Hundreds of thousands of pension savers may have been mis-sold annuities that failed to take into account the state of their health.
Pensioners in poor health - with diabetes or high blood pressure, for example - are eligible for 'enhanced' annuity products which take their life expectancy into account and deliver a higher income than standard products. However, hundreds of thousands of people may not have been asked the right questions about the state of their health.
The scale of the problem is expected to be revealed in a report to be published by the Financial Conduct Authority this month.
"I am hoping that the review will recommend measures to properly protect customers who are at risk of buying unsuitable annuity products. At the moment, there is no 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," says the government's older workers' champion, Dr Ros Altmann.
"As annuity sales are still widespread due to pension companies failing to allow their customers to take advantage of the new pension freedoms, 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."
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According to Altmann, the problem could be on an even larger scale than the Payment Protection Insurance (PPI) mis-selling scandal that has engulfed banks over the last few years. As many as 900,000 people may have been sold the wrong type of annuity, missing out on £5.4 billion as a result. Another 530,000 widows may have been left high and dry because their husbands weren't told that payments would case on their death.
Altmann is calling on pension companies to introduce standard forms written in plain English, to explain their products and to basic questions to establish suitability before selling an annuity. 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.
They should explain the risks of annuities – for example that there is no inflation protection and no partner's pension if the customer dies early.
And, she says, the FCA should ban hidden commission and require anyone selling annuities to make it clear up front how much money the customer will pay and whether independent advice is being given.
Just last week, insurer Aviva admitted to selling standard rather than enhanced annuities - though only to 250 customers. It's offered them back-dated payments of around £500 each and promised to adjust payouts from now on.
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