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Drawbacks to annuity reform

I read with interest the letter from Shadow Paymaster General Howard

Flight entitled, Put an end to the unfair pension annuity regime

(Money Marketing, January 17).

Howard Flight argues for a minimum level of income to be annuitised,

above income support levels, while the balance of the fund is made

available to the consumer at their discretion. I assume the minimum

income level increases with RPI.

I would recommend that both he and MP David Curry, who has recently

promoted a bill to this effect in the House of Commons, consider the

problems facing this proposal.

First, my actuarial friends tell me there is currently an

insufficient supply of index-linked assets to match the annuity

liabilities.

Second, at the moment, the consumer takes a level pension which

reduces the need for the minimum income guarantee early in

retirement. Compulsion to take an RPI-linked annuity, which would

necessarily happen if Howard Flight and David Curry wished to

safeguard a minimum level of income above income support levels,

would reduce the income and, therefore, increase the take up of the

minimum income guarantee.

Third, if people want their pension as a lump sum, then I would

assume that they would have no objection to repaying the tax relief

which forms a substantial part of the fund they have. In the case of

contributions made in the 1970s, this can be up to 83 per cent, in

the 1980s up to 60 per cent and in the 1990s up to 40 per cent. In

the former case, the entitlement arising would be 17 per cent of that

part of the fund.

However, 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 21st Century consumer.

In particular, annuity construction and the need to provide an open

death benefit should be reviewed.

Before seeking to tear down a system which provides a safeguard for

many, I would ask Howard Flight and David Curry to first campaign for

greater awareness of the open market option – the right to shop

around for the best annuity – which could increase retirement income

substantially for many pensioners.

Bob Bullivant

Corporate development director,

Britannic Retirement Solutions,

Redhill. Surrey

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