Our review, published earlier this month, confirmed the suspicions of many people when it showed that the annuities market is not working well for consumers.
The introduction of automatic enrolment will significantly increase the numbers of people saving into a pension, and the once-in-a-lifetime annuity decision will be taken by more people than ever in future. It is critical we act now to try and improve it.
What we found worried us: many people are potentially worse off in retirement because they are not shopping around and switching on the open market.
Of those who stick with their current pension provider, eight of 10 could get a more generous income in retirement if they bought an annuity from a different provider, with the average benefit of switching equivalent to having an extra £1,500 saved into a pension. Considering the average size of these pension pots is nearly £18,000, that is significant.
We are also concerned about those with small pension pots. We found very few firms which would offer standard annuities for less than £5,000 on the open market, meaning they have far less choice and more limited access than those with larger amounts.
Many thousands of people use comparison websites to find out more about their annuity options and to buy their annuity, and we have already acted on our findings in this area. We found poor practice on all of the sites we looked at with most being unclear on costs and they have now made changes at our insistence. With comparison sites playing such an important role – particularly for those with smaller sums saved, we had to act to protect consumers from being misled.
This report is only the first step. It exposes the challenges and confirms the extent to which consumers are losing out. We don’t have the complete jigsaw yet but we are starting to build a clear and authoritative picture of what is going wrong.
As part of this, we will also be taking a close look at the activities of the different market participants, including providers, to ensure they are putting the customer’s best interests at the heart of everything they do.
We will publish some interim findings in six months, and are aiming to publish our final conclusions in a year’s time. But we don’t expect the industry to wait a year before considering how best it can serve its customers. There are some immediate things to consider in the comparison sites guidance, and there are some lessons to be learned by reading the thematic review.
It is important we get this right and we will be working with the industry over the next year with the aim of ensuring the market works well for those buying an annuity . We know there are lots of different views about what is going wrong and what action we should be taking to make things better, and we will consider these carefully as we continue our work.
This Thursday I will be sitting down with the pension industry to discuss these issues at a Money Marketing Wired live TV event; I look forward to talking more about this then.
Nick Poyntz-Wright is director of long-term savings and pensions at the FCA