Pension system 'not working', says City watchdog FCA

elderly couple at football match People only buy an annuity once so need to search for the best value deal

The UK pensions system is not working, the City watchdog has concluded following a review into the "disorderly" annuities market.

An annuity is a retirement income that is bought once with a pension pot and provides an income for the rest of the holder's life.

This income could increase by 6.8% a year by shopping around for an annuity, the Financial Conduct Authority said.

And the industry had "closed the door" on those with small pension savings.


People who save into a defined contribution pension will almost always buy an annuity with their pension pot. It is the most common form of retirement income, apart from the state pension.

The Financial Conduct Authority (FCA) reviewed 25 pensions firms representing 98% of the UK annuities market.


There are three key questions that everybody should consider before purchasing an annuity:

  • When is the right time?
  • What type of policy and which options?
  • Which annuity company pays the highest income?

If you will be paying tax on income you don't need or you think annuity rates are about to rise, you might consider deferring your annuity in the hope you will be better off. However this is tricky and you could lose out if you get the sums wrong.

Although most people purchase a traditional annuity there are a number of alternatives such as investment-linked and drawdown which can be considered by those who can take some risk.

It is only natural to want the highest annuity income as soon as possible but an annuity lasts for life so it is important to consider all of your options are before making an irreversible decision.

The FCA found that six out of 10 retirees bought an annuity from the provider which they used when saving for a pension. Many looked elsewhere but did not switch.

But 80% of those could have got a better deal, and a more generous retirement income, by shopping around effectively and then buying the annuity from another provider.

In pounds and pence, the typical pot of pension savings analysed in this review was £17,700. This would typically be used to buy an annuity that would pay an annual retirement income of £1,030.

But by shopping around, that annual income could increase by £71, or 6.8%, to £1,101.

One in six people could see their retirement income increase by more than 10% if they changed provider, the FCA said.

Those buying an enhanced annuity - available to smokers or those with a medical condition that shortens their life expectancy - could see a £135 a year, or 8.3%, rise in annual retirement income by shopping around, after building up an average pension pot of £26,800.

"The need to get an income in retirement unites us all. But once you've bought an annuity you can't change your mind," said Martin Wheatley, chief executive of the FCA.

"We need to understand why they aren't shopping around and switching."

Mr Wheatley told the BBC's Today programme that buying an annuity was simply too confusing for most people: "Information is not provided in a way that allows people to make simple choices," he said

Small savings

The FCA review found that people who had saved less than £5,000 into a pension pot were particularly poorly served by the industry.

Pension file Pensions are often considered to be confusing for savers

"There is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them," Mr Wheatley said.

"There should be competition across the entire market, not just for those with the most money."

The FCA will now conduct a study to assess competition in the market, and will publish some possible remedies within 12 months, but some have argued that the process is too slow.

"It is disappointing that after a full year we still have to wait many months more for a second stage investigation by the FCA before regulatory action of some description can be initiated," said Malcolm McLean, consultant at Barnett Waddingham.

Start Quote

We recognise that our industry can do more to make the market work effectively for customers”

End Quote Otto Thoresen Director general, Association of British Insurers

"The purchase of an annuity is effectively still a one chance opportunity. Consumers must always consider that while a difference between annuities may not seem like very much, if they then multiply this by 20 to 30 years the losses in retirement income can add up to a significant amount of money."

Andrew Tully, of provider MGM Advantage, said: "The FCA review doesn't go far enough, or act quickly enough. This will potentially leave many thousands of retirees high and dry when navigating the annuity minefield."

Most complaints made to the Financial Ombudsman Service emerged from a lack of explanation in plain English from a provider about what an annuity is and how it works.

The Association of British Insurers (ABI), which represents many pension providers, said that changes were already being made to make things clearer.

"We recognise that our industry can do more to make the market work effectively for customers which is why we are finalising a new package of measures to enable people to engage and to shop around for better deals," said Otto Thoresen, director general of the ABI.

"This would include ensuring customers have the right to a conversation to help them understand the difficult decisions at retirement; and how all customers can get a comparison of rates."

Huge industry

Some 420,000 annuities are sold every year, and millions of workers are saving into a pension pot so will eventually need to buy an annuity.

The amount that a pension pot could buy in the annuities market fell sharply during the financial crisis, but started to recover in 2013.

The FCA found that nearly all price comparison websites it studied failed to offer clarity for those shopping around for a good deal.

Pensions Minister Steve Webb said that the FCA's review of the market was vital as more and more people save into a pension through the automatic enrolment system.

"This makes taking effective action to ensure that people get value for money from annuities all the more important, and the new FCA review is a welcome and crucial step, as part of the government's on-going work on the issue," he said.

"We want to build a fairer society, and that means helping people to get the most out of their hard-earned pensions savings when they retire."

Not everyone has to buy an annuity to receive a pension income. Those with final-salary pensions will be awarded a pension pot linked to their salary when they finish work, so will not need an annuity.

The state pension is also unconnected to annuities.


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  • rate this

    Comment number 764.

    And we wonder why people can't save or figure things out for themselves.
    The wonders of the comprehensive education system.

    Agreed, dacades of decline in maths standards because of our one-size-fits-all attitude to education.

  • rate this

    Comment number 763.

    @757 and 758. Although laudable, I do think you efforts to educate here are wasted. There is no desire to learn with some people or they would have taken control of their finances years ago rather than turn into Gimmee Gimmees.

  • rate this

    Comment number 762.

    Wish I could afford a decent pension but no doubt the low earners will be working until we drop, just like in Victorian times.

  • rate this

    Comment number 761.

    @748.Since that is the case: why let yourself be a sheep?

    Hmm? Sheep or maybe an honest customer who puts his/her trust into having those who advise him/her, having the SAME level of honesty,& NOT looking to make a quick buck in doing so... Its called having PROFESSIONAL ETHICS!

  • rate this

    Comment number 760.

    21, There are many people who have never earned enough to save for a pension as their income was far too low. Most clerical grade work does not always pay well, nor did they (me) get a work based pension despite working for years. I did take time out for a family, lack of child care in the 80's made it impossible to return quickly enough. Give children money for their old age instead of presents.

  • rate this

    Comment number 759.

    By the standards of many other places ( this is my 7th country to live in) the UK has plenty of choices in finance & tax matters. I like it here & am happy to live by the rules, which are actually tailored for pro active people to steer their own financial futures.

    But that only works if you bother to bend your brain around the choices. Otherwise - you'll be sheared and it'll be your own fault.

  • rate this

    Comment number 758.

    @753 and @737

    Being numerate is important. You are both exhibiting a lack of numeracy.

    Approx. 27K is the UK MEDIAN wage.

    Thus the vast majority by DEFINITION cannot be on less than this because of how median is defined - look it up !!!!!!!!!!!!!!!!!!!!!!!!!!!! Surprise, surprise it means half are on less than this and half more. The mean is higher still skewed by high earners.

    Is this hard?

  • rate this

    Comment number 757.

    'The median wage in the UK is over 500 pounds a week. Do you know what a median is? It is not the average'

    There are 3 kinds of average. Most people think of the mean (total/number) but the median (mid point in a ranked list) and the mode (commonest) are also averages. The mean income is higher than the median because of the very high values at the top end.

  • rate this

    Comment number 756.

    . Compounded by them giving public sector workers an unaffordable final salary pension also at the expense of the tax payer.

    The local Authority Pension scheme in my area makes more money through investment than it pays out. You pay council tax and you pay for groceries at the supermarket. Both payments include a percentage for staff pensions.

  • rate this

    Comment number 755.

    Currently our pension systems invest in overly leveraged debt laden world economies, which are insanely low (0%) interest rate dependent. Collapse of global markets is unavoidable.

    Protect yourself; invest in things unable to be run off a printing machine. Buy commodity stocks, precious metals, and the like.

    "Argentum et aurum comparenda sunt"
    (Silver and Gold must be bought)

  • Comment number 754.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 753.

    11 Minutes ago
    There is a myth that the average wage is £27K, well I can tell you vast majotity of us are on less than half of this."

    Actually it is not a myth it is true! It is just the majority of people don't earn that amount but rather the few at the top earn so much when you average it out it it looks better. Avergae salary doesn't mean the average person receives it.

  • rate this

    Comment number 752.

    @748 Justin Idea

    You might find the grass in the sheeps field has been cut so low the sheep are starting to notice what the farmers are up to.

    Iceland had the right idea.

  • rate this

    Comment number 751.

    In the world of business you are not all equal & deserving (for those of you who didn't understand my post at 730).

    Its business, its not personal.

    Some of you need hand holding.

  • rate this

    Comment number 750.

    It all goes to prove there is little competition in the bank industry, why?..because they have setup unreasonable regulatory barriers to entry with thanks to their gov't partners. If there is enoguh money for all players no need to compete.

  • rate this

    Comment number 749.

    People are told 'get out there & take a job' - any low pd job if necessary - & not to be a burden on the benefit system, but somehow must save for a rainy day in ISAs & then put loads more in pension plans for old age. They must avoid xs credit like plague in case of unaffordable debt, so propery ladder - no chance. Just *how* are ppl meant to do all this & get by with rising h/hold bills as well?

  • rate this

    Comment number 748.

    I read a lot of 'banker bashing' here on a regular basis. I think you have no idea of the wide spectrum of financial operatives; a tiny fraction of them are bankers in the classic sense.
    But the vast & complex world of financial operatives is well-rewarded, but requires cleverness, speed, courage & ruthlessness...and lots of gormless sheep.

    Since that is the case: why let yourself be a sheep?

  • rate this

    Comment number 747.


    Oh dear, oh dear.

    The median wage in the UK is over 500 pounds a week. Do you know what a median is? It is not the average.

    And we wonder why people can't save or figure things out for themselves.

    The wonders of the comprehensive education system.

  • rate this

    Comment number 746.

    727. Little_Old_Me
    "I'd say you're too lazy to bother looking to see if the BBC offers the advice you claim it does not - took me 5 secs to find this for starters"


    Maybe. That's a non BBC endorsed source, who seems to me strenuously to avoid giving the very facts to which I referred, and also appears a sales pitch for IFAs.

    It was from June 2012 too. There's one which at least mentions PAS

  • rate this

    Comment number 745.

    lol, I was wondering how long it would take till someone put me up for moderation. Sorry that folk don't like looking at topics with the boot on the opposite foot.


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