensure consumers have better information when they make big decisions about their income at retirement are sensible. But action is long overdue and the regulator and industry must now quickly put in place changes to ensure retirement products offer true value for money.’
More to follow on this story…