Forget the roses, chocolates and champagne. One of the most anticipated deliveries on Valentine’s Day – in the financial services sector, at least – was the publication of the FCA’s long-awaited thematic review of annuities.
Key among its findings was that 60 per cent of those reaching pensionable age do not switch providers when they buy an annuity. This despite the fact that the FCA estimates around 80 per cent of these consumers could get a better deal on the open market.
The regulator reckons that the aggregate benefits consumers miss out on by not shopping around and switching is the equivalent of between £115m and £230m of additional pension income. If consumers researched the market or, more appropriately, sought professional advice, they could increase their final pension pot by as much as 30 per cent in some cases.
The review also flagged the FCA’s intent to conduct a market study into the wider retirement income market (annuities, income drawdown and alternative products) in order to consider what measures need to be implemented to promote healthy competition. Interim findings will be published in summer 2014, with the final report being issued within the next 12 months.The study made three fundamental recommendations:
- Imminent retirees must be able to maximise their income
- They are able to do so at the right time
- It is possible for them to buy the right type of annuity
Not surprisingly, much market noise has been aimed in the direction of the first of the three, especially given the current low interest rates and thus annuity rates. Arguably, though, the second and third tenets come before finding the best rate and can only be realistically delivered through consumer engagement with professional advice.
The review went on to state that, due to the confusing trade-offs they face, the impact of behavioural biases and a general lack of engagement in pensions and annuities contributes to consumers missing out on the benefits available from shopping around and switching. Many simply do not have the confidence to do so.
Additionally, it highlighted the incentive for providers to retain their existing pension customers, as the estimated overall levels of expected profitability of standard annuity business sold to existing pension customers is more than the expected profitability of annuity business sold on the open market. The differences in retention rates of pensions annuitising with their pension provider vary widely, highlighting TCF concerns.
In general, groups of consumers affected are faced with lower annuity rates, due in part to the fixed costs of providing an annuity representing a larger proportion financial impact on the customer’s funds.
There is also a lack of access to enhanced annuity rates for some consumers converting with their existing pension provider.
All in all, then, not the most memorable of Valentine’s Days.
The Personal Finance Society is pushing for greater advocacy of professional advice, including the potential for a focused advice option, as it is the only realistic way to deliver the three main outcomes.
Keith Richards is chief executive of the Personal Finance Society