PENSION providers should do more to spell out how annuities work in order to help consumers through the “minefield” of picking the right retirement deal, the ombudsman service has urged.
The Financial Ombudsman Service, which resolves disputes between consumers and financial businesses, said many complaints about annuities could have been avoided if the pension firm had made more effort to explain “in plain English” exactly what an annuity is.
Common complaints are from people who bought a deal that turned out to be unsuitable or that they were unaware they could not go back on their decision.
The call came as the Financial Conduct Authority announced an inquiry into the market after finding that in around eight out of 10 cases it looked at where people have stuck with their existing pension provider to buy an annuity, they could have been better off financially by shopping around and switching.
Around three-fifths of people stick with their current pension provider when buying an annuity, but on average the benefit of switching equates to someone having saved an extra £1,500 into their pension.
Annuities are a one-off purchase that people make when they retire to convert their pension pot into a fixed yearly income.
There are many different types of annuity and people in ill health could be thousands of pounds better off over the course of their retirement if they opted for an “enhanced” annuity.
Martyn James, of the Financial Ombudsman Service, said picking the right annuity “can feel like a minefield”.
He said that, with the confusing terms used, “it’s inevitable that people rely heavily on the advice they get from big business. We’d like people to feel empowered to speak up if they don’t understand what they’re getting into.”
The ombudsman gets about 50 complaints a month about annuities and upholds around one third.
Many complaints revolve around people saying their annuity was unsuitable, perhaps because their ill health was not taken into account.
Ros Altmann, an independent pensions expert, said: “Insurance companies often make it impenetrably difficult to move to another company. Reams of paperwork, full of jargon means that most ordinary people have no hope of really understanding the complexities of annuities, buying from their existing provider is far faster, easier and saves much form-filling and chasing up of information.”
She said some of those who try to switch “end up giving up because they need the money quickly and the process is so time-consuming or difficult”.
The FCA estimates that 80 per cent of those purchasing an annuity from their existing pension provider would benefit from shopping around and switching.
It found that people buying a standard annuity could boost their annual income up to £200 by buying on the open market and those buying an enhanced annuity could be up to £290 better off.
The regulator found that people with smaller pension pots of under £5,000 have little choice if they try to shop around.
The FCA’s report will be published in the next year, which could come up with remedies such as changing rules to shake up competition and placing curbs on the behaviour of some firms.
Karen Wynard, director of Eastwood Financial Services, based near Halifax, said pension providers are improving their use of plain English but, when it comes to shopping around and moving to an alternative annuity provider, increased amounts of paperwork can put some people off.
“We always educate people about their options and encourage people to take independent financial advice. Sometimes the forms to move to an alternative annuity provider are not the easiest to complete. The providers are getting better at plain English, rather than using too much jargon.”
She said it was important for people with medical conditions/poor health to explore their options as they could receive a higher pension income.