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 today, 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 that 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.
Early analysis from the regulator also 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 that there is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.
“There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers.”
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.