Some firms in the annuity space may have failed to encourage their existing pension customers to shop around, so their clients end up simply buying an annuity with them without considering their options.
The FCA reveals in the third quarter of 2016, among those buying annuities 58 per cent were using their existing provider.
Prudential is one of a number of companies requested by the regulator to review all non-advised annuity sales to existing pension customers since 2008 over concerns its customers were not given enough information about enhanced annuities over standard annuities.
“We know not enough people shop around for their annuity, and not only miss out on the best rate but also the right shape annuity for their personal circumstances. The situation has actually got worse since the introduction of the pension freedoms,” points out Andrew Tully, pensions technical director at Retirement Advantage.
“But just because it is something that’s been happening for a while doesn’t mean it’s acceptable.”
As Mr Tully notes: “The FCA recognises this and so from September it will force providers to include an annuity comparator when they provide information to people approaching retirement.”
He believes this is a step in the right direction but points to a “major flaw” in the proposal as it will only compare standard rates and won’t include enhanced rates.
“An individual getting information showing a small monetary benefit of shopping around may decide it isn’t worthwhile, not knowing that due to health conditions the gain could have been much larger. This is a flaw which needs to be fixed if we are serious about helping more people get the best deal,” Mr Tully says.
Andrew Pennie, head of pathways at Intelligent Pensions, concurs: “Use of enhanced annuities through medical and lifestyle underwriting is also underused, with far fewer people obtaining an enhanced rate than would actually qualify for one.
“There are websites which can compare annuity rates but with new contracts, such as annuities written under drawdown rules, it is always best to seek specialist advice to ensure all options are considered and the best solution found.”
More money, more risk-taking?
Many people make the assumption that annuities are more suitable for those with smaller pension pots, while retirees with a much larger amount saved for their pension are likely to benefit from taking income drawdown in retirement.
