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Annuity firms face FCA probe as review exposes open market failure
by Michelle Abrego on Feb 14, 2014 at 07:13
The Financial Conduct Authority (FCA) is set to probe pension providers after its review into the annuity market found that 80% of consumers could secure a more generous retirement income by shopping around.
The regulator has found that up to 150,000 consumers every year could benefit from shopping around by as much as an extra £1,500, which if extrapolated could result in up to an extra £230 million boost to pension savings.
It found that 60% of consumers bought an annuity from their pension scheme provider and said that all annuities sold to existing customers were expected to be more profitable than those sold on the open market option.
The regulator launched a thematic review into the annuity markets in January 2013 with the aim of discovering the extent to which consumers miss out by not shopping around.
The FCA will now use its new competition powers to launch a market review to look into the conduct of pension providers, consumer behaviour and the structure of the retirement income market.
It will also look specifically at the role of providers’ role in shaping consumers’ decision making.
FCA chief executive Martin Wheatley said the regulator wanted to understand why people were not shopping around for 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. For most people getting the right annuity could mean the equivalent of an extra £1,500 in savings – so we need to understand why they aren’t shopping around and switching,’ he said.
The regulator analysed data from 25 providers, out of a possible 31 that offer annuities. It said that for a pension pot of £17,700, consumers buying an annuity from their scheme provider would get an average income of £1,030 per year. However, a consumer using the open market option could increase their annual income by 6.8% or £71 a year.
It found that consumers eligible for enhanced annuities were also losing out.
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