The Financial Conduct Authority (FCA) is set to introduce protections for anyone purchasing a pension annuity forcing annuity providers to inform their customers how much they could gain from shopping around and switching provider. 

FCA research shows that 60% of customers were not switching providers when they bought an annuity and up to 80% of these customers could get a better deal on the open market. 

A recent retirement income market study by the FCA recommended that an ‘annuity comparator’ be established in order to encourage shopping around. This comparator is likely to be an information prompt before an annuity is purchased.

Under the FCA’s proposals, firms will be required to deliver information in a personalised form in a format set out by the FCA. This prompt will have to show the difference between the provider’s own quote and the highest quote available to the consumer from all other providers on the open market.  There will also be a prompt to help the customer access the best quote – this will be a link contained in the information prompt.

Christopher Woolard, executive director of strategy and competition at the FCA said: ‘Although sales have declined since the pension freedoms were introduced, annuities still play a significant role in retirement provision.

‘It’s important that consumers shop around to get the best deal for them - yet our previous work found that very few people actually did so.

‘We believe that the proposals we have outlined today will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market.’

Firms will be also be required to give consumers details of whether the annuity is a single or joint life product, whether the rate of income paid by the annuity is guaranteed and the total pot that will be used to buy the annuity. 

The FCA tested different information and formats to understand which worked best to encourage consumers to shop around.  The behavioural testing found that when shown the annual increase in income that a consumer could gain from purchasing an annuity on the open market, the testing showed a 27 percentage point increase in the number of participants that went on to compare products from different providers.

The FCA is currently consulting on its proposals and intends that the new rules will come into force in September 2017.

The regulator has also announced that it plans to introduce requirements on the providers of retirement income products to provide data to the FCA about the types and volumes of products they are selling.

Since the pension freedoms were introduced in 2015, the FCA has been collecting retirement data from a representative sample of firms on ad hoc basis.  The consultation proposes to formalise the data that is gathered with firms being required to report this to the FCA.

The consultation closes on 24 February 2017.

Details of the FCA consultation on Implementing information prompts in the annuity market: CP16/37 are here