HM Treasury needs to “tear up” the rulebook currently governing annuities to allow more innovation in the market, members of the pensions sector have argued.
Stephen Lowe, group external affairs and customer insight director at enhanced annuity provider Just Retirement, told FTAdviser the annuities market is currently being constrained by rules which have been made redundant by the changes wrought by chancellor George Osborne in this year’s Budget.
“We have some requests to make to the Treasury to tear up the rulebook to allow us to innovate in different product areas.
“[For example] when we manufacture a lifetime annuity we are not allowed to vary the amount of income the customer takes.”
Mr Lowe flagged up there are some options, such as basing the level of income on an index such as the retail price index, or starting with a lower income but guaranteeing a percentage rise each year.
He added Just Retirement is toying with several ideas for innovative annuities, including one which would deliver a “U-shaped” income.
Mr Lowe claimed this product would give retirees a higher income in the first few years to allow them to enjoy early retirement, then a lower income for a period, and finally a higher income again around the time that people typically need to pay for care services.
Another request Mr Lowe said Just Retirement will make to the Treasury is to allow the creation of annuity-type products outside of a pension wrapper.
For example, the current tax treatment of a purchases life annuity - which Mr Lowe claims is the only way to secure income outside of a pension wrapper - should be brought into line with the that of Isas, thereby making it a more appealing option.
Speaking to FTAdviser, Mike Morrison, head of platform marketing at AJ Bell, agreed that the rules should be relaxed to allow more product innovation.
“We have never had the ability to vary that level of income. There has always been this ideal that we have an annuity product that could do that.”
He added that providers should also be looking at the option of deferred annuities, which are popular in the US and which only “kick in” once the client reaches a certain age.
“So you may have gone down a drawdown type scenario with the risk to your money but by 80 or 85 you have got this thing as a backup.
“Really what I would like to see is all the [annuity] laws taken away.
“If the legislation goes as intended from next April you will have no restriction on what you can do with your income stream. In effect you could replicate any sort of form of income flow that you want using a range of different investment funds.
“Why couldn’t you do that with an annuity and build in some sort of guarantees as well?”
However, IFA Alan Parkinson argued that although innovation could be a good thing, the annuity product is not inherently flawed.
Mr Parkinson said that the reason annuities have been less appealing is due to lower income owing to persistently low interest rates, and that there are no more guarantees of income as a percentage of the pot.
He said that previously people would be promised income equal to a certain percentage of their final pot, for example nine per cent of every £1,000, and that the percentage might rise depending on how long the client waits to draw on the annuity.
Knowing what you could get out of a pension would motivate people to save, whereas Mr Parkinson argues people are discouraged because they don’t know what income their pot will buy by the time they reach retirement age.
Mr Parkinson said: “The product itself isn’t flawed... What I would really like to see is the industry come back with guarantees.”
