Pensions minister Steve Webb managed to create some headlines over the weekend by floating his switchable annuities plan in the press.
Superficially, the idea may be attractive to savers fearful of being trapped in the same annuity until death and suspicious of what they consider to be profiteering pension companies.
But behind the headlines there are a number of troubling questions and concerns such a plan could lead many to receive lower incomes in retirement.
Despite the bad press annuities have received of late, the idea of receiving a guaranteed income until you die should be an attractive one to many people, especially considering demographic trends.
Experts are warning that introducing a compulsory ability to switch providers could lead to a 25 per cent fall in annuity rates, with the actuarial assumptions used to calculate annual incomes blown apart. The possible benefits to consumers are questionable. Webb may argue that competition could drive up rates but there is no guarantee this would happen and the costs associated with regular reviews may cancel out any upside.
There are plenty of other annuity problems the pensions minister should talk to the Treasury and/or FCA about first. Too many people are ending up in lower-value annuities than they could be receiving on the open market or not taking up enhanced deals they would qualify for due to medical conditions.
A simple way to help address this problem would be to make a referral to an independent broker the default option for those approaching retirement, a Labour idea recently rejected by the Government in Parliament.
Investors with larger pots should be seriously thinking about whether an annuity is the right option for them at all, with various other flexible options available through drawdown without the need for Webb’s intervention. However, the FSA’s decision to ban adviser commission but allow it to remain for non-advised business has created an unlevel playing field, with the dice loaded against independent advice.
The FCA’s current investigation into the annuity market should be published in the coming weeks and will hopefully look to address some of the inconsistencies created by its predecessor.
There are plenty of annuity failures to be fixed but ministers should take care that in grasping for their big legacy idea, they do not end up creating more problems than they solve.