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Govt urged to consider radical annuity rule changes

Aviva head of policy John Lawson says rules should be changed to make annuities more flexible.

The Government is facing calls to review pension rules so providers have more flexibility to develop annuity products which pay a higher income when someone’s circumstances change in retirement.

The Government is currently consulting on the practicalities of its social care reforms, which will see the introduction of a £72,000 cap on care costs in April 2016.

Policymakers expect the financial services industry to respond by developing new products, such as an annuity product which provides more income when someone needs care.

In order for this to happen, however, Aviva says the Government would need to change pension rules which prevent providers dramatically increasing payouts in a single year.

Aviva head of policy, pensions and investments John Lawson says: “At the moment the regulations say an annuity can only increase year-on-year. That would need to change in order for providers to offer products linked to long-term care needs.

“The difficulty for providers is we do not have a lot of data on the likelihood of future long-term care, but you could potentially develop a market in this area.”

Lawson also says regulations could be adjusted to make it easier for providers to reduce annuity income in certain circumstances, such as when a pensioner begins receiving their state pension when they have taken their annuity years earlier. 

He says: “More flexibility could be brought into the defined contribution world to better reflect the way people take pension income.”

Evolve Financial Planning director Jason Witcombe says: “Long-term care funding is a huge worry for a lot of people so if there could be an insurance-based solution I think demand would be high.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Good idea John

    This has been tried before but without success.

    The problem is that most people take a short term view of their annuity i.e. who pays the most income

    The challenge is get people to take a longer term view of their retirement – if we can do this then people will consider annuities that start lower but increase in the future.

    Personally I don’t think we need more products – just a better understanding of the issues and the products we have at the moment

  2. The other big annuity (and investment) providers, such as the Pru and L&G, should be standing shoulder to shoulder with Aviva in lobbying the government to allow them to create a new retirement income product that’s completely unshackled from annuity rates. If only one provider raises the issue, it’s all too easy for the government to dismiss its call as being based just on a self-interested pitch to grab more business. Many voices speak louder than one. Annuity has virtually become a dirty word, perhaps the single biggest deterrent to committing money to a pension plan.

    What’s needed and what the big retirement income providers need together, not individually, to press for is a new product in the form of a Retirement Income Bond, geared to utilise fully over the remaining (underwritten) lifetime of the retiree (in the case of couple, the youngest) the whole of their fund, allowing for a prudent rate of assumed investment growth (my suggestion is 5% p.a.) and an insurance element against early fund depletion. Such a product would be virtually as secure as a conventional annuity, so on what grounds could it be reasonably rejected?

    It should be possible for the available level of income to be reviewed and revised (only upwards) periodically (5 yearly perhaps?) to reflect better than expected investment growth and/or a deterioration in health. Virtually no one, I suggest, would be interested in being able to reduce the level of income.

    The government should also scrap (or at least reduce to no more than a token level) the punitive death tax charge against unspent funds (why is there no Nil Rate Band, as with IHT?) and instead allow them to pass down into retirement funds for the next generation. Wouldn’t that encourage forward planning?

    Wouldn’t Retirement Income Bonds (RIBs) improve retirement income levels and thus the amounts of tax-assessable and spendable income flowing into the economy? Wouldn’t that stimulate the economy in all sorts of other ways?

    Wouldn’t these benefits outweigh massively the revenues it gathers from the 55% death tax (which, in the overall scheme of things, probably aren’t much) against unspent funds?

    How can the government in general and Steve Webb in particular not see this?

    The UK is afflicted by a widespread retirement income crisis which the government could, in conjunction with the industry, address by way of meaningful and positive measures. Why isn’t it doing so? In its pre-election manifesto pledge, this is exactly what the Conservative party promised to do ~ so why hasn’t it? Why is it prioritising the forced implementation of AE schemes over addressing the underlying malaises of the current pensions framework? These people really do need their heads knocking together.

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