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Speak up on annuities

It is all over bar the shouting. Given most of the responses so far to the Government&#39s consultation paper, Modernising Annuities, you would think that the campaign to end the misery and injustice of annuity purchase was over. Far from it.

Since its joint publication by the Department of Work and Pensions and Inland Revenue earlier this month, it appears many have simply given up on the idea of reform until after the next general election.

The consultation paper – rather an interesting title for a relatively prescriptive series of ideas – ignores much of the debate which has intensified over the past 18 months and does nothing to help the growing number of people caught in the annuity trap.

It presents a series of questions designed merely to tinker with the annuity regime rather than provide an alternative for the 21st Century.

It is worth reminding ourselves that legislation which governs the compulsory purchase of annuities dates back to the early 1920s. I do not think even the Government would argue that financial markets, lifestyles and pensions themselves bear any resemblance to the period just after First World War.

But archaic thinking now will continue to damage the Government&#39s stated aim of encouraging all of us who are able to do so to make provision for our own retirement.

There are two major elements to concentrate on during the consultation which may make the Government see some sense. First, there is the big idea in the paper – limited period annuities. Second, there is the major pension policy initiative of this administration – stakeholder.

Limited-period annuities represent an interesting concept. At first glance, they appear to provide greater choice and investment flexibility up to age 75. However, they could just provide an opportunity for the next pension misselling scandal.

Imagine the following plausible scenario. A 69-year-old man has taken out his first limited-period annuity when he retires at 65 and the product is approaching the end of its life.

Letters from his IFA start dropping onto the doormat telling him about the options available to him from X, Y and Z annuity providers offering a variety of rates until age 75.

The choice of contracts might be bewildering – but probably will not be. The rates might be considerably better than they were when he was 65 – but, again, probably will not be. The decision should be easy – but will it really be?

Limited-period annuities may do wonders for traditional providers but they will establish a charter for churning. Older people will be approached time and time again after they retire with a batch of samey products. We live in a commercial world so these short-term products will have to be designed to recoup costs and have the necessary loading of charges.

This does not sound like a very good deal, does it?

The general consensus is that limited-period annuities are only going to be suitable for people with funds over £150,000. With income drawdown only being effective above a similar level, it does not add much to options and only gives choice to those most able to exercise it.

This brings me on to the second substantive point – Government pensions policy.

The big pension idea of the Government – stakeholder – has been a laudable one. To encourage more people to make private retirement income provision must be the right move.

But the evidence since the launch of stakeholder – the take-up of new stakeholder schemes remains abysmally low.

There are two clear factors why this is the case. The numbers of schemes being supported by employer contributions is low but there is also considerable evidence of employees resistant to joining.

I was recently speaking to one of the big IFA firms which looks after a large number of workplace pensions and employee benefit arrangements. The head of pension strategy told me they are encountering massive resistance towards stakeholder schemes in general.

Much of this is because, while most people do not know about the annuity rule – there is usually one bright spark who has read in the weekend papers about the annuity trap and talks about pensions being a rip off.

If the Government really wants to make a success of stakeholder, it needs to address these two clear areas of concern – employer contributions, or the lack of them, and employee reluctance because of forced annuity.

The recent coverage of the number of employer schemes which have abandoned defined-benefit systems only makes the problem bigger – a point the Government is already concerned about.

There is a tremendous opportunity in the coming of months for those involved in the annuity debate. MP David Curry private member&#39s bill has been high on the agenda and the Government&#39s consultation needs responses by April 5.

What will make the Government sit up and take notice is if the enormous annuity mailbag directed at the national newspapers every week, is channelled at the consultation.

If the Government can get a feeling that doing nothing is not an option then it will be forced to think again. IFA support will be critical and I know Aifa is looking to mobilise its membership to respond.

It is crucial you and your clients do so or we may be stuck with the present system until the Government realises pensions cannot be promoted within a legislative framework designed for the 1920s.

Respond – you can do so at: pensionconsult@ir.gsi.gov.uk before April 5.

Iain Anderson is director and chief corporate counsel of Cicero Consulting

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