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Loosening the annuities

No one can deny there is a head of steam gathering on the annuity debate. The pressure is mounting on the Government at least to ease the rules which force individuals to buy an annuity by 75.

One of the leading voices is Conservative MP John Butterfill, who has tabled a private member&#39s bill to relax the purchase requirement and deal with some of the key criticisms of annuities – that they restrict personal choice and can represent poor value for some people.

Dovetailing with the reading of Butterfill&#39s bill, which is scheduled for March, will be a campaign led by former regulator and author of the Choices paper on annuity reform, Dr Oonagh McDonald.

Backed by the life industry, Autif and the AITC, the Retirement Income Working Group Campaign will aim to get the proposals contained in the Choices paper into all the major political parties&#39 manifestoes for the widely anticipated spring general election.

McDonald&#39s report recommended that the retiree should secure an index-linked minimum retirement income but the remainder of the fund could be invested elsewhere.

Last week, McDonald criticised the Government for looking to Catmarking products as the solution to individual financial planning needs, reminding the Government there is a difference between the simplicity of products and their suitability.

Now McDonald is taking the message of the working group a step further. She says: “We have just established an industrywide campaign which bodies across the industry are backing and funding. The campaign will involve mailing MPs and trying to get the recommendations into the main parties&#39 manifestoes.”

Many think that this action is long overdue.

Winterthur Life pensions strategy manager Mike Morrison has been concerned that the chorus of opinions have not been working towards positive and unified action.

He says: “From all sides there are people concerned about annuities – actuaries, the industry, politicians. DSS research showed a level of concern among consumers on compulsory purchase. We need a proper industry forum for when we get past the general election.”

But the Choices report is not without its critics. Morestead director Billy Burrows says: “Yes, it is time for the end of compulsion but we must not confuse the debate with abolishing annuities.

“Even if you remove compulsion, a great number of people will still buy an annuity. We have yet to see workable proposals from the retire- ment income working party.”

What of the alternatives? Burrows suggests there are a range of possibilities from existing annuity and drawdown products to create different solutions.

The recent report, Reinventing Annuities, by the Staple Inn Actuarial Society recommends a flexible and transparent unit-linked income vehicle. It has gained a good level of support.

Merrill Lynch Investment Managers director marketing strategy Roderic Rennison says: “This is the most interesting and comprehensive document on annuities for years. The future lies in unit-linked structures and it is only a matter of time before a life office takes up the ideas in the Staple Inn report.”

Torquil Clark pensions development manager Tom McPhail also recommends an alternative. He suggests that at retirement an investor could place their pension fund in a retirement account from which an income could be drawn. As with a drawdown plan, they would be free to select an investment strategy within the annuity account to suit their requirements.

Many experts are agreed an already dynamic market will witness the launch of even more innovative products, regardless of whether the Government sits on its hands regarding reform or not.

Both reform and product development are excellent news for IFAs. McDonald says: “The report we produced acknowledged the need for advice in the retirement market. If the remainder of retirement income is opened up by the next Government, a huge market for highly professional advice will be opened up.”

Advisers agree. Intelligent Pensions managing director Steve Patterson says: “Even if compulsory purchase is removed, there will be questions about best advice, such as how dependent you are on your pension and whether the security of your income is more or less important than securing capital.”

Income Drawdown Advisory Bureau director Ronnie Lymburn says: “We have seen more and more products come on to the market and there will be more innovative products in the next few months. It is important to make sure the advice mechanism is right. The FSA is already starting to look at appropriate advice models and best practice.”

Any movement in the annuity debate is an opportunity for IFAs to do what they are good at – providing professional and holistic financial advice.

With pensions becoming increasingly commoditised, advisers are likely to shift increasingly into the at-retirement and post-retirement markets to steer their clients around the annuity problem.


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