The Prudential Regulation Authority has set out plans to raise the FSCS compensation limit for annuities to 100 per cent of the fund.
Under current rules, people who buy long-term insurance products – including annuities, pensions and life assurance – receive FSCS protection up to 90 per cent of the value of the fund, with no upper limit.
The PRA says the proposal to increase the limit “reflects the potential for significant adverse consequences to policyholders, and the wider financial system, of cover being disrupted”.
The limits for all other types of insurance will remain the same.
PRA chief executive Andrew Bailey says: “The increase in FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a product, have greater protection if their insurer fails.”
The PRA also considered, and rejected, setting a cap of £1.25m on long-term insurance claims, in line with the pensions lifetime allowance.
EY senior adviser Malcolm Kerr says: “The proposal to increase the annuity compensation limit to 100 per cent makes sense given that these contracts could remain in force for 30 years or more and cannot be surrendered.
“The paper shows that the Bank of England recognises there will be innovation in the annuity market and have factored this into their thinking.”
The PRA says the new rules will take effect in July next year.
The news comes after consumer bodies warned retirees who take their pension as a cash lump sum from April next year, when new flexibilities announced in this year’s Budget come into force, may be unaware of the financial compensation protections they are losing.