Commentary – FCA policy on annuity prompts (PS17/12)

The FCA has now announced (PS17/12 – Implementing Information Prompts in the Annuity Market) that whenever a Guaranteed Annuity quotation is produced the Provider must include a one page statement showing whether a customer could get a better income if they purchased the annuity elsewhere.  This means that annuity providers will have to change their systems and gather the necessary comparative annuity quotes, and where relevant show the actual amount of extra annual income that the customer could get if they bought the top of the market quote.  Providers are not required to signpost where that top of the market quote came from but must point consumers to the Money Advisory Service site.

The rationale for this change is to encourage more shopping around rather than buy an annuity from the existing pension provider.  The FCA have undertaken research which showed that the form of prompt that had the greatest effect was one which provided a personalised comparison based on their actual requirements and which showed how much more income they could get by shopping around.

Of course, there is an element of “shutting the stable door” as this move is being implemented against the backdrop of a huge fall in annuity sales, although the FCA points out that 80,000 consumers a year are still purchasing annuities and would potentially benefit from this change.  This new requirement was first proposed before Pension Freedoms were announced in Spring 2015 so it will have taken a full 3 years before coming into effect.

The question that remains unanswered relates to the +90,000 who are opting to buy a Flexible Income product each year.  Again, many stay with their existing provider and a very large proportion do not seek advice.  Some sort of Drawdown Comparison is just as important for these customers as for those who still buy annuities.

The effect of a high charging product in terms of income provided is just as great for Drawdown products as it is in the annuity space, and there is potentially even more diversity in charging structures for drawdown than is the case for annuities.

It is to be hoped that this will soon come to the top of the industry’s, and the regulator’s, agenda.