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Annuities to get more expensive under Budget reforms, IFS warns

The Institute of Fiscal Studies says annuities will become even more expensive with more poor choices after the Government announced reforms to retirement income.

In the Budget yesterday the Chancellor said all over-55s can take their pension pot in cash from next April and do not need to buy an annuity.

Insurers’ share prices dropped sharply on the news with specialist providers Just Retirement and Partnership falling by around 50 per cent in value in just two hours.

The Guardian reports Institute of Fiscal Studies director Paul Johnson said there are some genuine uncertainties about the effect of the policy.

He said: ”Most importantly it will likely make annuities even more expensive for those who do want to buy them. The market will become much thinner and there will be greater levels of adverse selection – only those expecting to live a long time will want to buy an annuity thereby driving up the price. There is a market failure here. There will be losers from this policy.

But speaking in the House of Commons today, pensions minister Steve Webb says the Government’s pensions reforms do not mean the “death of annuities” but will jolt insurers into creating new products.

He said: “We think lots of people will still opt for a lifetime income rather than a capital sum so we don’t think this is the death of annuities. We do think it will give a bit of a jolt to the annuity market and make them do better.

“The ABI and providers are realising they will have to up their game but it is a chance to provide new and innovative products and we are happy to work with them on that. “

Alongside annuity reforms the Government said all members of defined contribution schemes will receive independent face to face guidance.

Webb said: “We need to make sure people have guidance so they make informed choices. They will still be able to proceed to regulated IFAs. 

“The industry will have to up its act because now people will have to take cash. If they want to take an annuity they will have to be persuaded it is value for money and there is market impetus to act. We have asked the FCA to ensure a good guidance regime is in place potentially using bodies such as The Pensions Advisory Service.”

This morning, TPAS chief executive Michelle Cracknell called on the Government to rethink its proposals for face to face guidance.

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  1. I agree with various other commentators that allowing unfettered access to pension funds creates a significant risk that, as much as anything else by way of a knee-jerk reaction against all the antipathy towards pensions that’s built up over the past 25 years, people will plunder them [their funds] without thought for the consequences of running them down to nothing sooner rather than later. Assuming that Webb was, at least to some extent, involved in the formulation of this latest new policy, did he not warn the government of this risk? I suppose we’ll never know.

    I’m all for products that will facilitate the extraction of more income from a given pension fund, notably the Retirement Income Bond about which I’ve been banging on for the past few years but, in my opinion, this latest announcement goes dangerously too far, from one extreme to another.

    Increasingly, I anticipate, advisers will find themselves faced with “insistent” clients determined not to accept advice to implement a responsible long term retirement income strategy. Now, more than ever, providers need to devise products that represent a credible alternative to just accessing and spending pension funds at an unsustainable rate. The big players in the investment-linked retirement income market such as Prudential, Liverpool Vic and MetLife should lead the way and we can only hope that the government really will support any new initiatives on this front.

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