Annuity providers will have to tell customers if they can get a better deal elsewhere under new rules being developed by the Financial Conduct Authority.
The FCA is concerned that too many people still buy an annuity from the same company that has looked after their pension savings, rather than shopping around for a better quote and taking what the industry calls the “open market option”.
The regulator said that 60 per cent of annuity buyers do not switch provider. Of those, four-fifths could have got a better deal elsewhere.
Under proposals outlined on Friday, annuity providers will have to give customers information about more attractive products offered by rivals.
“Annuities still play a significant role in retirement provision,” said Christopher Woolard, executive director of strategy and competition at the FCA. “It’s important that consumers shop around to get the best deal for them — yet our previous work found that very few people actually did so.”
Industry operators said the FCA’s measures would put more pressure on annuity providers to offer more competitive rates.
“There will be no hiding place for those who offer poor value,” said Moneyfacts, a financial comparison website. “The only shame is that customers will have to wait until September 2017 for this new requirement to come into force, and that the FCA rule has not gone further by making shopping around for an annuity compulsory.”
The proposals were welcomed by insurers that offer annuities on the open market. “This will nudge and encourage people to shop around more than they do today,” said Stephen Lowe, communications director at Just Retirement. “The information will be placed directly in front of the customer’s face. It will be blatant.”
However others warned the measures contained were “significantly flawed”. This was because they obliged providers only to compare standard annuities, and not enhanced annuities, which can pay a much higher income to those in poorer health.
“The risk here is that people will anchor themselves to the best rate when there is likely to be a better deal out there for significant numbers of people who have health conditions,” said Andrew Tully, technical director with Retirement Advantage, a pension provider.
The number of companies quoting for open market annuity business has declined sharply over the past couple of years. “It is a very difficult market to operate in,” said Tom McPhail, head of retirement policy at broker Hargreaves Lansdown.
Insurers in the market were confronted by rule changes that have given consumers more choice over what to do with their savings; low interest rates that have squeezed margins; and the EU’s Solvency II capital rules that came into force this year, he said.
According to Hargreaves Lansdown, Standard Life and Liverpool Victoria have left the market this month while Prudential and Aegon pulled out earlier this year.