Annuity inquiry must lead to fairer pensions

The Financial Services Authority's news this week that it has launched an investigation into the £15bn annuity market prompted criticism that the City watchdog has taken so long to act.

The news followed years of criticism that millions of people are sold the wrong income plan when they retire, leaving them missing out on tens of thousands of pounds.

Last year round half a million people bought an annuity, which gives a regular income until death, based on the size of someone's pension pot.

But a large number of retirees simply take the plan offered by their pension company, which could offer a lower payout than they could get elsewhere. So by not shopping around for the best retirement deal, pensioners end up losing out on tens of thousands of pounds.

In fact a report from the National Association of Pension Funds (NAPF) and the Pensions Institute last year showed that retirees are being short-changed by up to £1bn from their total future pension income because serious obstacles stop them getting the best annuity deal.

"At the moment, consumers are dealing with an unfair and opaque system that is preventing too many of them from securing a decent income for their old age," said Joanne Segars, chief executive of NAPF.

The pensions expert Ros Altmann has campaigned about the problems for years. "The annuity market has been a scandal in the making for too long," she warned this week.

The regulator's investigation will look at how badly off consumers end up by not shopping around. It will also examine whether there are particular pension firms that leave people worse of by sharp practice or even groups of consumers who are more likely to end up with a lower retirement income.

How bad is the problem? Research by the financial website Moneyfacts on annuity payouts on Thursday showed that a 65-year-old retiring with a £50,000 pension pot could receive up to 16.2 per cent less income by failing to shop around for the best deal. That would leave them £8,000 worse off over 20 years. The figures would be much higher, of course, if you had a bigger pension pot.

What happens next? As usual with regulators, progress will be slow. In fact the FSA doesn't expect to complete its investigations before it hands over a range of responsibilities to the new Financial Conduct Authority in April.

Once the initial investigation is concluded, evidence will be taken forward by the FCA in the second half of this year, the FSA said. That logically means there won't be any real progress until 2014.

So where does that leave people facing retirement in the next 12 months? How can they avoid being caught in the annuity trap?

That's simple. Don't take the annuity income offered by your pension provider. "Shopping around, choosing the right type of annuity and, so far as it is possible, timing the purchase to the best advantage are all critical factors which can make a massive difference to the outcome from a pension plan," advised Malcolm McLean, consultant at Barnett Waddingham.

With annuity rates at record lows, delaying taking out an annuity can be a good option, suggested Tim Banks of AllianceBernstein. "Delaying the purchase of an annuity until age 75 could boost annual pension income typically by 25 per cent," he reckons.