Research into the consumer experience of purchasing an annuity to provide an income from pension savings has shown that many UK pensioners risk getting poor value from their investments, according to the Financial Services Consumer Panel, which published its findings from an extensive 12-month study on Tuesday.
The Financial Services Consumer Panel is a UK independent statutory body that works with the Financial Services Act (FSA) and represents the interests of consumers in the development of policy for the regulation of financial services. Its latest research indicates that the market is not providing a good service for the majority of consumers, therefore the organisation is recommending that the government should make regulatory and structural reforms to the annuities market.
According to the report, which included a literature review and three separate pieces of independent research, annuity deals have become more complicated and many retirees are entering into them without taking advice.
The panel is calling for a code of conduct to be embodied into regulatory rules and mandatory standards for the non-advice market, which emphasises the need for high professional standards, transparent disclosure of charges and a clear explanation of the implications of non-advice for consumer protection. It also recommends that the government should address the current regulatory arbitrage in which non-advice services are expanding at the expense of the professional advice market; examine the possible exploitative pricing of annuities sold by insurance companies to their DC customers who have saved with them for a pension; and strengthen the definition of the Open Market Option.
In addition, the Financial Services Consumer Panel said that the Money Advice Service, a free service set up by government to help people make the most of their money, should develop an annuity adviser website and require member firms to adhere to the code of conduct. The panel also advises that the government should ask employees and trustees to establish a non-advice service for members of workplace schemes and ensure that the code of conduct is complied with.
Sue Lewis, Chair of the Consumer Panel said: “400,000 annuities are sold each year; this will increase significantly as those who have been auto-enrolled into pension savings reach retirement age. The Open Market Option has been around for a long time, but still isn’t working for many people, who are getting less income in retirement than they could. We are seeing a shift towards purchasing annuities via ‘non-advice’ routes, which means reduced consumer protection if things go wrong. The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand. We urgently need to reform this market, particularly for those with smaller pension pots, who usually can’t get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward.”