The Financial Services Authority has ordered an investigation into the £11bn annuity market amid concerns that British pensioners are getting a poor deal in exchange for their retirement savings.
The regulator will consider whether insurers are doing enough to encourage pension savers to shop around and move their savings in order to get the best annuity when a pension fund is converted into income for life.
Currently, people reaching retirement age are allowed to take their pension pot and shop around other providers for the most favourable annuity deal under what is called the “open market” option.
However, there can be a difference of as much as 20 per cent in the rates offered by different providers, which means that some pensioners could be missing out on a substantial boost to their incomes.
Regulators have intensified the focus on the pensions industry following last year’s launch of auto-enrolment, which will see all workers automatically enrolled into savings schemes by 2017.
While earlier this month, the Office of Fair Trading launched an investigation into whether employees are being unfairly hit with high charges on existing workplace pension schemes.
In addition, the cost of buying an income has soared in recent years due to the Bank of England keeping the UK Bank Rate low at 0.5 per cent for nearly four years and injecting £375bn of created money via a programme of quantitative easing into the economy.
This has depressed the yield on gilts and because annuities are linked to the yield on 15-year gilts, it means that savers get far less for their money. In fact, recent research showed that people who retire this year can expect to see an 18 per cent decline in their income.
However, there are suggestions that annuities may mount a recovery, with a recovery in the economy potentially pushing gilt yields up and improving annuity prices.
If you want to get the best possible income in retirement it is essential to get the appropriate advice. Is an annuity the right option for you ? How do you get the best rates ? How does your health affect this ? Our pension specialists can help you to consider all the options for your retirement.
Steve Horton is a Chartered Accountant and a Chartered Financial Planner who specialises in helping clients to manage their pensions and investments