“Only Muggles buy annuities.” So I am informed by my children who are
devoted fans of Harry Potter. So it is good to know that back at the
Hogwarts School of Actuaries they are turning their magic towards
reforming the present system of compulsory annuities.
The Institute of Actuaries has set up a working party which has published
a report entitled Extending Retirement Choices, which calls for more
flexibility for pensioners when they reach retirement.
The report builds on the work started by the Retirement Income Working
Party, chaired by Dr Oonagh McDonald, and recognises the need for a more
informed debate on how the current system of compulsory annuities can be
The report identifies seven criteria, which can be used to evaluate the
range of retirement options – choice, security, inheritability,
flexibility, self-reliance investment efficiency and cost-effectiveness.
The basic conclusion is the same as the previous working party. Pensioners
should have more flexibility but only if they have a pension fund large
enough to secure an income that is greater than the so called minimum
The idea behind the MRI is it should be set at a limit above that needed
to qualify for state benefit. One of the major concerns of the Government
is that if people have too much freedom they could blow there pension
savings on “high living”, and fall back on state for additional support in
The MRI has been calculated at about £140 per week and this would be
secured by purchasing an index-linked annuity. Currently, it would require
a fund of between
£ 35,000 and £50,000, depending on age, to buy this annuity.
There were two main criticisms of the Retirement Income Working Party's
proposals. First, many people with smaller pensions would end up with less
choice not more. Second, the proposals did not take into account the
existing pension framework, making no specific recommendations for how the
surplus above that required to buy the MRI, should be dealt with.
Extending Retirement Choices does make some firm recommendations. It
proposes the setting up of a personal distribution plan. This will be
similar to the current pension drawdown policy but with more flexibility.
For instance, there will be no need to buy an annuity at 75 and drawdown
can continue, provided that the remaining fund is sufficient to purchase
the minimum retirement income. If the fund falls below this amount, an
annuity will have to be purchased.
This new proposal is a welcome addition to the annuity debate. One of its
strengths is that it is similar to schemes which operate in both the US and
Ireland. In the US, there is no MRI but pensioners can continue making
systematic withdrawals for life. In Ireland, pensioners have almost
complete freedom, providing that they keep a certain amount
in a special account.
There is mounting pressure to reform the rules that compel people to buy
annuities by 75 and this report should add weight to the campaign. At the
moment, the rules surrounding compulsory purchase of an annuity make as
much sense as the rules for Quidditich.
For those who have not read Harry Potter, muggles are normal people as
opposed to wizards. Hogwarts is a famous school of Magic and Quidditich is
a game played on broomsticks.