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The Actuary The magazine of the Institute & Faculty of Actuaries

Annuity providers to be forced to give comparative quote

Customers to be made aware about the potential gains of switching providers before purchasing an annuity according to plans set out by the Financial Conduct Authority (FCA).

New rules to help customers make 'better decisions' ©iStock
New rules to help customers make 'better decisions' ©iStock

The regulatory body have found that 60% of customers do not switch providers when buying an annuity, with 80% of these buyers able to get a better deal.

Proposals in their consultation paper will take effect from September next year, with firms required to show all customers their quote as well as the highest quote available from all providers on the open market.

FCA executive director of strategy and competition, said: “It’s important that consumers shop around to get the best deal for them - yet our previous work found that very few people actually did so.

“We believe that the proposals we have outlined today will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market.”

Behavioural research by the FCA found that when shown the annual increase in income that could be gained by purchasing an annuity on the open market, 27% of participants went on to compare different products.

However there are concerns over how these changes to the rules could lead to many customers receiving an enhanced annuity, which give a higher income than a standard annuity due to the buyers’ health and lifestyle.

The new consultation paper is currently seeking discussion about the scope and content of the proposed comparative quote, as well as when the information prompt must be provided and the date by which the firm must implement the proposal.

Hargreaves Lansdown head of retirement policy, Tom McPhail, said: “The problem of making it easy for investors to understand the benefit of shopping around and to then act on that knowledge, has vexed policymakers for years.

“This proposal, to give annuity purchasers a pounds and pence disclosure of how much better off they could be will solve half the problem.

“The bit still to be dealt with is the fact that 75% of annuity purchasers could get an enhanced annuity and that won’t be reflected in this proposed disclosure.

“The good news is that the FCA knows this and will soon be taking steps to address that too, through revisions to the pre-retirement ‘wake-up’ packs.”

Additional proposals put forward by the FCA include firms being required to give consumers details of whether the annuity is a single or joint life product, whether the rate of income paid by the annuity is guaranteed and the total pot that will be used to buy the annuity.