Pensions minister Steve Webb faces a backlash from insurers after he hinted the government may seek to bring in new rules allowing annuitants to trade in products for better deals from rival providers, with a major employee benefits firm deriding his comments as “misleading”.
In an interview with The Telegraph, Steve Webb pensions minister, said he wants pensioners to be able to switch to better annuities regularly in the same way that homeowners can change their mortgage deals every few years.
The proposal, which Mr Webb said would end the current “lottery” for retirement income, would mean retirees could switch products if rates rose in the years after they purchased their annuity, or if their health later failed and they wished to move to an ‘enhanced’ product.
However, insurers and others have denounced the plans, saying providers would be forced to cut rates further if this new risk were introduced and dismissing the link to mortgages, which set charges on an entirely different basis and typically include fees for switching.
Mark Wood, chief executive of JLT Employee Benefits, warned the two cannot be compared and it is “misleading” to do so.
He said: “The annuity market is evolving rapidly. The introduction of annuities paying a higher income to those with shorter life expectancy has materially benefitted many pensioners.
“With annuity rates at historic lows, allowing switching as rates improve may well encourage those deferring the purchase of their annuity on the expectation of better rates in the future to commit to an annuity at this point in time.
“However comparing an annuity with a mortgage is misleading. A mortgage simply finances the purchases of a house while an annuity guarantees an income for life, however long an individual lives.
“Allowing people to chop and change runs the risk of making this guarantee unaffordable.”
In August 2013, the Financial Conduct Authority stepped up its review into annuities’ consumer outcomes, stating it was “complex but necessary” as it found holes in the Association of British Insurers’ self-regulated code of conduct.
The code came into force for ABI member firms at the beginning of March and requires them to provide “clear, timely information” for those approaching retirement by encouraging the customer to consider their options two years before retirement.
The FCA said the code had widespread support, but that many had argued it does not go far enough and does not cover the whole market. The regulator said it will monitor the ABI’s work to assess whether it meets consumer needs.
Craig Palfrey, director of Increaseyourpension.co.uk, said: “In one fell swoop, Steve Webb has displayed the breathtaking extent of his ignorance surrounding annuities.
“The problem with his proposals is simple enough: just about everything he wants to see improved already exists.
“When it comes to retirement products and options, the problem is not what is on offer, but that people don’t always know what is on offer.”