Pensions  

Advocate: Should annuity-holders be able to switch annuities?

Yes - John Bloomfield, IFA at Bloomfield Financial

Because of the way annuities are priced, providers need to know that they won’t be left in the lurch if a customer does decide to transfer their annuity out of the pot.

If it does happen I would imagine it will be like mortgages with a reversionary rate and a penalty period, but at least there would be an option.

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More than half the people take the default option from the provider and if you meet them a few years later they could have got a lot more from their provider in terms of an enhanced annuities. They just don’t know what’s available for their situation. Most people would be better taking the open market option but they don’t, but it’s common to just accept what’s offered.

It would obviously be better for the market if people made a better decision while taking it out in the first place. We’ve been campaigning for years around this, however, and nothing has changed so we have to look at this as an option.

If it does happen the standard annuities will offer a much worse rate than they do now, so if providers can’t lock them in forever then the rates will become lower. I think it’s the best of two bad situations.

No - Alistair Cunningham, financial planning director at Wingate Financial

The problem with short-term or transferrable annuities are they’re just that; you can’t pay a fee, make a choice and stick with it for life (with zero ongoing advice costs), nor can you benefit from the mortality cross-subsidy that effectively comes from the fact that the longer you live, the more of your peers will die before you, effectively boosting your annuity rates.

For those who don’t want to make a one off decision, and are willing to bear some investment risk, an appealing option may be pension fund withdrawal (drawdown). Income can go down as well as up, and ongoing adviser fees paid - therefore this is not an option for those with smaller funds, or those who cannot afford the risk of the loss of some income.

The annuity market does need fixing, but transferrable annuities are not any significant part of the solution. Pensioners need sensible defaults, in particular to use their open market option. Advice should be more heavily promoted, so pensioners understand better the implications of having no inflation increases, or spouse’s pensions, for example. In a economy where payday lenders charging usury rates of interest can survive it should be no surprise that the more complex retirement market is not working for many people.