Hi, I'm Ros Altmann. My blog http://pensionsandsavings.com/ aims to help people understand financial issues. I'll cover pensions, savings, annuities, care, retirement and economics. I'm an independent expert and have advised consumer groups, Government, corporations, trustees and the pension industry.
- Standard annuities assume purchasers are in good health - selling them to someone with heart trouble and cancer is unjustifiable.
- Treating Customers Fairly requires protection against such annuities mis-selling.
- I challenge providers and regulators to justify selling annuities without clear risk warnings or suitability checks.
Urgent action is needed to remedy the failings.
In March 2013, Mr. Davies, now 62, was in poor health and needed his pension after being made redundant. He was undergoing tests for cancer, had a history of heart trouble, was partially disabled by polio and had smoked for forty years. He was sent many pages of paperwork by his pension provider, full of terms he had not come across before. He had saved £27,000 with Royal London, which does not itself offer annuities.
Instead of sending their customers to a service which would help them choose the right type of annuity at a competitive rate, it had a tie-up deal with Prudential, under which it received 2.5% commission on each annuity sale. The terms of the deal did not require the Pru to offer annuities which catered for people in poor health, nor ensure competitive rates for the standard annuities. Mr Davies did not understand annuities and was offered his tax free cash plus a standard single life annuity at a 4.4% rate - giving him around £17 a week.
He was in such poor health that this cannot be considered a suitable sale, yet there are no regulatory controls to protect customers such as this properly.
The Regulatory system and pension companies leave it up to each individual to know what to do. Two weeks after he bought the annuity, he was confirmed as having cancer.
He immediately wrote to Royal London but was not told that he could have undone the annuity at that time within the ‘cooling off period’. He subsequently realised that this annuity was not right for him and went to his MP, who wrote to Royal London and the Prudential but each blamed the other and he received no redress. A complaint to the Financial Ombusman has also delivered no result.
Power of the media:
Following his email to me, I looked at his paperwork and passed his details to Jo Cumbo at the Financial Times, who took up his case and he has now received an apology and his money back. I am delighted that the pressure from Jo Cumbo at the Financial Times resulted in the return of Mr Davies’ pension fund, but this media intervention should not have been necessary. How many more have not had such help?
This is not an isolated case:
Mr. Davies’ situation is not an isolated case, although it is most dramatic example I have seen. Over the years I have received countless emails from distraught widows left penniless after discovering that their very ill husbands had died relatively soon after buying a standard single life annuity which assumes the purchaser is in good health.
Nobody was required to make it clear this was an unsuitable annuity for them but these widows were not willing to speak to the Press for fear of suggesting their husbands had somehow done wrong. Mr Davies is the only living customer to have contacted me and was willing to speak to the media.
Around 1000 people a day buy annuities without clear risk warnings or suitability checks:
Every day, on average around 1000 people lock their pension savings into annuities, without clear risk warnings or suitability checks before they buy. Many are unwell, yet their pension provider does not normally know about their health – they cannot possibly know because they are not required to ask. There are still no safeguards in place to stop this happening. I hope others who have been sold standard single life annuities when they were seriously unwell will contact their company for redress.
I challenge pension providers and the FCA to justify this:
Can pension providers and regulators explain how selling standard annuities, which assume good health, without actually asking any specific health questions, comply with regulatory requirements of ‘treating customers fairly’? Without clear risk warnings of suitability, customers are not being given a fair chance of buying a suitable product.
Annuities are irreversible, so pre-sale checks are vital:
Annuities can work well for some customers, but they are complex products that should be sold with more care. Giving customers a fair chance of doing the right thing, taking account of their own health and personal circumstances, is particularly important because annuities are a unique financial product – once purchased, they can never normally be changed.
Customers must therefore understand firstly whether they actually need to buy one or not and then what type suits their circumstances. The reams of paperwork sent to customers fail to make clear how annuities work and do not help people understand how to find the right type of annuity or best rates. Just writing about ‘open market options’ and the availability of other types of annuity, does not explain the basic principles of annuities, nor ensure customers find the help they need with these complex products.
Customers don’t understand annuities:
Like so many others who have contacted me, Mr Davies simply did not understand the language of annuities.
Even the most cursory of checks would have revealed that a standard single life annuity was not suitable for a smoker with heart trouble, currently undergoing tests for cancer. With just a five-year guarantee, he was highly likely to lose three quarters of his pension fund as a result of this purchase, but, because nobody had to explain how the annuity worked, he did not realise that the rest of his fund would go to the Prudential, not his family. The wording of the paperwork is unclear. It is written by people who deal with annuities daily, while customers have never come across these products before.
What should be done? - Require suitability checks and clear risk warnings to explain annuities:
The free at retirement ‘guidance guarantee’, which could help people understand their pension options, will not be in place until next April. In the meantime people with serious health problems will continue to lock into unsuitable annuities that mean they lose much of their pension fund. I am, therefore, calling on all pension providers and the FCA to address the shortcomings of this process immediately.
The ideal is to have an independent financial adviser to go through all the relevant options and recommend their best course of action, but there should also be immediate changes to the way annuities are sold.
Basic suitability checks should be made mandatory now, so that annuity firms cannot sell standard annuities to customers in poor health.
Customers should be automatically offered impaired life or enhanced rates if they are not in perfect health.
Absolutely clear risk warnings should explain that the balance of their pension fund will stay with the insurer after they die, and not be paid to their family, unless they specifically cover a partner.
I challenge providers and the FCA to explain...
Dr Ros Altmann
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