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John Greenwood: The true scale of the annuity scandal

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Losing £84 a year on worthless payment protection insurance, seeing your first year’s premiums disappear in charges or watching 20 per cent wiped off your Equitable Life bonus only to see it put into secure assets for much of the lost decade for equities: no-one would want any of this to happen to them, but then nor would anyone want to find they had saved in a pension all their life only to find out they had lost half its value because they did not know how to buy an annuity.

Yet while the first three scenarios have provoked reviews and compensation, for annuity customers it remains a case of tough luck. 

The ABI’s publication of comprehensive annuity rate tables has revealed the full shocking extent to which some consumers will have been ripped off by the annuitisation process. Call me naïve but I am surprised, now the truth is out, just how bad the annuity story actually is.

For years the received wisdom has been that you can get perhaps 12 or 15 per cent more on a conventional, healthy annuity by shopping around, and maybe 35 or at a push 50 per cent more if you factor in seeking an enhanced income as well.

The ABI’s new annuity tables now show us that some people could have got more than 100 per cent more had they shopped around for a better deal. So some retired today are living off half the annuity they could have got had the annuitisation process been designed by government in a better way. The government and regulator face some serious questions here.

The ABI figures show a single 65-year old from Manchester cashing in £18,000 could have received £839.52 a year from Scottish Widows, Clerical Medical or Halifax, yet would have received £1,099.92 from Reliance Mutual.

If that individual had smoked for the last 10 years and had lung disease, he or she could have got £1,778.23 a year from the Pru, more than twice as much. There are minor issues around postcodes for these numbers, but broadly speaking, these figures are accurate.

Most smokers will have got their smoker enhancement, and you would hope that most people with severe illnesses would get enhancements. But you can also be sure that many in the last 15 years will have missed out, some massively.

Yet for those missing out on half their life’s pension savings to date there is no talk of reviews or compensation. This is perhaps not surprising, poor deal annuity providers would argue their actuarial calculations suggested their results were right, and the regulator knew what was going on, so gave tacit approval.

Would aggrieved pensioners succeed with a maladministration claim against the regulator and/or government for failing to create a robust system to protect their interests, or carrying out its own research and revealing the full extent of the disparity in prices? It sounds like a big ask.

Now we know just how much is at stake surely the pressure is on the Government to get a quick fix. At least 400,000 people a year remain on a conveyor belt towards a poor annuitisation process. Labour’s proposal to require auto-enrolment to offer some form of brokerage service should be put on the statute book as a matter of urgency. The ABI has done its bit – now is the Government’s turn.

John Greenwood is editor of Corporate Adviser

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. In the last week I have had 2 companies, that’s you Friends Life and Aviva, telephone my clients direct after they have issued retirement packs close to the policy retirement age and try to persuade them to sign up. These are for policies where we are regularly in touch with both the client and the companies.
    In the case of Aviva they sent a medical application form for an enhanced annuity, which the client may well qualify for. This was sent back to Aviva from my office with our company stamp all over it. Despite this they still sent the quote direct then telephoned direct to try and sign up. When the client asked if they had sent a copy to the adviser they said er? no, should we have done?, Pleased to say my client gave an emphatic yes, one week later still no copy.
    With attitudes like this no wonder policyholders are getting a poor deal.

  2. What about personal responsibility? If people have been forced, or coerced, into buying a poor annuity, then compensation is reasonable; but if they have simply failed to shop around, it’s no different to people paying over the odds for car insurance (or anything else). We should focus on education, not compensation; otherwise, we all end up footing the bill for those who just can’t be bothered.

  3. Dear John

    Those of us at the sharp end have known for years about this. The Lady with the Cape is a good example – she is in fact a vampire as the latest figures have shown. But what does not seem to have been highlighted is that some life offices still have Guaranteed Annuity rates or the old fashioned Pension Annuity plans, both of which pay very reasonable rates, provided you are a standard life and prepared to take a single life annuity at the times specified. However these firms (and SWF is a prime example) do all that they can to obscure, hide and not disclose in plain terms that these are indeed available.

    I’ sure you have realised that the three life offices you mention have one thing in common – Lloyds banking group.

    In fact the whole problem is not really rocket science and the public can be safeguarded with one simple sentence. “Don’t buy an annuity until you have consulted an IFA”.

  4. Looks like this topic is gathering momentum and Keith S comments are very true.
    Looks like the next mis-selling or none mis-selling…..you never told us therefor we want compensation, type claims.
    The thing is, right or wrong IFA’s will pick up the FSCS bill when the “players” have left the market!

  5. All this and the biggest crook/fixer of annuity rates HM Govt with QE goes unchallanged.

    Govt fixing of annuity rates is costing annuitants far far more in lost income with no chance of compensation.

    Losing a few pounds pa by not shopping around pales into insignificance with the loses caused by QE.

    Add to this the effect of QE on GAD rates for drawdown clients who have seen their income slashed as a result and you have a REAL scandal where clients have no recourse or compensation.

    I don’t see the FCA ABI or any other body threatening to sue the Chancellor for price and market rigging.

  6. Harry, I ALMOST agree with you.

    However, someone with £18k is hardly an attractive prospect for an IFA.

    In addition, by the time you take off your £600ish, that’s a good chunk of any potential uplift. If they were already with one of the top companies, it may even reduce the consumer’s income.

    I’m with anonymous of 2.51pm – “education not compensation.” Let’s start from a position of personal responsibility.

  7. ‘Twas ever thus, so what’s new in this article? I still don’t know why the FSA doesn’t stipulate the OMO as the default process and prohibit providers from quoting in their pre-retirement packs any annuities other than those based on GARs.

    It’s such a simple and straightforward solution to a problem that, in the absence of any action, continues to fester on like a untreated wound that refuses to heal.

    Simple and straightforward? Words still sorely absent from the FSA’s vocabulary. Isn’t the FSA supposed to be the guardian of consumers’ best interests? Ah, well……….

  8. John Greenwood has hit the nail firmly on the head and what amazes me it has taken so long for this to be realised.

    The TRUTH of the matter is annuities have been mis-sold for years and years. Remember, unless it is an old deferred annuity or GAR policy ALL annuities are brand new contracts and brand new sales and subject to all the same regulatory scrutiny that IFA’s have. And the TRUTH is millions of annuities have blatantly been mis-sold by the insurance industry. IMO this is potentially as big a mis-selling scandal as Personal Pension Review back in the late 90’s.

  9. @LeeD

    A very valid point. Unfortunately I was being a bit blinkered, just looking at it from my own perspective. The smallest annuity I seem to handle is £50k and I always check the providers quote with what I can obtain (including accounting for my own charges).

    From time to time I do come across pots which are around the £18k mark. Recently I had one valued at £19,500 odd. I was in the peculiar position of first arranging the underlying investments in such a way as to lose money so that the total fell under the £18k triviality rule. Life can be weird. (That was a charity case – oh dear I have let the Katz out of the bag – people will now regard me as a softie).

    So apologies for that. Yet again I repeat that I’m not a campaigner for the GBP (Great British Public) just my own clients. Anyway for amounts around £18k you have the triviality rules as above.

  10. @Harry Katz

    Problem is Harry, most sub £18k funds don’t qualify for triviality as they have other sources of income or are not the right age !

  11. @Harry you big softie, doing a charity case!
    Triviality limit should be 2 or 3%, perhaps even 4% and then everyone above the limit shoudl be required to take advice.

  12. And another thing.

    There are also going to be thousands of women out there who’s husbands were SOLD a single life level annuity who then died leaving them NOTHING !

    Those widows helped their Husbands save for his pension, possibly for his entire life. Only for his fund, or the majority of it to go to his insurance company. A lifetime of saving for nothing.

    Remember also, some of these individuals did not even agree to it; they were just put into the default annuity automatically by their caring insurance company !

  13. Let’s not forget the 3.5% commission that providers pay to IFA’s for enhanced non-advised, Internet transaction based purchase, a la HL etc – my fund of £300k – they wanted £14,000 commission ! !
    Come on you IFA’s – put pressure on the providers to limit & reduce these obscene commissions – until you do this your business’s are going to slowly fail.

  14. I agree with a couple of previous comments. This is a problem that can be easily sorted by banning pension providers from providing annuity quotes at retirement age. The default process should be a referral to the OMO.

    Don’t get me started on clients covering the cost of advice from their pension fund if they choose to. The mess of options from providers severely limits a clients choices. Wasn’t RDR supposed to be all about clarity and choice for clients?

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