Towers Watson comments on the FCA finding that the UK annuity market is not working for consumers**.

Will Aitken, senior DC consultant at Towers Watson said: “Retirement income choices can be daunting but, as with any major purchase, annuitants need to do their research or risk getting a bad deal. People, who would not dream of booking a holiday without comparing prices or looking up the hotel on Trip Advisor, are leaving themselves permanently poorer in retirement by not looking into their options.

The average 7 per cent difference in income for those who lose out by not shopping around may not sound a lot expressed as a monthly amount but it adds up over a retirement that might last 25 years. With inadequate savings making retirement a more distant prospect, that’s money they can’t afford to lose. It is helpful that the Financial Conduct Authority is looking closely at which aspects of the annuity market could be improved and encouraging the industry to improve processes to ensure that insurers treat all customers fairly, in particular those with small pot sizes.

How much profit insurers will make on each year’s annuity business can’t be known sure until the last payment is made, but the work the FCA carried out with Towers Watson’s assistance indicates that expected profits are higher where annuities are sold to existing customers than when they are sold on the open market. The fact that several insurers offer annuities to existing customers without trying to win other business could also indicate that they do not expect their rates to be competitive. In general, more shopping around should therefore lead to more business going to providers who offer keener prices and an overall gain to consumers. Some workplace pension schemes now facilitate this by offering annuity broking services.

However, there could be some losers as well as winners if more people are persuaded to take advantage of enhanced annuities. If insurers expect standard annuities to be paid out for longer on average, that will have to be reflected in the price. Healthier retirees could therefore be offered worse rates once they are no longer pooled together with people who have shorter life expectancies.

Pension-2 © The Economic Voice copyAs the FCA report makes clear, there is much room for improvement in how annuities are bought and sold. However, while they won’t be the right product for everybody, we should not lose sight of the significant benefits that annuities can bring both to the people who buy them and to society. Annuities insure people against the risk of running out of money if they live for longer than expected: amongst annuitants, the people who end up needing an income for longest will be the ones who receive it for longest. Annuities allow customers to benefit from insurers investing in long-dated illiquid assets, with some of the investment spread passed on in the purchase price. Annuities also provide a macroeconomic benefit in encouraging insurers to invest in long-term British infrastructure projects at a time when many other capital providers are reluctant to do so.”


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