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Life offices press for an end to LPI rule

Life offices are lobbying the Government for the relaxation of the requirement for defined-contribution pensioners to buy a limited price index annuity.

Product providers argue that LPI annuities are poor value because the shortage of index-linked gilts means that the cost of providing the inflation protection exceeds the benefits.

Figures from Standard Life show that a 60-year old male buying an LPI-linked annuity with 5 per cent inflation protection would have to live to 114 before he received as much as if he had bought a level annuity.

The Pensions Green Paper proposes reducing LPI protection to 2.5 per cent from 5 per cent but providers are lobbying for its abolition for money-purchase arrangements.

They argue this will only add another layer of complexity as retirees can already have to purchase three different annuities under current rules – inflation up to 3 per cent for protected rights pre-1997, up to 5 per cent post-1997 and without protection for non-protected rights.

LPI annuities are obligatory for five million people who have contracted out through personal pensions and hundreds of thousands of members of occupational money-purchase schemes.

Standard Life senior technical manager John Lawson says: “Retaining LPI for money purchase schemes is bad for the Government as well. LPI annuities mean lower lifetime incomes and therefore higher means-tested benefits.”

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