Annuities and the open market option are getting unprecedented attention.
Why are annuities and the open market option such political hot potatoes at the moment? If we are being frank, the word annuity sums up a heady combination of boredom and complexity which would send most politicians running to the House of Commons' bars. Yet, annuities have been the subject fora great deal of political debate in the Finance Bill and in the aftermath of reports from Dr Oonagh MacDonald and the Social Market Foundation. Why?
In a general election run-up, pensioners are important. Not only are they vocal, they are also prepared to vote to make their point. It is clear that pensioners are not happy about the poor returns they are making on their annuities.
Shadow Economic Secretary Howard Flight says some two-thirds of the electorate are over 45 and therefore either starting to think about their pensions, close to drawing them or having to buy an annuity.
The over-45s have nearly 80 per cent of all financial wealth in the UK, according to Henley Centre for Forecasting. Much of this is concentrated among the over-60s because of high levels of homeownership and possession of private and occupational pensions.
All the politicians I have spoken to on this issue are motivated by a genuine wish to improve the lot of the pensioner. There are a number of suggested solutions.
Flight advocates ending the obligation to buy annuities. He says: “If an IFA put all of someone's savings into gilts on a 20-year view, they could be attacked for misadvice. This is exactly what the Government is, in effect, doing by continuing with the compulsory requirement to buy an annuity.”
Oonagh MacDonald's proposal broadly follows that already adopted by Ireland and Canada, in which pension capital goes into a ringfenced pension account and, within sensible but broad guidelines, beneficiaries can invest the funds as they see fit – with the proviso that an annuity must be purchased to cover a minimum income.
There is also a school of thought which says the annuity is not at fault. It is buying the right annuity which is the real issue. It is the little known open market option which appears to be the quick and effective way of dealing with the combination elements of security and return.
Only 25 per cent of people reaching retirement use the open market option and only 3 per cent of the funds which are converted to annuities on retirement are on terms that are enhanced for lifestyle or health reasons. This is despite the fact that, of the population reaching age 65, it has been estimated that up to 40 per cent could qualify for an enhanced annuity on the basis of health or lifestyle.
Political interest has been further stimulated by the financial industry. Evergreen Retirement Assurance, a specialist annuity provider, recently commissioned a Mori poll into public awareness and attitudes to the open market option, which showed a very low level of knowledge among consumers. Evergreen communicated the research findings to politicians from all parties.
The Mori findings support industry speculation about the effect of the open market option. By purchasing the most competitive annuity, retired people can improve their income by as much as 14 per cent and up to 30 per cent forpeople with a lifestyle or medical condition. This is clearly also in the best interests of Government. Both the Treasury and Department of Social Security will benefit as wealthier pensioners pay more income tax and means-tested benefits are deferred.The active promotion of the open market option results in a win, win, win situation.
Practicality also plays a role – as primary legislation is not required – which is a relief to the party manager who recognises there is no place for additional legislation in Parliament's already over-burdened timetable. All that is required is the FSA ensures that pension providers tell pensioners they should shop around to purchase the best annuity possible or risklosing significant income in their old age.
Evergreen corporate development director Bob Bullivant says: “The open market option is a major public policy issue. It affects every pensioner in the UK with annuity purchase totalling a staggering £7bn a year. We are committed to informing consumers about their right to purchase the most competitive annuity. It is not only good for the consumer, it is the only way to develop a more competitive consumer-focused sector.”
Bullivant says there has been significant interest from Parliament and the Government about Evergreen's activities. He says: “We were particularly delighted that, when Steve Webb, the LibDem social security spokesman tabled an amendment to the Finance Bill on the open market option hementioned Evergreen not just once but three times.”
Genuine interest has been shown from all parties in this issue. Social security select committee member Gareth Thomas, MP, believes this is an important issue which MPs from all sides of the House will want addressed by the Government. He says: “I am convinced that as many pensioners as possible should be aware of their rights. There is a strong case for opening up competition in the market by showing pensioners they have the open market option”.
Jim Cousins, MP, an experienced Labour member on the Treasury select committee agrees. He says: “We are now clearly in a pre-election period. This is useful for the work of select committees which can now concentrate on issues which do not have an obvious party tag. Instead, they can focus on cross-party issues where, through consensus, we can bring change. Important issues such as compulsory annuitisation, the tax treatment of annuities and money-purchase schemes and the open market option clearly fall into this bracket.”
Campaigners who have worked hard to raise awareness of the open market option should take pleasure from thefact that this issue has achieved such a high political profile and that Treasury Economic Secretary Melanie Johnsonwill consider making changes on a number of annuity issues. The Treasury has promised “to change annuity regulation, including emphasising the open market option, before the end of the year”.