Missold annuities scandal will take several years to fix

Published:  26 Feb at 6 PM
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Figures disclosed to a UK newspaper earlier this week have proven that a high number of pension savers have been mis-sold annuities by their insurance companies.

Although government regulators are aware of the rip-offs, it’s estimated that it will take several years to reform the system. Ten international insurers offer higher pension payout rates to clients in poor health or with negative lifestyle habits such as smoking or excessive drinking.

The reason for the payout differential is that such savers are unlikely to live as long as their more fortunate counterparts, leaving the unused proportion of their capital in the hands of the insurer. However, the regulator has disclosed that only seven out of every 100 pension savers who took out an annuity with those companies was offered a rate suitable for their medical conditions.

This means that insurers are contravening regulations by selling unsuitable products to tens of thousands of retirees every year, and making extra profits as a result. Figures show that, on average, each saver is being short-changed by £1350 on each £100,000 of the money used to buy the annuity.

Even if a customer in poor health managed to live for 15 more years, he or she would be out of pocket by some £20,000. One insurance firm has admitted that their standard annuities are only aimed at super-healthy individuals with a life expectancy of 93 years.

The Financial Conduct Authority has the power to stop the abuse, and is clearly determined to take action, but experts expect at least a two-year delay before the broken system is fixed by introducing reforms. During the interim period, over a quarter of a million pension savers approaching retirement could well be taken in by the scam, and insurers will rake in yet more profits from mis-selling.
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