The capital gains tax changes grabbed most of the headlines after the pre-Budget report but the Government also used it to announce changes to how people decide what type of annuity they want and where to buy it. This stems from concerns that too few people – 33 per cent – are exercising the open-market option on retirement.
At the end of last year, a cross-party working group was set up with help from other interested parties, such as consumer bodies and regulators, to delve a little deeper into this area.
Buying an annuity is probably one of the most important financial decisions a person has to make but is one of the least recognised. Some people, probably by enlisting the help of an adviser, think about whether to switch providers. However, there are still a lot of people who, through ignorance or apathy, do not think about their options at all.
The Government wants to ensure that more people recognise the significance of this decision.
Looking at the annuities review, there was no single recommendation that would probably achieve that aim on its own. However, I believe the whole might be greater than the sum of the parts and, if taken together, the recommendations could push this decision higher up people’s agenda.
The main recommendation was for The Pensions Advisory Service to create a web-based tool for people to work through what type of annuity they want. This would link into FSA comparative tables to show the most competitive providers. This could throw up many questions for people and will need the support of a helpline.
Another recommendation is for the Department for Work and Pensions to design focused material to highlight the choices that people have to make. Instead of sending this out eight months before retirement, the DWP is keen to push home the message earlier, maybe two or more years or before retirement.
The combined effect should mean that more people recognise there is a decision to make but also that they need help from an adviser in making it.
The FSA plans to collect data on how long the worst offending providers take to transfer open-market option funds. However, the recommendations stop short of saying what the FSA will do with all this information, leaving the question open as to whether it can do anything to force change.
Providers, through the Association of British Insurers, are also determined to do their bit and re-examine the processes behind switching funds. I hope this will lead to better processes, fewer complaints and happier customers. The result of these changes could be customers who have a better idea of what they want and where they can get it. This is vital at a time when people are building up bigger defined-contribution pots.
But it is disappointing that, as one part of the Government wants to empower consumers to make active decisions, another part wants to stifle innovation in retirement income products which could give people what they want.
The Treasury has decided not to change the pension tax legislation, which would allow the smoother development of hybrid or mid-market retirement income solutions. These products sit within the unsecured pension rules but give a guaranteed income. They are different from an annuity in that they allow people to give up some of their guaranteed income for the potential benefit of future investment growth and an increased guaranteed income in times of good performance. In times of poor performance, they still get the guaranteed amount.
Making changes to allow these products to sit comfortably within the legislation would have been a true step forward. In my view, the Treasury has missed a chance to meet the needs of the growing number of people with medium-sized pension pots who have to make the choice between drawdown or an annuity, neither of which may suit their needs totally. More choice could also be a factor in encouraging greater pension saving.
We need better informed customers but we also have to give them the products to ensure those decisions relate to their needs.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable