Urgent review of annuity market needed, says consumer body
The statutory body, which advises the Financial Conduct Authority (FCA) on the interests and concerns of consumers, has found evidence of a “complex market” which is “failing to deliver good outcomes” for many consumers.
It said there has been a “significant shift” to non-advice routes in the mass market for annuities, which means reduced consumer protection if things go wrong.
This rise in non-advised annuity sales has been driven by light touch regulation and higher profit margins, not consumer demand, the FSCP said.
The independent body has published the findings of research into how consumers buy annuities and what they experience when they do.
It found “many barriers” inhibiting consumers’ full engagement when they decide to convert their pension pot into a retirement income, such as “low financial capability; fear of product complexity and of making an irreversible, high cost mistake; general distrust of professional advisers, and inability to find appropriate advice at acceptable cost.”
Though people searching for annuities are showing a greater awareness and use of their right to shop around under the Open Market Option, the research found that many “shop but stop”, put off by complexity, information overload and the perceived cost of a full scale search.
The FSCP has called for the FCA to introduce a code of conduct for the non advice market, emphasising the need for high professional standards, the transparent disclosure of charges, and a clear explanation of the implications of non advice for consumer protection.
It has also recommended addressing structural weaknesses in the annuities market, especially the advice gap and excess cost of annuitising small pension pots, due to lack of scale economies. One recommendation is to amend tax rules that prevent those with several small pension pots, together worth more than £18,000, from taking their pension as a lump sum.
Sue Lewis, chair of the FSCP, said: “400,000 annuities are sold each year; this will increase significantly as those who have been auto-enrolled into pension savings reach retirement age. 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 urgently need to reform this market, particularly for those with smaller pension pots, who usually can’t get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward.”