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Diggle flies again

I am a huge fan of Inland Revenue head of savings and pensions policy Paula Diggle and think she has done a great deal to reform financial services for the better. She introduced Oeics, pushed through Cat standards in the face of much industry opposition and came up with the idea of individual pension accounts.

When she left the Treasury, many of her opponents rejoiced to see the back of her. Foolish people. You cannot keep a good woman down and, even in the backwater of the Inland Revenue&#39s Somerset House headquarters, Diggle is dabbling, if not with the stuff of men&#39s souls, then certainly with the stuff they hope to retire on.

Diggle&#39s Modernising Annuities paper has the logos of two departments on it, the Inland Revenue and the Department for Work and Pensions. But it is only the Revenue that counts.

The annuity reform lobby has reacted with fury to the proposals, seeing them as only so much tinkering and not the radical reform they are urgently pressing for. My old mate Iain Anderson, who is backing MP David Curry&#39s bill to reform annuities, worked himself up into a lather about it on this page a couple of weeks ago, talking of “the misery and injustice” of annuity purchase.

But the Curry bill and Oonagh MacDonald&#39s proposals were discounted by the Government – and Diggle – some time ago.Diggle&#39s consultation paper is clear-cut, calm, informed and logically argued.

Read her lips. The Government has made it perfectly clear that if you get the tax benefits of a pension, then you have to use the money to buy a reliable income for your lifetime. That is called an annuity. If you want to use the money for something else, then do not save in a pension.

There are plenty of other ways to save, tax-efficient Isas being one of many flexible ways to invest money for a rainy day.

However, the Government will make changes to allow more flexibility, to promote the development of better annuity products and to ensure the annuity market becomes more efficient, transparent, competitive and, thus, delivers better value for more people. Among its proposals are:

•To broaden the flexibility on offer, especially the opportunity to transfer between providers of unit-linked or with-profits annuities to gain better performance.

•To create new limited-period annuities which will allow a rolling programme of annuities to be taken out, each one more accurately meeting the next few years&#39 needs.

•To improve consumer understanding and awareness of how annuities work by clarifying real rather than nominal returns.

At the heart of the dispute is that the proposals for annuity reform will only really benefit the wealthy, not those who retire with a relatively small pension pot.

But once the new opportunities come on stream, the annuity market will be made more up-to-date and relevant, while preserving its core function, which is to provide a steady income on retirement.

There will also be a need to lighten regulation around annuity advice. Costs have to be removed from the system so that better value can be offered, particularly considering the average person&#39s relatively small pension pot and straightforward circumstances.

The Government is also not prepared to change the age 75 limit for buying an annuity because, if nothing else, mortality drag means you would be better off buying an annuity before 75 than using the money in drawdown or whatever.

In other words, if you have to use your money to fund an income for life, an annuity is better than anything else for virtually everyone. The Government will only review the age 75 rule if mor-tality rates change significantly. So, if you want change here, start eating spinach.

As the proposal for limited-period annuities shows, the Government is now prepared to accept a wider definition of what an annuity is.

Other realistic ideas are being kicked around. Martin Campbell, the former head of public affairs for Virgin Direct and now a financial services consultant, has floated the idea of a pension annuity that pays to the customer&#39s estate on death any difference between the amount they paid for the annuity and the amount they received back as income before they died. Of course, this would be net of the tax that would have been paid, so as not to deprive the Inland Revenue of its payback.

The purpose of this new product would be to placate those customers – and there are lots – who object to the insurance company “pocketing my hard-earned pensions savings if I die early”.

This idea seems to be finding favour with the Inland Revenue, as long as it is seen as a solution to this customer objection, getting in the way as it does of people&#39s preparedness to save towards their own pension. The Inland Revenue would not be happy if it was seen as the thin end of some wedge that would allow pension savings to be used to hand down legacies to wealthy offspring.

Annuity reform is dead – long live annuity reform. As Bob Bullivant, from Britannic Retirement Solu-tions, keeps pointing out on Money Marketing&#39s letters page, there are a great many changes that can be made to modernise annuities without attacking the principle of an annuity at its core. The market can be imaginative and creative.

The consultation will herald significant changes but it looks like those who want wholesale change will have to keep dreaming those dreams and scheming those schemes.

Edward Vaizey is director of public affairs at Consolidated Communications


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