The Financial Conduct Authority (FCA) have revealed that an estimated 90,000 people, many in poor health, were not sold annuities correctly because they were not told they could shop around or receive an enhanced annuity (1).
A pension annuity is an insurance contract that insures against you living too long. In return for the money you have saved in your pension pot an annuity provider will give you an annual income for the rest of your life. Enhanced annuities are designed to give people in poor health who have shorter life expectancies a better deal (2).
The FCA reviewed non-advised sales of annuities made by pension providers to their customer since 2008 and found that thousands of customers had been sold a standard annuity when they may have been eligible for an enhanced product (3). The ongoing investigation looked at more than 1,200 non-advised sales at firms which account for around two-thirds of the annuity market (1). The compensation due to these customers will amount to £120 to £240 for each year they had the annuity (4).
Despite the failures, the FCA review does not see a systematic problem with annuities. Megan Butler from the FCA said “Annuities play an important role in providing an income for retirement. It is important that consumers get the right information at the right time in order to make the right decision for their retirement”. (4)
The FCA has identified what they see as particularly poor behaviour at a small number of firms, rather than an industrywide failure to adhere to FCA rules. The fallout from this mis-selling incident is further bad news for annuities which are already suffering from historically low rates, which determine the value of pension incomes. Sales were also hit by pension freedom rules that allow people to take their pension pot in cash from the age of 55 (2).
Jackie Spencer, from the Money Advice Service, said: “Getting access to the right information at retirement is vital so that people can decide whether an annuity is the right option for them. Shopping around for an annuity and comparing the options will ensure that people are making the most of the money they have, and their money lasts for the full length of retirement.”(4)
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.