Shropshire Star

Scandal that could see pensioners miss out on millions

For millions of people, the prospect of retirement can be daunting at the best of times.

Published

Adjusting to the change in routine after a lifetime in work can be difficult in itself, and it is little surprise that some people become fearful about the future.

However, for those who have diligently put away savings through their career, they should at least be able to expect a reasonable degree of financial security. Or can they?

According to experts, Shropshire pensioners are being left thousands of pounds out of pocket because they do not have access to the right information when they retire.

And worryingly, it seems that those who suffer from long-term health problems are most at risk of losing out.

Robin Melley, from Kidderminster

Robin Melley, of Bridgnorth-based Matrix Capital, says people with long-term illnesses or medical conditions are missing out because their pension providers are not telling them about how they could boost their incomes.

He is calling for urgent changes to the way the sector operates following a critical report by the Financial Conduct Authority about the mis-selling of products known as annuities.

And a government adviser has warned that the mis-selling could be on a larger scale than the PPI scandal which has engulfed the banking industry over the past few years.

It is estimated that as many as 900,000 people may have been sold the wrong type of annuity, missing out on £5.4 billion as a result.

In simple terms, an annuity is an insurance policy tat converts the pension pot built-up by the time of retirement into a regular guaranteed income.

Prior to changes announced in last year's Budget ­— which come into effect in April ­— tax rules meant that most people could only access their pension pot by purchasing an annuity or a 'drawdown' product which allows people to access their pension pot while leaving it invested.

Central to the mis-selling allegations are the fact that people with known health conditions, be it high blood pressure or cancer, should be entitled to a higher income as they are not expected to be claiming their pension for as many years as somebody who is in excellent health.

However, the FCA found that many pensioners with these health problems had been sold annuities which made no such provisions, leaving them thousands of pounds out of pocket.

The FCA report could be the opening shot in a battle which could result in billions of pounds being paid out to savers who have lost out as a result of being sold products which do not suit their needs.

However, Ros Altman, the Government's champion for older workers, has accused the FCA of dragging its heels in seeking a remedy to stop the problem.

"It is truly shocking that the FCA's inquiry uncovers what seems clear evidence of persistent mis-selling, yet it is not proposing any immediate action to stop it," she says.

"Those in poorest health are losing out most and still won't be properly protected. Those with health issues are most at risk of losing out from poor annuity sales practices."

Malcolm McLean, senior consultant with Barnett Waddingham, has also questioned why the FCA has not chosen to take immediate action against the companies concerned.

"It would appear that they are sweeping past mis-selling under the carpet," he says.

Mr Melley says a lack of understanding among the general public about the importance of annuities, and poor information from financial providers, has led to the majority of customers simply sticking with their existing provider, leaving them out of pocket.

The FCA report said the market was "not working well for most customers."

Mr Melley says the FCA found that 60 per cent of consumers did not switch providers when it came to purchasing an annuity.

"And yet, 80 per cent of them would have been better off if they had shopped around for the best rate," he says.

"The galling part of this is that annuity purchase is an irreversible decision, so it is extremely difficult, if not impossible, for people to change once they have made their choice.

"The Financial Conduct Authority found that some pension companies failed to inform customers that other providers may offer enhanced annuities for medical conditions that they do not underwrite," says Mr Melley.

The FCA investigation, which began in 2013, also found that another 530,000 widows may have been left without an income because their husbands weren't told that payments would cease on their death.

Miss Altmann says: "Annuity companies are not clearly telling people about the risks of buying a single life annuity.

"This means many widows are left penniless when their husband passes away.

"The company will send information about 'joint life' and 'single life' annuities but most people do not understand what these terms mean. "

Miss Altmann says there needs to be a duty on insurers to explain in plain English how annuities work, what their risks are and to ask a few relevant questions that would identify potentially unsuitable sales. For example, if the annuity assumes the customer is in good health, then this should be made clear and the company should ask about customers' health.

"The need for a second line of defence for annuity customers is urgent, in particular in light of the fact that once the annuity is bought it can never be changed."

Mr Melley adds that the FCA found evidence indicating that firms' sales practices made consumers less likely to shop around for the best deal.

He says: "There is no doubt that, as a result of this, many consumers are missing out on a potentially higher income in retirement. "Communication from annuity providers to their customers, spelling out their options, is in urgent need of improvement."

As of April, people will be able to decide for themselves whether or not to purchase an annuity, or take out their pension as a lump sum and reinvest it as they see fit. Prior to the changes, anybody taking out more than 25 per cent of their pension as a lump sum would be hit by a punitive tax rate of 55 per cent, however, following the measures announced by Chancellor George Osborne in the Budget, people will be able to access their entire fund and still only be subject to normal income tax rates.

However, Miss Altmann fears that insurance companies will make it difficult for people to use these new freedoms.

Melley says, if bought correctly, annuities are still an attractive option, particularly for those seeking a guaranteed income, but people should make sure they had all the information to hand before making a decision.

He adds: "Unfortunately, the vast majority are still buying annuities from their pension provider, often because they think they have no choice. Annuities can still be good value for money, but only if customers shop around on the open market."

Otto Thoresen, director-general of the Association of British Insurers, says the industry would look closely at the report findings, and work with the regulator to address areas of concern.

In the meantime, customers who feel they were mis-sold should in the first instance lodge a complaint with their annuity provider. If they remain unhappy with the response, they can take the complaint to the Financial Ombudsman Service.

Richard Lloyd, executive director of the consumer organisation Which?, says consumers have repeatedly been let down by the pension industry, with years wiped off people's hard-earned savings.

Richard Lloyd, executive director at Which

"It's welcome to see the FCA working with the industry to clean up mistakes from the past," he says.

"The regulator's proposals to ensure consumers have better information when they make big decisions about their income at retirement are sensible. But action is long overdue and the regulator and industry must now quickly put in place changes to ensure retirement products offer true value for money."

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