The FCA plans to investigate insurers’ sales and retention practices as part of a 12-month review of competition in the annuities market.
The regulator’s thematic review of the market, published last week, reveals 80 per cent of people who buy an annuity from their existing provider would be better off if they shopped around and switched provider.
The FCA has identified two groups of customers who are particularly at risk of not getting a good deal – those with small funds, who are generally offered a lower rate than those with larger funds, and people who are eligible for an enhanced annuity but do not explore this option.
The FCA is also concerned providers may be incentivised to prevent consumers from shopping around. A review of 10 firms’ annuity books found business sold to existing customers is more profitable than business sold through the open market option.
In addition, early analysis from the regulator suggests profits from standard annuities may be higher when compared to enhanced annuities.
FCA chief executive Martin Wheatley says: “For most people getting the right annuity could mean the equivalent of an extra £1500 in savings – so we need to understand why they aren’t shopping around and switching.
“But this isn’t true for everybody; our research showed there is virtually no market whatsoever for people with smaller pension pots.
“There should be competition across the entire market, not just for those with the most money.”
The FCA will publish its final competition study report in 12 months. Following this, the regulator will outline proposed remedies that could include rule changes to stimulate competition or constrain the behaviour of providers.
What’s wrong with the annuities market: key FCA findings
Most people who don’t shop around would be better off if they did
The FCA found that four out of five people who buy an annuity from their existing provider could get a better deal on the open market.
People with small pension pots get a bad deal
People with pension funds worth less than £5,000 are offered worse rates than people with larger pots and have less choice of providers.
In addition, these savers have reduced access to enhanced rates – 10 of the 12 providers that offer enhanced rates to their existing customers do not offer them to people with small pots.
Not every provider offers access to an enhanced annuity
10 providers do not offer access to an enhanced rate to their existing customers.
Providers have an incentive to prevent people shopping around for an annuity
The FCA concluded that business sold to existing customers is more profitable than business sold through the open market option.
Furthermore, preliminary analysis of profits on enhanced versus standard annuity profits also suggests standard annuities are more lucrative.