Only reviewing OMO is a missed opportunity
Shopping around must focus on more than just price - need the right annuity!
Dr Ros Altmann, Director General of Saga has welcomed the FSA review of annuities but says it must consider all of the issues.
Just looking at OMO is not enough - need to get right annuity, not just good rate: The FSA has just announced it will be conducting a 'thematic review' of annuities. It will consider consumer detriment from not shopping around when buying an annuity, but this is not enough. The FSA needs to consider how people can be helped to buy the right kind of annuity for themselves, rather than only focussing on the rate. Getting a better rate for the wrong product is not good enough. People need to get a good rate for the right product.
Annuities usually once in a lifetime, irreversible purchase and are complex: Most people only ever buy an annuity once in their life and it is irreversible and may last for many years. The industry and regulators know that annuity purchasers do not know much, if anything, about how annuities work or how to select the best type of product. Yet the Regulator has not helped to ensure that customers are helped to identify what will be best for them given their circumstances.
Annuity buyers lose money from their pension fund: Even those who have no adviser to help them, have money deducted from their pension fund when they buy an annuity. That money goes to the pension company, yet there is no obligation to carry out any kind of checks as to whether the customer may be buying the wrong product.
Single life annuity leaves partners with nothing: Someone with a partner, who buys a standard single life annuity, could give all their pension savings to the annuity company and then die relatively soon after purchase, leaving their partner with no income and all their pension fund in the hands of the annuity provider. People are not always told that they can buy an annuity that will leave provision for a partner or has a longer guarantee period than the standard annuity.
Health issues can give much better rate from impaired life annuity: Someone in poorer health than average - whether this be due to minor conditions such as high blood pressure or more major issues such as having had cancer - could get a much better annuity income if they shop around for an 'impaired life' annuity, but they may not know this.
Asymmetry of knowledge - consumers don't know about annuities and are not clearly told: There is no transparency on annuity rates, and the terms used to describe the annuity features are so confusing that many ordinary people just give up trying to understand and take what they are offered. This is a vulnerable time of their lives financially, when they may be just entering retirement with many other issues to deal with, so they particularly need help to make this irreversible decision.
FSA must look at wider issues than just shopping around - whole sales process is not working well for customers: The FSA needs to look at the entire sales process, not just the issue of whether people shop around for better rates. This includes helping people select the right type of annuity - or even recognise that they may be better taking their tax free cash and then staggering any annuity purchase over a period of time, rather than locking in to one product at today's record low rates.
Annuities very poor value at the moment so vital to do it right: In fact, annuities are extremely poor value at the moment and offer very little protection for many people. A 65 year old with £100,000 pension fund will be offered an annuity rate of less than 5% now. This is not a 5% 'interest rate'. The money paid is also from the actual pension assets. So, by the time the customer reaches age 85, their annuity will still have paid them back less than £100,000 and if they die any time before this, they will not have even had their pension capital back. They will also have had no income return on their money at all - so they would have been much better off in a savings account. With such poor value, it is vital that anyone who can get an impaired life annuity is helped to do so, but companies are not obliged to tell you this.
Annuities can be a very high risk purchase: Although the income an annuity pays is guaranteed for life, this does not mean it is a 'no risk' purchase. The sales process for annuities seems to indicate that the regulator believes buying an annuity carries no risk, except for getting a 'good rate'. But there are, in fact, many risks that retirees face, which annuities may not mitigate.
Risk of getting ill not covered: The risk of getting ill, which would mean annuity income would be much higher later, is not dealt with when buying a standard annuity.
Risk of dying relatively soon not covered: The risk of dying relatively young is not catered for. If someone buys a 5 year guarantee with their standard annuity, and dies soon, then the annuity company will only have paid back less than a quarter of their pension fund savings and will keep the other three quarters. If that person had a partner, but did not buy a 'joint life' annuity, their partner will get nothing more.
No protection from inflation risk: The risk that inflation may erode the value of annuity income is not covered by standard annuities, because most people buy only a level income, that is fixed in money terms for the rest of their life.
No protection if interest rates rise: The risk that interest rates may rise in future and therefore annuity rates may improve is also not catered for - locking in at today's record low rates could be a terrible investment decision, but the Regulator treats this issue as unimportant. Far from being 'no risk', buying an annuity could potentially be making an extremely risk investment decision with your accumulated lifetime pension savings.
Annuities only cover 'risk' of living a long time: The only risk that annuities really cover for is the risk that people will live a long time. So, out of all the risks that people face in retirement, annuities only deal with one. Yet millions of people lock their whole pension fund into this one product, they do not understand it, have no help to get the right kind of product and pay money to an annuity provider to have the product sold to them.
Surely the FSA must look at all these broader issues, if it really wants to 'make the market work for consumers'.
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