The more prescriptive the pension annuity rules are, the less likely people are to commit substantial savings to pensions. To me, certain things are self-evident:
The laws governing annuity purchase should be changed.
Annuity purchase should not be regarded as a single, once in a lifetime event.
There should be no requirement to take tax-free lump sums at the same time as annuities are purchased.
A less prescriptive environment would increase the perceived value of annuities and encourage more savings in pensions.
The Government should be prescriptive about the timing and form of annuity purchase, but only up to the level of the Mig.
The range of allowable investments for pension savings should be made as wide as possible to meet people's needs better as individuals during retirement.
I strongly believe the laws governing the timing of annuity purchases from pension arrangements should be changed to give people more control over their own financial affairs in retirement.
The act of purchasing a pension annuity should not be regarded as a single event as it is now, but rather as three separate and distinct actions:
The purchase of an annuity to the level of the minimum income guarantee (Mig).
The taking of a tax-free cash sum.
The purchase of a further annuity or annuities from the balance of the pension savings not used to provide the lump sum and the annuity equivalent of the Mig.
I believe these three separate actions should be recognised as such by legislation and people should be given the right, within parameters, to choose the timing of each action to suit their own requirements. People should not be required to purchase annuities at the same time as they take the tax-free lump sum provided by their pension savings.
The benefits of breaking the link between the timing of annuity purchases and the taking of the tax-free lump sum would provide the answer to many of the negative perceptions surrounding annuities and encourage people to commit more to pension savings in the first place.
I regard the creation of a less prescriptive environment for those spending their lifetime pension savings as being key to increasing both the perceived value and the real value of such savings. In particular, such changes would prevent people having to make economically unsound decisions towards the latter part of their working lives, such as purchasing annuities as a means of accessing tax-free lump sum entitlements.
I agree that the Government has the right to be prescriptive concerning the timing and purchasing of annuities to the level and value of the Mig but would question whether it is sensible for such a right to extend to the extra savings that many people manage to put aside for their retirement.
Once people have demonstrated they will not need to rely on the state during retirement, they should be allowed to choose how and when the balance of their savings is applied to financial instruments such
I would recommend that changes are made to allow for as wide a range of annuity options as possible to be provided for pension savings. These could include products such as fixed-term annuities and other income-producing investments which could be used by people to tailor their income and investment requirements to suit their needs.
Steve Bee is head of pensions strategy at Scottish LifeDOCE: