Pensions Minister, Steve Webb has been subjected to a tirade of attacks in recent days following his comments about the failings of annuities. He is accused of proposing unworkable reforms, but he is making valid points. His remarks seem to have been misunderstood.
Of course the Minister understands how annuity products work, but he is highlighting that they no longer fit well with people’s lives. In calling for the ability to change an annuity if pensioners’ health, personal circumstances or market conditions change – as they inevitably will for most people who lock in at age 60 or 65 – he is rightly pointing out that annuities are too inflexible for today’s retirees.
He believes reform is required and is articulating his desire for a new kind of product that is not really be an annuity, and for which there is not yet a name. Of course the point of annuities is that they are fixed for life, but fixing at too young an age, or at the wrong time and wrong rate, or buying the wrong type of annuity are all likely to mean people failing to get good value from their pension savings.
Yes, ‘fixed term annuities’ and income drawdown products allow people a little more leeway to adjust the income from their pension savings to fit their later lifestyle if circumstances change, but these are niche rather than mainstream products. The standard annuities, which most purchasers are directed to buy, cannot adjust over time.
Annuities offer a guaranteed income, but the pension fund capital is entirely at risk and the income paid out is often too low to represent good value for money for purchasers. Annuities provide large profits to insurers and brokers, which probably explains the pressure to protect and prolong the status quo, but who is ensuring the customer gets fair value?
Steve Webb is clearly concerned that providers are allowed to offer exceptionally poor rates, with differences of 20% or more for the same product which, once bought, can never be changed. He also expresses his concern about the numerous fees and charges that can be surreptitiously deducted from people’s pension savings when they buy an annuity, which customers are unaware of.
All in all, the Pensions Minister is rightly saying that annuities require urgent reform. He should not be criticised for this, he should be applauded. Comparing annuity purchase to taking out a mortgage is valid. These are the two most important financial decisions of people’s lives and it is important to get them right. Being able to change mortgages is taken for granted, yet pension annuity income must be set in stone, regardless of other changes. Why?
Many annuities offer dreadful value these days. Improving their design, inflexibility, charges and value for money is needed to fit modern longer lives, rather than retaining the old one-size-fits-all product which no longer fits.
What do you think? What do you think about Ros’ opinions? Should the annuity market be able to operate in a free market or should providers not be allowed to offer certain products and certain rates. Is Steve Webb right in envisioning a market where people can change their annuity in the future? Let us know in our LinkedIn discussion.
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