Out-Law News 2 min. read

Pensioners should be allowed to switch to better annuities regularly, says Pensions Minister

Pensioners could be given the ability to switch to better value annuities regularly in the same way that homeowners can change their mortgage deals under plans being explored by the Government.

Speaking to the Sunday Telegraph, Pensions Minister Steve Webb said that buying an annuity was a "lottery" that could affect pensioners' retirement income by 15% or 20% in some cases. He said that the Government needed to address the "whole issue of cost", alongside its drive to reduce "hidden charges" on pension schemes and annuities.

"When you take out a mortgage, in a few years if rates change you can switch your mortgage," said Webb in an interview with the newspaper. "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?" he said.

Webb also called on insurers to do more to explain the nature of the "complicated transaction" and related charges when selling annuities to consumers.

However, insurance experts said that annuity rates were "not as straightforward as a fixed term mortgage calculation" and that the changes being contemplated by the Government could have negative as well as positive consequences.

"The minister acknowledges that the changes he is proposing could have a 'massive' impact on the way the market operates," said Huw Evans, director of policy with the Association of British Insurers (ABI). "Some of these changes could be negative and some positive but it is important that they are well thought through. The industry is keen to contribute fully to the thinking on how we can make the retirement income system work better for savers."

"Purchasing an annuity guarantees someone an income for life from their savings. It is calculated based on a number of factors including life expectancy, so it is not as straightforward as a fixed term mortgage calculation. Many people welcome the certainty an annuity gives them although there are other ways they can choose to take their pension," he said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income. Annuity rates have been falling for a number of years as a result of low interest rates and poor yields on government bonds. The Financial Conduct Authority (FCA) has been carrying out a 'thematic review' of annuity pricing, and is expected to publish its conclusions shortly.

The Government recently consulted on a number of options for a new type of workplace pension which would enable employers and their workers to share investment risks more equally. In the interview, Webb indicated that any reform of the annuity market could be included in the Government's response to that consultation; and that it could also include plans to increase the use of 'mixed' pension arrangements and proposals to help pensioners with health conditions or that have worked in risky jobs to get a better deal.

Pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, said that "trying to stop people buying an annuity and then spending the rest of their life regretting the choice" was the "right aim".

"His suggestion of switching annuities won't be warmly adopted by the pensions industry, not least because providers would need to build it into their pricing," he said. "However, there are changes already happening in the annuity market, a gradual shift in the right direction, and impaired life and fixed term annuities are starting to have a higher profile."

He added that making more people aware that they should "shop around" for an annuity in the run-up to retirement would "bring a huge improvement" for pensioners.

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