The survival of commission and lax regulation are fuelling a "significant shift" to non-advice in the mass market for annuities, at the expense of professional advice, transparency and healthy consumer outcomes, according to the Financial Services Consumer Panel (FSCP).
Firms' preference for non-advice is only partly driven by the need to offer efficient services for smaller pots, it said. The fact that commission - banned on advised business at the end of last year - is permissible for non-advice, and that firms are not held accountable for the suitability of sales, are stronger influences, the FSCP concluded.
The independent statutory body has published the findings of research into how consumers buy annuities and what they experience when they do.
It recommends urgent regulatory and government-led structural reform "in order to prevent millions of pensioners from losing out" when purchasing annuities.
There is a danger, the FSCP said, that the shift in distribution channels towards non-advice "will undermine the intentions of the RDR [Retail Distribution Review], leaving most customers with no choice but to use commission-based, non-advice services".
Though it said it had come across some excellent non-advice services, "the many examples of poor practice mean that the general outcome for consumers can be akin to a lottery".
"We are seeing a shift towards purchasing annuities via ‘non-advice' routes, which means reduced consumer protection if things go wrong," said FSCP chair Sue Lewis. "The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand.
"We urgently need to reform this market, particularly for those with smaller pension pots, who usually can't get independent advice."
The FSCP has called for the Financial Conduct Authority (FCA) to introduce a code of conduct for non-advice services which emphasises the need for high professional standards, the transparent disclosure of charges, and a clear explanation of the implications of non-advice for consumer protection.
There should be a ban on the use of the word ‘free' and firms offering non-advice should also have the facility to offer full fee-based, regulated professional advice, it recommended.
The FSCP has also called on the FCA to conduct a market study examining "the possible exploitative pricing" of annuities sold by insurance companies to those customers who saved with them for a pension", and to strengthen the definition of the open market option (OMO).
The FSCP's Lewis said: "[About] 400,000 annuities are sold each year; this will increase significantly as those who have been auto-enrolled into pension savings reach retirement age. The OMO has been around for a long time, but still isn't working for many people, who are getting less income in retirement than they could."
Bought plans in 1988 and 1989
To be added to model portfolio service
Launched 25 September