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
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.
Corporate development director,
Britannic Retirement Solutions,