Does the FCA’s consumer duty help or hinder the pensioner?

“Ferret Systems” power Gareth’s analytics


How Jane can give £10,000 to an insurer for an annuity and not benefit a penny

Gareth, “the Ferret” Morgan is a fintech consumerist who stands up for those who are excluded from mainstream financial advice (and mainstream regulation).  His analytics have prevented people from taking bad decisions often by suggesting counter-intuitive solutions that make sense for people on lower incomes/.

In this blog, first published as a comment on my thoughts on the FCA’s new Consumer Duty. He explains that the outcomes of the purchase of financial products can be unpredictable and that the financially vulnerable need to be aware of the  impact on benefit entitlements when buying financial services.

In this case, he looks at the decisions taken by pensioners with their retirement income. In particular, the conventional wisdom that people should consider deferring converting pension saving into an annuity till they are 75, (a solution that features prominently in much trustee literature).

Let’s remind ourselves of how the proposed consumer duty plays out to regulators and ask whether this model can generally be applied.

the “outcomes” base

In this worked example, Gareth explains how someone can give an insurance company £10,000 in return for an annuity at 75 and get no improvement to their standard of living in return. Does the insurance company have a duty to this consumer to point this out, or does that duty transfer to the trustee?

Thoughts for insurers (comments in green are from Gareth)

Gareth Morgan

The proposal seems to have a number of uncertainties associated with it. 

The Consumer Duty would require firms to:
•       ask themselves what outcomes consumers should be able to expect from their products and services
•       act to enable rather than hinder these outcomes
•       assess the effectiveness of their actions

“Outcomes” – is this just the result of the product, or the effect on other circumstances. In other words, is it the effect on the bottom line?

If it’s the bottom line then enable and hinder will be important.  If it’s just about the product, then it has little meaning for many people. 

Let me give an example, using real figures..

Jane  is single, 75 years old and pays £125 a week rent, £1,250 a year Council tax and has £10,000 of DC pension savings.  She gets a full old state pension of £137.60.

At the moment, using the current 15-year gilt rates and the GAD tables for her age, she is treated as having a notional income of £14.19 a week from her unused savings. On that basis she is entitled to:

Guarantee Pension Credit        £25.31 a week
Housing Benefit                         £120.00 a week
Council Tax Reduction           £23.97 a week

Total weekly benefit                     £169.28
Total weekly income             £306.88

She decides to make use of her pension savings

She buys an annuity (using the Money Advice Service calculator for a lifetime fixed income annuity) of £647 a year, or £12.44 a week

Her benefit entitlement is now:

Guarantee Pension Credit        £27.06 a week
Housing Benefit                         £120.00 a week
Council Tax Reduction           £23.97 a week

Total weekly benefit                    £171.03

Including the state pension and annuity gives:
Total weekly income             £321.07

Alternatively, she decides to drawdown the whole of her savings, giving her £10,000 in the bank (or in an interest generating account – any income from  interest is ignored for benefit purposes). That £10,000 is ignored for benefit purposes.

Her benefit entitlement is now:

Guarantee Pension Credit        £39.50 a week
Housing Benefit                         £120.00 a week
Council Tax Reduction           £23.97 a week

Total weekly benefit                    £183.47

Including the state pension gives:
Total weekly income             £321.07

She has exactly the same income as she would have if she took an annuity but has £10,000 in cash, plus any income that it generates.

The outcomes are very different.

If the expected outcome is to make her ‘better-off’, then the annuity does this in comparison with her previous position.  Using drawdown has the same ‘outcome’ in income terms.

If the outcome is just about how much the annuity pays, then a few pounds either way makes no difference.

Does selling her an annuity enable the best outcome?
Does selling her an annuity hinder the best outcome?

Isaac Asimov’s first rule of robotics said

“A robot may not injure a human being or, through inaction, allow a human being to come to harm.”

If the new duty ignores provider inaction, and allows Jane to choose the worst outcome, then not much will have advanced.

Her situation is predictable but will that mean that it falls to be treated as being included in “take all reasonable steps to avoid foreseeable harm to consumers”?

Thoughts for trustees

As has been noted many times by commentators, the context of our financial decision making is complex, that is why financial advisers need to do full fact-finds and why they have insurance to cover mistakes (such as advising Jane to buy an annuity).

Fintech at work

Every year, around 700,000 “crystallize” their pensions, following one of the FCA’s investment pathways, even if that pathway is a short one to the saver’s bank account.

The conventional wisdom is that the longer you live, the more attractive an annuity is and many longer dated target dated funds actually assume annuity purchase as the outcome of deferring taking income.

If you are a trustee of a scheme and suggesting a deferred annuity purchase as an option for your members, think of Jane and talk to Gareth. If you are the FCA, consider how your consumer duty is going to play out for those who make financial decisions for themselves and ask whether you can apply your model in a non-advised world.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Does the FCA’s consumer duty help or hinder the pensioner?

  1. Bob Compton says:

    There has always been a problem with the interaction of Pension Credit for people on low or no income with private/occupational pension provision. It is also why when Auto Enrolment was being developed it was important that the State 2nd Pension and Old Age pensions were simplified. As long as State means tested benefits are required as there is no universal state pension entitlement, there will be examples like Gareth has illustrated. Unfortunately the people affected often have no recourse to the guidance needed.

  2. Richard Chilton says:

    There can also be some other interesting interactions between means tested benefits and pension money. In some cases, people will be able to get much more net value from their pension pots by taking them before retirement rather than afterwards. Before retirement they only have to consider Income Tax. Afterwards they have to worry about the scaling back of Housing Benefit, Council Tax Reduction and any Pension Credit. The scaling back can reach 100% with Pension Credit and 88% with just Housing Benefit and Council Tax Reduction. For some people, there is a lot to be said for having a good time whilst you are still working.

    • Many people depend on -in-work benefits before retirement. They will be affected by any use of their pension savings. There’s no account taken of the value of pension savings before state pension age though. The effect of using savings is more severe below pension age – lower capital disregard, higher notional income from capital, a capital cut-off for benefits etc.

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