Excessive Profits Rob Pensioners of Income

Insurers have been accused of taking excessive profits on annuities - robbing pensioners of retirement income according to City regulator

Emma Wall 10 December, 2013 | 4:08PM
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Pensioners are being robbed in retirement, according to a report by the Financial Services Consumer Panel (FSCP). The FSCP, which calls itself an independent voice for consumers of financial services in the UK, revealed that insurers were making up to 20 times more profit on an annuity than any other financial product or service they provide.

After a year long study into the annuity market, the Panel concluded that a lack of regulation in the annuity industry was negatively impacting the consumer, and the current commission based model had to change. 

"We are seeing a shift towards purchasing annuities via non-advice routes, which means reduced consumer protection if things go wrong," said FSCP chairman Sue Lewis.

"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."

Too many workers are failing to exercise their open-market option when purchasing an annuity. Pensioners who do not exercise their open market option and shop around for an annuity before fixing the rate at which they will receive retirement income could be penalised by 31%, according to figures from the Association of British Insurers (ABI) in August. 

Instead of taking advice before securing the rate at which their retirement income will be paid, retiring workers are simply opting for the first offer provided. This is the 'non-advice route' Lewis says is in need of reform.

Nick Oliver, Divisional Director, Financial Planning at Brewin Dolphins called buying an annuity potentially "a life and death decision".

"We encourage anyone approaching retirement to use a financial planner and as soon as possible in advance of retirement, who can assess all of your options, rather than proceeding blindly with your existing pension provider," he said.

Oliver said that more information needed to be given to consumers explaining that their pension fund and their annuity are two entirely different contracts and both require analysis and research to establish if they are the most suitable. He said that it was also critical to understand the level of commission or fees you will be paying for this advice, which can also materially impact your income for life.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar