On retirement the money an individual has saved in their pension plan is used to buy an “annuity,” a type of insurance policy which ensures a consistent income or pension in exchange for their lump sum.Â
The majority of people (approximately 60%) accept the terms made available by their existing company because they are unaware that they can transfer their funds to another provider in order to obtain more favourable rates; this is known as utilizing the Open Market Option.
By exploiting this alternative people can increase their retirement income by at least 10-20%, often by more (up to 40%), if they have serious health problems or lifestyle issues resulting in a reduction in life expectancy.
The pension annuity market is estimated to be worth Â£1.1 billion a year with the sale of approximately four hundred thousand new contracts in 2011.Â
However due to an increase in longevity and decreasing interest rates, incomes derived from annuitiesÂ have fallen to their lowest ever levels which means that a man aged 65 would have seen a reduction of 12% in the proceeds from his standard annuity in 2012 (Moneyfacts Research).
The FSA is to embark on an investigation into the pension annuity marketÂ In the first stage they will try to ascertain whether people are being penalised by failing to explore all the alternatives for their pension and if so whether it affects some groups more than others.Â
Scott Mullen from My Pension Expert emphasised this point: “Individuals need to seek advice and obtain support to research all available options when purchasing their annuities in order to gain the best possible rates and avoid disadvantaging themselves for the rest of their lives; we at My Pension Expert, as fully independent annuity advisers, aim to give that assistance.”
In addition the FSA also want to establish if some providers are failing to offer competitive rates.Â They intend to conduct a pricing assessment of all annuity providers in order to obtain a comparison of the rates offered through the Open Market Option and other routes with those made available solely to existing policy holders.
Punitive action against companies whose rates are uncompetitive could be taken. The second part of the enquiry will aim to discover how the strategies companies use to provide annuities affect the ability of consumers to access all options.