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 864.

    @856 Rebecca Riot "London is notorious and always has been."
    People are dodgy, notorious, always have been & probably will always be so!!

    btw If you don't understand a document don't sign it, say you'll think about it, walk away. Take someone with you who has a better of idea of business. There is nothing shameful in knowing your limitations - we all have them.

  • rate this

    Comment number 863.

    @849.Rebecca Riot
    "This coalition governments central purpose is to drain off all the savings from the middle classes."

    That's the purpose of all current government types, red blue or yellow. Same is happening across the western world.

  • rate this

    Comment number 862.

    Ignoring the tax benefits of saving into a pension. Most private pensions will be required to take out a "forced" annuity on retirement, i.e. you don't really have a choice of putting anywhere else, As you can't be trusted not to spend their pot in one go. Once they introduce "forced" pensions, it will become nothing other than a clever way of privatising the state pension.

  • rate this

    Comment number 861.

    Saving for a pension means having a job - and one that will pay enough for you to be able save. Until we can get these two critical things, the pension will fall by the wayside - just like holidays and all other "non essentials". Its bad enough for most folk, but just try this when you're disabled too.

  • rate this

    Comment number 860.

    Some employers match the workers contributions, 1:1, 2:1, sometimes even more. It is this alone which makes the schemes worthwhile, and a national scandal that both employers' and employees' contributions are held to ransom by exploitation of naiive, outdated tax laws.

  • rate this

    Comment number 859.

    The pension contributions you give to an insurer by law have to be invested and accounted for...can anyone explain why the same isn't true of NI contributions which are simply spent when received?

  • rate this

    Comment number 858.

    To 32.David.
    Your comment shows what is wrong with the annuities business--they should not be set up to "make killings" they should have been set up to make profits,obviously,but not so much that the profits on selling and running them are the main reasons for selling them in the first place.
    All too often,greed seems to be the reason for selling policies-greed by the sellers,not the buyers.

  • rate this

    Comment number 857.

    Despite so many high profile names realising that when they get to retirement, there's very little in the pot, what there is, is being fleeced by con merchants, and STILL NOTHING is done.

    Pensions are a big con. Stop giving them your money because they will only steal it.

  • rate this

    Comment number 856.

    City of London Stock Exchange is well know as a place to do dodgy deals. London is where the Yanks come when they know that whatever they are up to might lead to their arrest if trying it in New York. But London on the other hand has friendly arrangements, very loose rules and easy to dodgy deals. London is notorious and always has been?

  • rate this

    Comment number 855.

    746.The J Hoovers Witnesses - ".....who seems to me strenuously to avoid giving the very facts to which I referred...."

    You seem to be saying that unless something tells it exactly how you personally think it should be told it is not any good? Really?

  • rate this

    Comment number 854.

    Financial advisers are like "professional tipsters" they sell you the name of the "certainty" that is then "very unlucky in running" meanwhile they live off the money you paid them and certainly didn't risk their money on the "certainty". Nice work if you can get it

  • rate this

    Comment number 853.

    Gosh, which Sherlock figured this out! Annuities are a wonderful way of making buckets of money - but only for the fat cat provider, not the pensioner. Given the choice I wouldn't touch one with a barge pole but unfortunately the insurance companies and the Government have the system sown up on this. Anyone would be much better off using a stocks and shares ISA rather than a PPP.

  • rate this

    Comment number 852.

    846.HilaryJ...I think you'll find that those digging us out of this problem aren't earning 1000 times the minimum wage. People with the same skills and experience I have generally do earn similar pay to me which is fair I think?

  • rate this

    Comment number 851.

    Unless you're forced to take an annuity, then stop and work out at a reasonable interest rate how long the pension company is expecting you to live. Compound interest backwards. Then decide if it's a better risk living off the interest/ capital.
    If the pension company wasn't making money they wouldn't do it, they're all far from being charitable institutions. Your savings feed you and a fat cat.

  • rate this

    Comment number 850.

    I haven't clocked up enough NI payments to qualify for a State pension let alone a private pension. I'm not the only one in this position.

    No one seems to be that bothered by this issue.

  • rate this

    Comment number 849.

    This coalition governments central purpose is to drain off all the savings from the middle classes. They know you have got it so they want it, and they are going all out to get it out of your pockets?

    Another five years of this dodgy lot means another five years of pinching your hard earned money. Suggest you don't vote for them the next time?

    Just more of the same and now flooding as well!

  • rate this

    Comment number 848.

    Ask yourself, how much is enough....then keep it simple. You will sleep better!!

    I've always wonder why a 'financial adviser' works for a living.

  • rate this

    Comment number 847.

    "it's not working"!?
    Really?, a few million people pointed ALL this out years ago.
    Unfortunately they cant ALL have another 40 years of contributions because you chose not to listen,thanks!!

  • rate this

    Comment number 846.

    'Every time I hear "fairer society" a little voice in my head says higher taxes and lower personal allowances for people who work.'

    How about less inequality in the rewards for those who work? Skill and responsibility should be rewarded but not at 1000 times the minimum wage.

  • rate this

    Comment number 845.

    @829.Knut Knutsen
    "Pension pots are based on FTSE 100 Companies."

    Some are, some are not.


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