Another annuity review

1st March 2014

The pension annuity market had been in the spotlight for some while and the latest review, from the Financial Conduct Authority, shows why.

Annuities have had a bad press in recent years. Rates are close to all-time lows, thanks to low long term interest rates and improving longevity. Matters have been made worse by regulatory and other changes in the marketplace which have made advice an uneconomic option for someone with the typical pension pot of under £20,000.

In February the Financial Conduct Authority (FCA) published its long-awaited thematic review of the pension annuity market. It had taken a year to produce, but in truth revealed little new information amongst the raft of data. What it did underline was the message of many other reports on the annuity market: the importance of shopping around rather than accepting the annuity rate on offer from your existing pension provider.

The gain from shopping around is most marked where you may be eligible for enhanced annuity rates, e.g. because you are a smoker or have an existing health condition). The FCA said that its research suggested “that overall 80% of those purchasing an annuity from their existing pension provider would benefit from shopping around and switching. … for enhanced annuities the proportion is 91%.”

Estimated annual income gains by consumers from purchasing an annuity on the open market

Standard Enhanced All Annuitants
Average fund size used for
annuity purchase
£17,000 £26,800 £17,000
Average annual income achieved
from existing pension provider
£1,000 £1,630 £1,030
Average amount of annual
increase in income
£67 £135 £71
Average proportion annual
income could be increased to
6.7% 8.3% 6.8%

Despite its findings, the FCA is not about to set on an immediate shake up of the market. Instead it plans “a competition market study into retirement income”, which may not reach fruition for another year. In the meantime, if you are considering converting your pension fund into a retirement income, remember that 80%...

The value of your investment can go down as well as up and you may not get back the full amount you invested.

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