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15:29 - 14-May-2008
Pension savings are used at retirement to buy an annuity which pays an income for life. But two-thirds of savers end up buying an annuity with their existing pension firm - even if it offers a terrible deal.
In a damning report, to be published later this week, the FSA reveals a huge gap of around 20% between the best and worst annuity rates.
It says - as revealed in Money Mail last week - that 40% of firms are still failing to advertise a saver's right to shop around (known as the 'open market option') properly in letters sent to those approaching retirement, with some firms actively misleading savers.
The report, which looked at 80 information packs from 55 firms, says a 'significant' number of firms failed to even explain that shopping around can result in a higher pension. And very few mentioned the advantages for customers with health problems.
This is despite the fact that smokers can qualify for a 15% boost to their retirement income from an impaired annuity - and those with serious ill health much more.
In a swipe at some of the biggest pension firms - it said those with good annuity rates are just as likely to be to blame. Firms that don't make the necessary changes by December could face hefty fines or be named and shamed.
The findings make a mockery of a report published last week by the insurance industry, which attempted to play down the crisis. The Association of British Insurers claimed 85% of customers are getting at least 95% of the highest rate.
It claims that someone with a £10,000 pot who gets the best annuity compared to the average rate will be just £513 better off over their lifetime. But just looking at the top nine annuity providers alone, Money Mail has found a 15% difference between the best and the worst deals for someone with savings of £10,000.
So, someone buying a policy with Canada Life will get £735 a year compared with £626 from Axa. If they live to 90 they would be £2,725 worse off, according to Annuity Direct.
Two other firms - Scottish Widows and Friends Provident, are also more than 5% worse than the best rate available. And these are just the rates from insurers who publish figures - many refuse to do so. For savers with a £50,000 pot, the difference is even more dramatic. Four out of nine firms offer rates which are 5% worse than the best available. These include Standard Life, Friends Provident and Scottish Widows (both over 10% worse) and Axa - 17% worse.
A 65-year-old man with a £50,000 pension pot can get an annual income of £3,853 from Aegon Scottish Equitable. Axa Sun Life - which offers one of the worst deals - pays just £3,206. So, if you live to 90 you'll be £16,175 out of pocket by choosing the latter.
The ABI says its figures, taken from 2006, represent 92% of savings going into pensions annuities and is as comprehensive as possible. But Nigel Callaghan, from Hargreaves Lansdown, says: 'The ABI research is so skewed it's laughable. It completely ignores impaired annuities which account for up to 40% of the market.'
Of 36 ABI member firms providing annuities, 10 of the firms with poorer rates refused to respond to the ABI - even though it is their industry mouthpiece. The ABI's figures also ignored the fact that it is estimated up to 40% of those retiring could qualify for a better pension - called an impaired annuity - on medical grounds.
Stuart Bayliss, from Annuity Direct, says: 'The ABI report has been heavily spun. It is selective in the extreme and doesn't convey the reality of the marketplace. The ABI are trying to defend appalling service which is not fit for purpose.'
An ABI spokesman says: 'We made it very clear what the scope of our research was, so for it to be attacked in this way is absurd. We have openly and freely acknowledged that improvements in customer service and communications are needed, as our press release states. The ABI is working hard to deliver those improvements.'
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