Annuity auction house would fix industry: report

Annuity auction house would fix industry: report

The government should create a not-for-profit auction house of annuities, a paper from the Centre for Policy Studies has suggested.

Michael Johnson, a research fellow at the think-tank, said the government needed to step in to fix the industry’s failings.

He said the auction house proposal would create a marketplace within which all annuity providers – including the state – would participate. This would be open to individuals’ defined contribution pots as well as those in workplace schemes.

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Mr Johnson said: “The 2014 Budget abolished the obligation to annuitise pension pots.

“While this liberalisation is welcome, there are legitimate concerns that some people may fail to purchase suitable retirement income products.

“People approaching retirement need to be encouraged to purchase retirement income products that limit downside risks, notably longevity, investment and inflation risks that almost all of us are incapable of managing by ourselves.”

His 20-page report, called Auto-Protection at 55, recommended a decumulation default called auto-protection, which would automatically convert DC pension pots into a regular income stream until death.

“When asked, most people approaching retirement say this is what they want from their savings, often without reference to the word ‘pension’ or ‘annuity’. The challenge is to determine the precise structure of the default pension,” Mr Johnson said.

He also recommended scrapping the 25 per cent tax-free lump sum – one of the key reforms introduced by the government – to discourage people from securing a pension at the age of 55.

Mr Johnson said: “This would help mitigate the risk of running out of money in retirement.”

How it would work

The decumulation default would ideally take the form of an inflation-linked pension, joint-life for married savers.

This would convert defined contribution pensions into a regular income stream.

The guidance guarantee Pension Wise could be extended to help savers through the auto-protection process.

Adviser view

Peter Chadborn, director of Essex-based Plan Money, said: “This auction house sounds like what advisers do already on behalf of their clients.

“The customer would have to have a decent understanding of the different aspects of an annuity, such as indexation, before they started making comparisons.”