The annuities market investigated
With the annuity market now growing year on year, and with pensions being more important than ever, the Financial Services Authority (FSA) is investigating the annuity market place and the insurance companies involved. Concerns are that insurers are not doing enough to point those with maturing pensions in the direction of the most appropriate annuity, by utilising the ‘open market option’ (the right you have to shop around for the best annuity rate).
A majority of people with maturing pensions should be encouraged by their pension provider into using the open market option (OMO)- simply, shopping around. However, too many consumers are persuaded to stay with their pension provider and end up with an inferior, often inappropriate, annuity.
Many companies claim extenuating circumstances as to why so few customers shop around. Most insurers will not accept small pensions to buy an annuity, thereby leaving savers with no choice.
Among the big insurers, use of the open market option is mixed. Last year the percentage of customers shopping around for an annuity was 33% at Norwich Union and Scottish Life, 35% at Prudential and 37% at Scottish Widows. These figures are all inflated by the inclusion of pension transfers.
Higher use of OMO occurs at Friends Provident (54%) and at Zurich (65%), though of the 17,300 Zurich customers who did not buy the company’s own annuity, 12,100 purchased one from Pru. This is because two years ago, Zurich entered into an arrangement with Pru whereby customers could obtain Pru’s market-leading annuities irrespective of their pension fund size.
More people should be shopping around for an annuity than ever before as insurers highlight the benefits of doing so. However, awareness of the open market option is not increasing. The FSA need to act quickly and decisively.
