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Put an end to the unfair pension annuity regime

The Conservative Party has been committed for four years to end the compulsory purch-ase of annuities by 75 and to legislate on broadly the same terms as David Curry&#39s Bill, for which I personally have campaigned since 1997.

The Minister for Pensions is out of touch in describing this as a rich man&#39s issue. Over 1.5 million people saving for their retirement in money-purchase pension schemes will benefit. The recent Winterthur survey found only 13 per cent of adults believe that it is fair to force people to buy annuities.

A major reason for the disappointing sales of stakeholder pensions is that people object to the Soviet-style requirement to buy a bad-value annuity with the proceeds.

Fourteen years ago, reforms in Canada allowed those with money-purchase pensions to have the option of putting their pension savings into a regulated retirement income fund, the drawings from which are taxed as income.

The number of ordinary Canadian people with such money-purchase pension savings has doubled to 40 per cent of the workforce.

The cost of a guaranteed annuity has doubled over the last decade, reflecting not just the fall in inflation but also the fall in real interest rates. This has resulted from a fall in the total of outstanding gilts, with budget surpluses, when gilt investment demand is rising – £8.5bn was invested in annuities last year, expected to rise to £12bn in three years.

The volumes will rise further with the shift away from final-salary schemes. Twenty-four per cent of companies over the last five years changed to money-purchase schemes and, in the last year alone, 46 companies, including Sainsbury, BT, ICI and Lloyds, closed their final-salary schemes.

David Curry&#39s Bill will ensure the income of those in retirement is kept above income support levels by requiring the purchase of a minimum retirement annuity – a guaranteed income for life – to top up the state pension for those who do not have an adequate Serps pension and on equal terms for men and women.

Any balances remaining in retirement income funds on the death of beneficiaries, their spouses and dependent children will be subject to a 35 per cent tax charge and form part of the relevant individual&#39s estate for inheritance tax.

While this means people will be able to pass on some of their pension savings to their children if they wish, it will be on a fair tax basis and will not provide any opportunities to save tax.

It will also resolve the long-standing problem for Plymouth Brethren whose faith does not permit them to buy an annuity.

The Government has offered no evidence to support the concerns it has expressed – that the changes would lead to a large loss of tax revenues as a result of increased pension savings – indeed, their answers to relevant Parliamentary questions on pension contribution data have been that they do not have the relevant information.

Over time, tax revenues could actually rise as the result of better investment returns from retirement income funds than annuities and lead to a significant reduction in the costs of pension minimum income guaranteed credits.

It would be a major contradiction of wider Treasury and FSA policy of discouraging unnecessary insurance wrapper costs to savers if, in the case of pension savings, the Gov-ernment sought to address the issues by permitting more flexible annuities.

Qualifying annuity contracts are already available which permit pensioners to select their own unit trust investments and to pass on any remaining balances to their children on death – but at a cost of 1.5 per cent a year and 3.5 per cent initial charge. The time has come to end the unfair and widely disliked forcing of people to buy poor-value annuities by 75 with their money-purchase pension savings.

Howard Flight

Shadow Paymaster General


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