Pensions  

Market view: Switchable annuities would drive down incomes

Forcing insurers to offer switchable annuities could drive down the incomes available to retirees and would most likely not represent value for money, pensions industry experts have said.

In an interview with The Telegraph, pensions minister Steve Webb said he wanted pensioners to be able to switch to better annuities regularly in the same way that homeowners can change their mortgage deals every few years.

Tom McPhail, head of pensions research at Hargreaves Lansdown, warned that switchable annuities would probably not be good value for money. He argued that annuities are good value “but only if you shop around for the best deal, including getting an enhanced rate if you are entitled to one”.

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According to Mr McPhail, in today’s market, a 60-year old buying a lifetime annuity with £100,000 would get £5,474 a year. By comparison, if they bought the same level of income on a five-year fixed-term basis then, at the end of the five-year term their income would fall to £4,981.

Mr McPhail said: “This highlights the fact that switchable annuities are unlikely to offer such attractive terms in the first place.”

Furthermore, he flagged up a Financial Services Consumer Panel report which stated advice is not a “realistic option” for retirees unless they have a pension pot of at least £25,000.

Mr McPhail said: “That’s for a one-off transaction. How much more expensive would the market become if investors were looking to take advice every few years?

“The priority should be to get investors shopping around even once at the point of retirement, rather than trying to invent products which either exist already or aren’t likely to be good value for money.”

Phil Loney, group chief executive of the Royal London Group, added that the pensions minister “has clearly not thought this one through” and that rates for conventional annuities would be likely to fall if insurers had to factor in the risk of switching.

He said: “Currently when purchasing an annuity savers are buying a guaranteed income for life. If people are able to switch annuities mid-term it introduces another variable and the guaranteed income becomes very difficult to price correctly.

“The impact of switchable annuities would therefore be to drive down the guaranteed income that savers are able to secure with an annuity. This presumably is not the outcome that the pensions minister is looking for.”

Jack McVitie, managing director of pensions consultancy LEBC, flagged up that the issue is a “not fully functioning market as opposed to a broken market”.

He said: “Today people will suffer significant financial loss for the rest of their lives as has been the case for years because government and regulators will not act to help them.

“The market needs direct intervention now. A simple message that such outcomes will not be tolerated and full redress will be demanded for the victims would be a start.”

Craig Palfrey, director of the consumer pensions’ resource website, Increaseyourpension.co.uk, added: “In one fell swoop, Steve Webb has displayed the breathtaking extent of his ignorance surrounding annuities.