The FCA has today announced plans to conduct a competition review into the annuities market after an investigation found most consumers could get a better deal by shopping around.
The review, which will be completed in 12 months time, could lead to a radical overhaul of the rules governing pension providers.
Here, we look at the problems uncovered by the FCA.
Most people who don’t shop around would be better off if they did
The regulator surveyed annuity quotes from 25 pension providers covering 98 per cent of the market. It found that four out of five people who buy an annuity from their existing provider could get a better deal on the open market.
The FCA says an additional 150,000 people could boost their pension savings by up to £230m by shopping around. For a person with an £18,000 pension pot, the average amount of extra income they could get is £70 a year.
People with small pension pots get a bad deal
The FCA concluded that people with pension funds worth less than £5,000 are poorly served by the market.
Firstly, there is a lack of choice – only three firms offer standard annuities to savers with small pots and they are not openly marketed.
Secondly, people with small pension funds are offered a worse rate than people with larger pots.
Finally, these savers also have less access to enhanced rates – 10 of the 12 providers that offer access to enhanced rates to their existing customers do not offer them to people with small pots.
Not every provider offers access to an enhanced annuity
10 providers do not offer access to an enhanced rate to their existing customers. Given that many customers who are eligible for an enhanced annuity do not purchase one, there is concern these savers will lock in to a poor value annuity with their existing provider.
Providers have an incentive to prevent people shopping around for an annuity
“Business sold to firms’ existing customers is more profitable than business sold through the open market option.”
This statement is at the heart of the regulator’s concerns about the annuity market. If a shareholder-owned provider makes more money from the customers it already has, why would it help them shop around?
Preliminary analysis of profits on enhanced versus standard annuity profits also suggests standard annuities are more lucrative. In essence, the incentives for providers are stacked against consumers.