The Financial Services Authority (FSA) has identified consumers abandoning annuities as a cause for concern in this year's Retail Conduct Risk Outlook.
Following the removal of the age 75 rule, low gilt yields and the onset of Solvency II which may further increase the cost of annuities, the regulator expects retirees to increasingly move away from annuity purchase.
Alternative products such as income drawdown may not be appropriate.
It warns annuity alternatives may pose the following risks for consumers looking to withdraw income:
• the capital value of the fund may be eroded;
• the investment returns may be less than those shown in the illustrations;
• annuity or scheme pension rates may be worse in the future; and
• high levels of income may not be sustainable when maximum withdrawals are taken, or a short-term annuity is purchased.
The FSA has said such factors "increase the potential for mis-selling income drawdown products, as advisers are likely to need to consider other variables (capacity for loss, risk, higher costs) that are not typically considered when an annuity is purchased."
Figures from the Association of British Insurers show pension annuity sales declined in 2010 to 426,000, down from 462,000 in 2009. The FSA attributes this to low interest rates and market uncertainty.
Likewise income drawdown plans decreased by 30% between 2009 and 2010 yet the total new premium increased from around £1.8bn to £2.1bn.
In addition, the FSA cautioned: "Consumers have the potential to suffer detriment if they are sold an income drawdown type product when an annuity would have been more appropriate to their circumstances. This risk has the potential to affect all those people entering retirement in the near future."
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