Allow the market to provide better annuity options
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I sent a copy of my letter to Money Marketing (January 31) setting out my concerns with David Curry's Pensions Annuities (Amendment) Bill to all the Members of Parliament who will be sitting on standing committee C which will be scrutinising that bill.
I made the following additional point which, although technical, has significant cost implications to HM Treasury.
The minimum income guarantee proposed in David Curry's bill (set at a level above income support) will increase with average earnings index whereas the annuity increases with RPI.
There is typically, therefore, a gap of between 1 per cent and 2 per cent between RPI and average earnings, which represents a considerable cost to the Exchequer now and increasing cost over future years as a result of the disparity between the RPI and average earnings' indices.
There may be other significant costs resulting from this proposal. For example, the fund would, I assume, be invested to generate a more tax-efficient income - capital gains tax breaks and bond withdrawals spring to mind.
I also urged those MPs to have regard to the need to allow the market to deliver solutions. It appears that the most common rationale given for the need to change annuity legislation is the fall in recent years of annuity rates.
Product developments and existing features are capable of counterbalancing falls attributable to lower returns on gilts and improving life expectancy. This includes use of:
Open-market option (Omo) - currently running at 34 per cent (Source: ABI). This means that two in three people could be receiving lower income than they could obtain for the rest of their life. Britannic Retirement Solutions has been campaigning for greater awareness of the Omo for over two years and welcomes the FSA's review.
Investment-based annuities - currently running at 8 per cent (Source: ABI).
Enhanced annuities which can improve income by up to 14 per cent or by as much as 30 per cent - currently running at an estimated 6 per cent.
I would be the first to argue that annuities are not perfect and there should be an overhaul of the outmoded design rules to reflect the changing life expectancies of the 21 Century consumer.
I would, however, caution against tearing down a system which provides a safeguard for many by adopting a proposal which may benefit only a few.
Bob Bullivant
Corporate development director,
Britannic Retirement Solutions,Redhill,
Surrey
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