Steve Webb, pensions minister, compared annuities to mortgages and told the media last week that it would be good if annuitants could switch to a better rate every few years.
He said current responses to the department for work and pensions’ annuity consultation last year had suggested that many pensioners in Britain had become trapped in poorly performing annuities, which they were stuck with for life.
But Phil Loney, group chief executive of the Royal London Group, said to allow such a move suggested Mr Webb had “clearly not thought this one through”.
Mr Loney explained that, currently, when purchasing an annuity savers are buying a guaranteed income for life. If people can switch annuities mid-term, this would introduce another variable and the guaranteed income would become very difficult to price correctly.
He said: “The effect of switchable annuities would be to drive down the guaranteed income that savers can secure with an annuity. This presumably is not the outcome for which the pensions minister is looking.”
A spokesman for the DWP stressed that Mr Webb’s comments did not reflect a firm policy but a perception based on recent consultations that suggested pension provision needed to be more flexible.
Reaction round-up
Adviser view
Simon Nichol, pensions director for London-based Broadstone Pensions and Investments, said: “Steve Webb’s proposals for ‘switchable annuities’ could end up being counterproductive. Annuity rates are set partly in the knowledge that some members will die early, subsidising other members of the annuity pool. If those who suffer later poor health can pull out of the pool and transfer to a better annuity rate, those left behind must inevitably suffer worse rates.”
Industry view
Jack McVitie, managing director of national pensions consultancy LEBC: “Today people will suffer significant financial loss for the rest of their lives as has been the case for years because the government and regulators will not act to help them. The market needs direct intervention now.”
Consumer view
Craig Palfrey, director of Increaseyourpension.co.uk, said: “The problem with his proposals is that nearly everything he wants to see improved already exists. Mr Webb’s ‘shopping around’ facility exists in the form of fixed-term annuities. Another suggestion is that people who suffer ill health should be given better deals, but we already have enhanced annuities.”
Background
The comments came as the government unveiled plans to overhaul universal benefits, which could end up axing pensioner benefits such as the winter fuel allowance. Prime minister David Cameron has also considered a triple lock put onto the basic state pension. Under the proposals, the government will raise the basic weekly state pension by 2.5 per cent a year.
