Money

Pensions

Annuities under the spotlight

Holly Thomas

Annuity providers came under fire this week from the City watchdog following its investigation of insurers, writes Holly Thomas

The Financial Services Authority (FSA) blasted the industry for some serious failings of people approaching retirement who are looking to convert their pension savings into an income.

By taking what is known as the open-market option, people approaching retirement can exercise their right to buy an annuity from a company other than their current pension provider.

However, the FSA said a significant number of firms stopped short of actually explaining that exercising the option can result in a higher pension.

It found that 40 per cent of the literature issued to pension customers as they approach retirement age - the so-called "wake-up" packs - failed to meet regulatory requirements.

Sarah Wilson of the FSA said: "Combine this with research suggesting a gap of around 20 per cent between the top and bottom annuity rates - not including enhanced and impaired annuity rates - and the potential for customer detriment is evident."

The FSA said very few firms mentioned the advantages of shopping around for customers with health problems, who could be better off buying an annuity from providers offering impaired life or enhanced rate annuities.

The FSA also said not all firms are using their guaranteed rates in their default annuity illustrations, even though they would result in significantly higher incomes for policyholders.

"This results in the policyholder getting a misleading view of the in-house pension and could lead them to underestimate the value of the guaranteed annuity rate and choose an option where it would be lost," said Wilson.

Owain Wright, pensions expert at Saga, said: "It's incredible that people spend their whole lives saving for a pension but when it comes to buying an annuity they do not get it right by spending time finding the best one.

"It has never been more important to secure the best income possible."

The "at retirement" market has tripled in size in the last 15 years, with more than £14 billion placed into annuities and income drawdown products in 2007. This will continue to grow in the future as more baby boomers reach retirement.

The FSA displays annuity rates on its website for comparison by consumers at www.fsa.gov.uk

The full report by the FSA will be published in July.

* Holly Thomas is the deputy personal finance editor of the Daily Express and Sunday Express. Her opinions are her own and for general information only. Always seek independent financial advice.

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