FCA to encourage annuity customers to shop around

Annuity firms will have to inform their customers how much they could gain from shopping around and switching provider before they buy an annuity under new rules unveiled by the Financial Conduct Authority on Friday.

A study by the watchdog found that there should be an an annuity comparator to encourage customers to shop around, in the form of an information prompt, before they buy an annuity when the retire.

Annuity providers from September 2017 will have to offer information in a personalised form set out by the FCA, which will show the difference between their quote and the highest available from other providers, and how to access the best deal.

The FCA found that 60% of customers were not switching providers, while 80% of these customers could get a better deal elsewhere.

It added that there was a 27% increase in the number of participants that went on to compare products from different providers when they were shown the annual increase in income that they could gain from buying an annuity on the open market.

The FCA also said that annuity providers will have to give details on whether the annuity is a single or joint-life product, whether the rate of income paid by the annuity is guaranteed and the total pot that will be used to buy it.

In an initiative by former Chancellor George Osborne, which started at the beginning of the 2015/16 fiscal year, that allowed anyone aged 55 or over to take their pension out as a lump sum, paying no tax on the first 25%, with the rest taxed at the income tax rate.

Christopher Woolard, the FCA’s executive director of strategy and competition said although sales have declined since the new pension freedoms were introduced, annuities still play a significant role in retirement provision.

He said it was important that consumers shop around to get the best deal for them, but previous work by the FCA found that very few people actually did so.

“We believe that the proposals we have outlined today will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market.”

Tom McPhail, head of retirement policy at Hargreaves Lansdown said: “This proposal, to give annuity purchasers a pounds and pence disclosure of how much better off they could be will solve half the problem."

“The bit still to be dealt with is the fact that 75% of annuity purchasers could get an enhanced annuity and that won’t be reflected in this proposed disclosure. The good news is that the FCA knows this and will soon be taking steps to address that too, through revisions to the pre-retirement ‘wake-up’ packs.”

The FCA is to also introduce requirements on the providers of retirement income products, about the types and volumes of products they are sell.