Webb’s proposals, outlined in an interview in the Sunday Telegraph, have drawn widespread criticism from pension experts, who say a focus on the existing problems in the annuity market, where a majority fail to shop around, should be addressed before examining more complex structures.
Experts have also pointed out that there is nothing to stop providers offering fixed term annuities under current legislation, while forcing them to make all annuities transferrable would push down rates across the board.
Webb told the Telegraph “When you take out a mortgage, in a few years if rates change you can switch your mortgage. But when you take out an annuity, that’s it – for life. This could easily be for a quarter of a century. Why shouldn’t you be able to change your annuity provider so a few years later somebody else could offer you a bigger pension? Why shouldn’t you be able to shop around?”
Webb said the proposal had not yet become formal policy but added that he was determined to look at ways of making pension payments more flexible.
Royal London group chief executive Phil Loney says: “The pensions minister has clearly not thought this one through. 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.”
LEBC managing director Jack McVitie says: “The issue here is a market not fully functioning rather than a broken market. 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.”
JLT Employee Benefits CEO Mark Wood says: “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.”
Broadstone Pensions and Investments pensions director Simon Nicol says: “Steve Webb’s proposals for ‘switchable annuities’ could end up being counterproductive. Annuity rates are set partly in the knowledge that some members will die early subsidising other members of the annuity pool. If those who suffer later poor health can pull out of the pool and transfer to a better annuity rate, those left behind must inevitably suffer worse rates.
“There are many things wrong with the annuity market but there is plenty of low hanging fruit yet to be picked, such as ensuring all annuity purchasers get the best possible rate through the open market option. Mr Webb seems determined to shake the whole tree and is in danger of bringing it down.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “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.
“Would switchable annuities be good value? Quite possibly not. 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 5-year fixed term basis then unless annuity rates improved, at the end of the 5-year term their income would fall to £4,981. This highlights the fact that switchable annuities are unlikely to offer such attractive terms in the first place.
“And what about the friction costs. The FSCP recently highlighted the fact that advice is not a realistic option for retiring pension investors unless they have at least £25,000 in their pension pot. 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? Introducing switchable annuities has the potential to significantly increase the costs and charges imposed on retiring investors. We do not think this would be a good thing.
“At the moment less than half of pension investors shop around even once at retirement. The primary objective should be to start by getting everyone to shop around the first time round, before trying to make it a regular occurrence. The launch of the PICA retirement broker directory next Monday should help with this process.”
“We cautiously welcome this initiative and will be interested to see whether this is something the minister intends to develop further. In the meantime the priority should be to encourage investors to shop around when they first reach retirement and to consider all their retirement income needs and product options; this seems a far greater priority than trying to invent solutions which either exist already or are of only marginal consumer value.”