The way people purchase life insurance cover and lifetime annuities has come under review by several pension experts, who are urging a reform in the process.

The groups have asked the Financial Services Authority (FSA) to clamp down on major life insurance firms still making it complex for consumers to shop around for the best deal. Therefore, complaints have been made that the FSA has failed to regulate such insurance firms.

Ros Altmann is at the forefront of the change campaign and appears to be a saviour amongst the millions of people who have witnessed plunging fund values and sliding annuity rates create chaos.

The reform has come after fear that people will be forced to convert their pension funds into a lifetime income, due to the current climate.

Most policies pay out income until death, though some will continue to pay a reduced income to a surviving spouse and such schemes must be completed by the age of 75.

However, once annuity is brought, it cannot be swapped at a later date, so ensuring a consumer gets the right cover is essential. This practice grates on Altmann: “There’s no arrangement like it in personal finance. You can change your home insurance or credit card provider at a whim. But with a pension annuity, you’re forced into buying it and then you’re stuck with it until you die.”

Time for a change

Altmann pointed out that change is urgent because of the strict regulations that govern buying a pension annuity. 

She furthered: “You would think the FSA would be insistent that the financial services industry is doing all it can to ensure people are ending up with the best annuities available. But it’s just not happening. It’s a financial crime. Thousands of people are being robbed of a decent retirement.”

Altmann commented: “It is time the FSA stopped pandering to the insurance industry – reform is essential. It is unacceptable that a majority of people are retiring with annuities that either do not represent best consumer value or are inappropriate for their particular circumstances.”

She concluded: “The buck stops with the FSA. It needs to get heavy.”

Shop around

Nigel Callaghan, a pension expert said it is time the FSA stepped in: “It’s a scandal – the system isn’t working.”

Groups believe that for the system to be fair, life insurance companies must to not hide away the fact that customers can shop around for a better deal. Research can secure an alternative annuity that is between 20-30% higher.

Callaghan said that insurers should be obligated to provide details of the best quotes available industry-wide, drawing such information from the FSA.

Last year, according to figures from the Association of British Insurers (ABI), only 35% of savers moved their pension funds to get the best-priced annuity at retirement. This figure was lower than in 2007.

Whereas, Altmann’s solution is for people to sign a form before they commit themselves, indicating that they have looked at all the choices.