The pensions market is "not working" according to the financial regulator. The Financial Conduct Authority review into the annuities market has concluded that the system is "disorderly" and pension savers are being failed by providers.
Once you've bought an annuity you can't change your mind
The FCA found that the majority of workers do not exercise their open-market option when it comes to retirement, instead purchasing an annuity from the company they have accrued their pension pot with. But 80% of these savers could get a better retirement income if they shopped around.
The FCA reviewed 25 pension firms that make up 98% of the market and found that pensioners could have secured themselves an increase of 7% a year income if they shopped around before buying an annuity.
"The need to get an income in retirement unites us all. But once you've bought an annuity you can't change your mind," said Martin Wheatley, chief executive of the FCA told the BBC.
But Wheatley said the currents system was too complex and difficult to understand.
The FCA also found that the smaller the pension pot the more likely a saver would get a poor deal.
Steven Cameron, regulatory strategy director at pension provider Aegon UK said savers should be rewarded for taking a positive approach to retirement planning, and the industry needed to help people understand their financial options around their pension savings.
“With the huge interest in the annuity market right now, it’s not at all surprising that the FCA has decided to follow up its thematic review with a market study. It’s also right for the FCA to look at the wider picture and the range of retirement options customers have,” he said.
Pensions advisory firm Broadstone suggested the FCA could ban the existing pension provider from selling an annuity to the pension holder unless they can demonstrate that the annuity on offer at least matches an average of the top three annuity providers.
Nicholas Fitzgerald, head of financial planning for wealth manager Brewin Dolphin said that it was no that the FCA’s review has concluded that the annuities market is not working.
Fitzgerald said that it was essential the FCA’s findings were swiftly translated into genuine improvements for savers, and not further complicate an already complex market.
The FCA is following up the review with a study into the competition in the pensions market. This delay in taking action has been criticised by consumer groups.
Gina Miller of the True & Fair Campaign into pension charges said: “It is shameful that for so long the insurance industry and its trade body the ABI, have been allowed to perpetuate these anti-consumer practices. Today, the FCA has stated that its review of the annuity market will take a year. If your home was burgled and you knew who the burglar was, would you expect the police to take a year to respond?”
Miller called for an entire overhaul of the pension market and for a simpler, more transparent, and more flexible system to be implemented.
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