Don’t get ‘burgled’ by insurers when buying an annuity

I’m fortunate to never have been burgled.

Locking doors and windows, keeping valuables out of sight, owning a dog; these are all steps we consider taking to keep our homes and property secure.

According to the front page of The Telegraph today, ‘Brokers are ‘burgling’ pensioners.

Or choose the front page of the Daily Mail, which leads with the slightly more sensationalist ‘Fleeced by the pension sharks‘.

As I tweeted over my breakfast omelette this morning:

Nobody is being ‘burgled’ by annuity brokers. Calm down, everyone. It’s a market which need some improvements, not a criminal cartel.

— Martin Bamford (@martinbamford) December 10, 2013

What both headlines refer to is the criticism of some insurance companies and pension providers in a new report from the Financial Services Consumer Panel.

They work alongside the financial services regulator, the Financial Conduct Authority (FCA), to provide an independent voice for consumers of financial services in the UK.

Their report concluded that annuity deals have become more complicated and many retirees are entering into them without taking advice.

They found examples of some high quality service, but also that “the many examples of poor practice mean that the general outcome for consumers can be akin to a lottery.”

Using rather strong language, the report referred to “exploitative” pricing of annuities sold by insurance companies to customers who have been saving with them for a pension. This refers to those pension savers who fail, for whatever reason, to exercise their open market option at retirement and shop around to get the best possible deal.

This is an important subject.

After working hard your entire life to save in a pension, the last thing you want or need at retirement is to be ‘burgled’.

Around 400,000 annuities are sold each year by insurance companies, many without the benefit of independent financial advice.

This number is expected to rise sharply in the coming years as more older people reach retirement age.

One solution to avoid a bad deal when buying an annuity is to obtain independent financial advice, preferably from an adviser who charges a fixed fee rather than charges a percentage of your pension fund.

Of course many savers with smaller pension pots cannot access affordable independent financial advice.

Instead, they are left with the options to buying directly from their existing insurance company or using an annuity broker, which can result in paying high levels of commission.

It’s an anomaly that commission is banned on the advised sales of annuities but readily available when customers do not receive the benefits or protection of advice. The FCA should address this urgently.

Annuities are in the news so much recently in part because annuity rates are so poor, compared to historic standards.

Falling gilt yields combined with rising life expectancy and stricter capital adequacy requirements for insurers means the income you can expect to receive from your pension pot is a lot lower than it was five or ten years earlier.

This is no excuse for poor practice from some insurance companies, pension providers and annuity brokers.

What we would like to see as one solution to this ‘annuity crisis’ is annuity providers refusing to accept annuity business over a certain size (say, £50,000) unless it is recommended by an independent financial adviser.

This would mean not only would the saver have obtained the best possible annuity rate, but also that all of the other important retirement income options had been properly considered.

Retirement income options cover so much more than getting the best annuity rate; something that is often forgotten in all of the excitement about annuities.

Annuity brokers have a role to play in respect of smaller pension pots, but there should be a level playing field, with commission replaced by fixed fees for providing a service.

Expect to see the FCA step in soon and decisively on this subject.

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