Two years after it began its probe into annuity sales, the Financial Conduct Authority (FCA) says that consumers are still not being given enough information about "enhanced" annuities. When a customer uses their pension pot or part of it to buy an annuity from an insurer, they trade in a lump sum for a guaranteed annual income.
An enhanced annuity provides a higher income for those who are in poorer health, and therefore have a lower life expectancy so a smoker might be eligible for an enhanced annuity, for example. As an annuity is a one-off purchase, it's very important that a customer finds the best deal, or they risk missing out on thousands of pounds.
Yet an initial review of a sample of customers and sales practices has indicated that consumers "may have been given insufficient information" about the availability of these special annuities, their potential eligibility, and the fact that they could have received a higher income if they shopped around, says Josephine Cumbo in the Financial Times. As a result the financial watchdog has deepened its probe, asking several firms to carry out a more extensive review before it decides on its next steps.
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Meanwhile, the regulator plans to launch a new annuity comparison tool, to show customers how their annuity rates compare with rivals' rates. Recent testing showed that the tool increased shopping around rates by customers from just 13% to 40%. "As the research shows that the annuity comparator is an effective remedy, the FCA intends to consult on necessary changes later this year to introduce this as a requirement."
Following the pensions freedom changes, of course, no one needs to buy an annuity. However, they can still be a useful way to secure a guaranteed income, and there's certainly a place for them in some investors' financial planning. But if you're thinking of doing so, the message to take away from this and it's one that we at MoneyWeek have been hammering away at for years now is that before you commit to buying one, make absolutely sure that you have scoured the market for the best possible deal.
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