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 884.


    No you always have a life. Most just spend too much, and live with this pretence spending is a right or normal. I have never earnt much, always below average but I spend far less, saving is easy.Life is not based in spending.Spending is a con of marketing. No one ever needs to pay money for a holiday for example, it is a con to sell implying it is any expectation of any 'life'.

  • rate this

    Comment number 883.

    "can anyone explain why the same isn't true of NI contributions which are simply spent when received?" the regulation we think is necessary for insurers isn't necessary for our NI contributions! Would explain why my statement only every says how many years I've "contributed" but never counts the amount contributed. If an insurer did the same wouldn't someone be locked up?

  • rate this

    Comment number 882.

    "It should be noted that the profitability analysis supporting our results is commercially sensitive at both a market and firm level and will not be made public." [Footnote 20 in the report]

    You can't tell what the profit or loss on an annuity is until the purchaser is dead. The FCA have made extremely well-educated guesses but no one's allowed to know what they are. So maybe profits are tiny!

  • rate this

    Comment number 881.

    "income drawdown. The trouble is it works out more expensive unless you have an above-average fund"

    It's not not necessarily expensive. Try this:

  • rate this

    Comment number 880.

    Rather than answer questions "Sally" uses rhetorical techniques such as the complex question fallacy and the strawman to divert attention.
    Go on moaner, as your question. So far I've answered every question you've ever asked of me, I'm sure I'm up to the task again.

  • rate this

    Comment number 879.

    My company pension provider said auto spouse pension & no health increase, makes me wonder if they told everything!

  • rate this

    Comment number 878.

    @862. TheRealist
    "Ignoring the tax benefits of saving into a pension."

    I wish people would stop saying that pension savings has a "tax benefit". It's tax deferral. You don't get the cash now (because you put it away in a tightly controlled savings vehicle) so you don't pay tax on it. When you take your pension, it's taxed.

    Sadly even politicians don't understand this simple fact either.

  • rate this

    Comment number 877.

    Perhaps all companies should be required to disclose profit margins on annuities, might help to make a bit more sense out of this fiasco.

  • rate this

    Comment number 876.

    @862 TheRealist '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'

    In fact, you always have the option of income drawdown. The trouble is it works out more expensive unless you have an above-average fund. One reason for its expense is complying with tax regulations designed to ensure HMRC gets its cut

  • rate this

    Comment number 875.

    859. wibble9999
    "can anyone explain why the same isn't true of NI contributions which are simply spent when received?"

    It's because when the state pension was introduced there was no pension pot built up over the working life of the 1st people to receive it, that is why still today what comes in immediately goes out.
    A 100 years ago there were 12 workers for every pensioner, today it's about 3.

  • rate this

    Comment number 874.

    This really doesn't address current problems, where current interest rates govern annuity rates.

    The vast majority of people should be advises to draw down on pensions and get an annuity later in life. Thus avoiding the terrible returns and keeping the capital invested.

  • rate this

    Comment number 873.

    855. Little_Old_Me
    "You seem to be saying"


    I've not total control over how things seem to anyone. My point is that the basic principles of pensions are simple. But everything I've read on the BBC does little to demystify the topic, rather to suggest it's so complex that you need an IFA, and to avoid mentioning what for most would probably be the best option, drawdown.

  • rate this

    Comment number 872.

    I would say it is a shame this story does not provide a link to the FCA's report:

    In truth, it seems a banal and superficial document. Presumably it is just a pretext for the proposed review, which should certainly recommend giving the right to transfer an annuity after purchase (including back into drawdown, if appropriate).

  • rate this

    Comment number 871.

    841. Rebecca Riot
    I heard that Dave's Dad operates from Jersey.

    You have some interesting sources. "Dave's Dad" died in September 2010.

  • rate this

    Comment number 870.

    Do not trust Insurance Companies / Banks to arrange and monitor your pension. The majority have shareholders interests above that of policyholders. Find a good IFA. Mine has produced 9% average returns over the last 15 years, with low risk funds. Annual review is vital to maximise your fund by making appropriate changes. Also drawdown options would appear to me to leave annuities dead in the water

  • rate this

    Comment number 869.

    Rather than answer questions "Sally" uses rhetorical techniques such as the complex question fallacy and the strawman to divert attention. It's not me or others on here that advocate bringing about a fundamental change in the organisation of society nor refuse to answer how that might be peacefully brought about. If that's your goal you have to provide strong evidence to support your cause.

  • rate this

    Comment number 868.

    Not working:
    Pension system
    Banking system
    Tax collection system
    Privatised cartels
    Dysfunctional privatised housing rental sector
    Ability to operate independently of the United States

    So, what is working?
    Corporate sponsorship of stooges masquerading as our representatives.
    Immunity from prosecution for pin striped mobsters
    Back door privatisation of NHS and suppression of NHS Risk Register

  • rate this

    Comment number 867.

    Forcibly having to buy an annuity with a pension-pot is as immoral as the mis-selling of PPI.
    The pension-pot holder should have had the choice of buying a fund (or funds) of his choice, or an annuity only if he actually wanted one.

    Compensation for mis-selling of annuities is required.

  • rate this

    Comment number 866.

    The only pension worth having is a final salary pension. Stakeholder and average earning pensions are a massive con trick, because a few years of high inflation can virtually wipe the value of a pension pot out overnight. Putting things into perspective, my house is worth about £300,000, but my pension pot was slightly higher. my FSP gives me a pension of £13k after taking a lump sum of £80k.

  • rate this

    Comment number 865.

    @859. wibble9999
    "can anyone explain why the same isn't true of NI contributions which are simply spent when received?"

    It was a Labour party con. Bernie Madoff got a life sentence for something similar. Nye Bevan is feted as a great reformer and founder of the welfare state. In his words: "The great secret about the National Insurance fund is that there ain't no fund" so he knew it was a con


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