Annuity providers will be forced to tell consumers how much they could gain from shopping around before purchasing an annuity, due to new rules proposed by the Financial Conduct Authority (FCA).
The annuity comparator, which is scheduled to take effect in September 2017, aims to tackle the longstanding problem of consumers failing to seek quotes from different annuity providers before they buy an annuity. Not shopping around often leads to a poorer income rate than they could get. The FCA has found that 60 per cent of consumers were not switching providers when they bought an annuity, but up to 80 per cent of these could have got a better deal on the open market.
Under the new system, providers will be required to show customers the difference between the provider's own quote and the highest guaranteed quote available on the open market. They will also need to display other information including the net annuity purchase amount, whether the annuity is guaranteed, single life, joint life or inflation-linked, and information on how to shop around.
Shopping around for the best annuity deal is particularly important as the government is now not going to develop a secondary annuity market. This would have allowed individuals to sell their annuity in return for cash or a flexible drawdown policy, but was dropped due to concerns that consumers would receive poor value.
Jon Greer, pensions expert at Old Mutual Wealth, says: "The government's inability to deliver on a secondary annuity market was understandable, given the major risk of poor customer outcomes. But it does mean there is pressure on the authorities to be seen to tackle perceived injustice in the annuity market. [These FCA proposals] represent an unprecedented interventionist approach. It is difficult to think of another market where a company is forced to promote a cheaper product from a competitor at the point of sale. The fact we have reached this stage illustrates the degree of frustration at the apparent lack of progress in increasing competition in the annuity market."
The falling number of providers offering annuities is also a problem. Since pension freedoms came into effect in April 2015, seven providers have stopped offering annuities. The shrinking market has been partly driven by a huge decline in numbers of people taking out an annuity since the freedoms came into force, as well as lower interest rates squeezing insurance providers' margins.
The smaller market makes it even more important to hunt around for a good deal. But consumers still don't do it.
Mr Greer says: "There have been some barriers in terms of the information that's been out there. Pensions have been seen as a very complex thing to understand so people have tended to take the first option that has been put in front of them without knowing what steps to take to find better deals. Hopefully these annuity changes will mean people shop around more and perhaps people's view of annuities will improve because, while people like having a guaranteed income and stability, they don't necessarily like annuities."
More work to do
Mr Greer says the regulator still has problems to iron out before launching its annuity comparator. In particular, the different ways in which insurance firms approach underwriting to come up with annuity quotes will make it tricky to develop an effective comparative tool.
"While it is possible to get indicative quotes relatively swiftly from multiple providers, getting a guaranteed rate from every annuity company will be hard," he explains. "To provide a precise quote requires specific information from the customer and there is a detailed underwriting process involved in providing a final quote."
Whereas some firms will use only five or six underwriting questions to generate a guaranteed rate, others will ask for much more information, making these firms harder to include.
Tom McPhail, head of pensions research at Hargreaves Lansdown, points out that the FCA's proposed comparator will only cover standard annuities, so not include enhanced annuities. An enhanced annuity pays higher levels of income on the basis of your lifestyle or medical history indicating you may have a shortened life expectancy. This could include factors such as smoking, diabetes, high blood pressure and heart disease, but other conditions such as asthma, high cholesterol and obesity could also qualify for increased rates, depending on their seriousness. For this type of annuity, the provider will normally ask you to complete a medical questionnaire and to provide a report from your doctor.
"The proposal to give annuity purchasers a pounds and pence disclosure of how much better off they could be will solve half the problem," says Mr McPhail. "My worry is that it doesn't incorporate the considerations of enhanced annuities. Given that 75 per cent of annuity sales are now enhanced annuities, that's a pretty big shortfall - it's a pretty big missing element of the equation."
Tips for annuity shopping As the FCA comparator will not include enhanced annuities you should check if you qualify for this type of annuity. "The more information you disclose - particularly about your medical history and lifestyle - the greater the chance you will get a higher level of income," says Mr McPhail. It's also a good idea to consolidate all your pension pots in one place before you start looking for an annuity, he adds, as this will lessen the amount of paperwork you have to deal with when purchasing an annuity. However once you've shopped around and found the best rate for your circumstances it's important to buy it as soon as possible, as typically the rates quoted are only guaranteed for two to three weeks. Although annuity sales have fallen since the introduction of pension freedoms, as more people have taken advantage of other retirement options, Matthew Brown, private client partner at Thomas Miller Investments, advises his clients to have some guaranteed income to meet everyday expenses. "I accept that annuity rates are not wildly exciting at the moment, but I think annuities are still a fantastic insurance policy," he says. "I worry that people who have got a reasonable-sized sum in their pension pot could be blinded by this figure and be too optimistic about how long it will last. And what we haven't seen [since pension freedoms came in] is a big market shock and downturn, when people are trying to draw their money out. That's something we are very careful about when advising our clients." To protect against the risk of your money running out in retirement you could consider an annuity if you have a pension pot of at least £100,000, but preferably more than £250,000 he suggests, although deciding how much is needed to annuitise is tricky. "Wealth is only important relative to what you spend, so somebody with £250,000 who lives a very frugal life will be in a very different position to somebody who has a £400,000 pot but is used to a very different lifestyle," says Mr Brown. "You need to know in detail what your needs are, what you spend, whether you are going to downsize in retirement or receive an inheritance from parents, for example. There's lots of different aspects of your life that you need to understand." Government-backed website - www.moneyadviceservice.org.uk - is a good place to get a general idea of what kind of quotes you can get for your annuity. This free website compares how much retirement income you might get in the open market from a basic lifetime annuity. To compare rates you will need to supply your pension pot value, age and postcode, as well as some details on your health and lifestyle. You can also call the Money Advice Service on 0800 138 7777 or 0800 138 0555 for Welsh speakers. |
Best lifetime annuity rates
Single life with level escalation (aged 65)
| Provider | Ranking | Income £ per annum |
|---|---|---|
| Hodge Lifetime | 1 | £5,105.54 |
| Aviva | 2 | £5,083.92 |
| Legal & General | 3 | £5,045.40 |
| Canada Life | 4 | £5,015.40 |
Joint Life - 50% Spouse's Pension with level escalation (male aged 65, female aged 62)
| Provider | Ranking | Income £ per annum |
|---|---|---|
| Hodge Lifetime | 1 | £4,717.10 |
| Aviva | 2 | £4,656.84 |
| Canada Life | 3 | £4,598.04 |
| Retirement Advantage | 4 | £4,494.24 |
Single life with RPI escalation (aged 65)
| Provider | Ranking | Income £ per annum |
|---|---|---|
| Legal & General | 1 | £3,114.72 |
| Aviva | 2 | £3,020.40 |
| Retirement Advantage | 3 | £2,810.88 |
| Canada Life | 4 | £2,630.64 |
Joint Life - 50% Spouse's Pension with RPI escalation (male aged 65, female aged 62)
| Provider | Ranking | Income £ per annum |
|---|---|---|
| Legal & General | 1 | £2,629.32 |
| Aviva | 2 | £2,609.16 |
| Retirement Advantage | 3 | £2,439.00 |
| Canada Life | 4 | £2,256.48 |
Source: JLT Pension Decision as at 30 November 2016, showing guaranteed five-year rates. Figures assume an annuity purchase price of £100,000 and are shown gross for non-smokers
