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Steve Webb floats proposal for switchable annuities

Pensions minister Steve Webb has called for retirees to be able to switch to better paying annuities in a bid to tackle what he calls “murky” insurer practices.

In an interview with The Sunday Telegraph, Webb said pensioners should be able to switch annuities in the same way homeowners can switch their mortgage rate every few years.

Webb said he wanted to tackle the “whole issue of cost” of buying an annuity, and insurers’ “hidden charges”.

He said: “When you take out a mortgage, in a few years if rates change you can switch your mortgage. But when you take out an annuity, that’s it – for life. This could easily be for a quarter of a century.

“Why shouldn’t you be able to change your annuity provider so a few years later somebody else could offer you a bigger pension? Why shouldn’t you be able to shop around?”

Webb also likened the annuity market to a “lottery”, saying that while the industry understands the annuity buying process, the public does not.

He added: “There are almost murky things at the point where you buy an annuity. There are odd percentages going in funny places for no good reason.

“I think lottery is a fair word. We are worrying about charges, but if the outcome at retirement can differ by 15 to 20 per cent or more just because of who you go to, that’s a huge difference and so there can be an element of a lottery in that.”

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. Utter, utter insanity. How on earth can an insurance company be expected to offered an annuity that will last for the whole of an annuitants life with the caveat that they can move at any time? The actuaries will laugh at you!

    Mr. Webb. I understand that you have to win votes but don’t do it at the expense of the truth. I beg you.

  2. Is the minister aware that there are already products called ‘Fixed Term Annuities’ on the market? Judging by the way he’s talking, I suspect not.

  3. I confess I’m no actuary, but from what I understand the current annuity rate is calculated factoring in mortality. The result is that rates are slightly better as a result of those that die earlier advantage the longer lived.

    Therefore if annuitants were able to switch annuities this mortality calculation would no longer be valid with the presumed result that rates would decrease for all.

    If this assumption is correct it again demonstrates that the Westminster numpties interfere in matters in which they have no expertise or knowledge and that (for them) the law of unexpected consequences runs rampant.

    Just stop messing with pensions, repeal the iniquitous tax on pensions and just leave things alone. We would all be better off as a result of that simple measure.

  4. Mr Webb illustrates quite nicely what happens when you put someone in charge of something that they know nothing about.

    The ‘at retirement’ market is broken and needs a radical shake up but that doesn’t mean meddling with existing options in a bid to make them right. I think Harry is write, remove the actuaries ability to factor in mortality and they can’t work the margins which results in a them leaving the market and then no one gets an annuity even if they want one.

    Leave annuities alone (except for cleaning up the sales process) and come up with new options that are more flexible and then clients can either choose between the old options – annuities/drawdown etc and any new options, whatever they may be, or they can choose a combination of both.

    As i said before the whole ‘at retirement’ market needs shaken up but i think this is best done by government and industry coming up with new more flexible options not by creating more complex rules for the existing insufficient options.

    All the above is simply my humble opinion, feel free to disagree.

  5. It sounds to me that the Government’s pension department is is broken and needs a radical shake up.

    Just make it compulsory to seek advice at retirement and if the existing scheme issues an annuity quote ban them from providing claim forms direct to the client these must go via an IFA.

  6. Alongside the destructive effect to prcing as already mentioned; I would imagine the charges for an adviser to review and switch the annuity every few years would far outweighy the few quid a client would save on the switch itself.

  7. @Matthew
    Spot on. But then Mr Webb assumes that people will do this on line themselves! After all they will become overnight experts. But have you noticed that yet again the press have failed lamentably to pick up on these points in their fawning alacrity to puff up the idiots in power.

    Not only do we have legislators who don’t know what they are doing – we also have a press who comment on subjects they don’t understand and can’t be bothered to check with an ‘expert’ before committing themselves to print. (Present host excepted – of course! – But then one wonders why the National Press doesn’t check with the financial press first?)

  8. This man is a total idiot. For God’s sake put people in charge of pensions who actually has a good knowledge of how the at retirement market works. Send Mr Webb to the acutaries so they can explain how any annuity is calculated and what the basis is for setting the rates. He then may actually understand why this is such a hair brained idea. Either that or have him put in charge of the white fish authority or the DVLA. Somewhere, anywhere, where he will not do any real damage to the nation.

  9. I’m sure what he meant was this:
    You purchase an annuity, which gives an income for life, at today’s rates.
    10 years down the line, rates increase, but you’re stuck with the old rate.

    Would it not be better if you could then go to an insurance company and say: “my previous pot is now down to X after taking 10 years’ income, so what could you offer me now as I’m locked into a poor rate…”

    Best not to call someone with a degree from Oxford, who is a professor, a “total idiot” then…

  10. @ Harry
    You are not concentrating. Read the posts and THINK about it. What you are suggesting is what is already there and isn’t that great once you crunch the numbers.

    And having a degree from Oxford and being a professor is absolutely no guarantee of having common sense or a grasp of pensions. Remember that according to his CV he has done nothing but teach and research. No real job where profit is the prerequisite. Don’t forget it was Nobel Laureates that almost brought the whole financial system crashing down on their own (LTCM).

    As a matter of interest I was responsible for compliance at a firm many years ago. One of the advisers did the job part time and was a professor of financial services at a very well-known University. A bigger liability and numpty it would have been hard to find. His work was truly dreadful.

  11. @Harry

    PS If it walks like a duck and quacks like a duck – then it’s a duck. Likewise if it behaves like an idiot, talks like an idiot and works like an idiot, it’s pretty safe to assume that he is an idiot.

  12. It’s clear from Mr Webb’s statement that he has no idea how an annuity works, which is really quite concerning bearing in mind that he is the Pensions minister.

    What he is proposing is totally unworkable in my view without, as has already been pointed out, making the situation worse.

    There is already a choice of options for those who take the opportunity to seek advice and this is where the focus should be, to encourage people approaching retirement to seek advice and properly assess the options available to them.

    The Government should also consider appointing ministers that have sufficient knowledge to head up the department they are in charge of.

    We are unable to do our job without the appropriate qualifications. Minsters and MP’s in general, it seems, need no qualifications to oversee the running of the Government of our country. How can that be right?

    At the present time, the lunatics are definitley in charge of the asylum.

  13. What’s really needed is for the shackle of annuity rates to be scrapped altogether in favour of a Retirement Income Bond, geared to utilise fully a given pension fund over the remaining (underwritten) lifetime of the retiree, with an insurance element against early fund burn-out. It’s simple and no one could reasonably argue that such an scheme/product wouldn’t represent value for money.

    Unless he utterly stupid, Webb must surely know that this is what needs to be done, but he’ll never admit it because of the massive decline in demand for gilts that would result. The Treasury has instructed him in no uncertain terms to talk about everything and anything else, but never something so radical that it would damage demand for gilts.

    Meanwhile, retiring consumers have to contend with dismal annuity rates, crappy retirement incomes and they tell the next generation not to consider pension plans as anything other than a completely duff deal to be avoided at all costs.

  14. @Julian

    That is exactly the kind of thing i’m talking about. We need new and alternative options to what is available at the moment.

    One of the biggest problems pensions have is the public’s perception that they are rubbish and therefore shouldn’t be bothered with. Every one needs to plan for retirement but the bad press pensions get leads people to think it’s pointless. Announcements by Mr Webb do not help the situation, in fact they make it so much worse.

  15. In all this antipathy to pensions and annuity rates what is often overlooked is the fact that over the last 30 years (the approx. working lifetime) pension savers have had it pretty good. From January 1984 to January 2014 the FTSE-100 increased by some 573%. Compare that to the 30 years from 1954 to 1984 when it more or less flat lined (FT30 in those days).

    573% over 30 years equates approximately to a compound annual return of 6.6%. If we assume annual premium of £600 then with a current annuity rate of (say) 6%.

    Compare this to a 3.5% compound annual growth with an annuity rate of (say) 8%, then ignoring PCLS the former annuity would be some 18% better than the latter.

    Basically what I’m trying to show is that you can’t have it all. Either decent investment growth or an attractive annuity rate. It is also as well to remember that pensions should not be the sole answer. I don’t disparage pensions. Admittedly they work best for higher rate taxpayers. The main thing wrong with them is incessant Government meddling. But if (say) you can afford £1,200 a year then perhaps half should go to your pension and half to an ISA. You should also try to avoid saving with a life office if at all possible.

  16. @ Harry Katz

    I hear I hear, but I still seek clarification about these numbers you say.

    So if I get £5k pa on a £100k fund now . . . and I develop an illness in 5 years’ time, should I not be allowed to swap for a better rate? Ok, I’d have been paid £25k by the end of the 5th year, but what fair value could the insurance company give me at that stage to take elsewhere?

    If this was drawdown and the balance (excl.cash payment over 5 years) was invested even in a structured product, surely the insurance company is quids in?

    What do you think Julian (and I agree with your suggestion)?

  17. @Harry

    That is the whole point. If you get ill in 5 years’ time and then die that is a factor in the actuarial calculation that permits the 5% that (in your example) you initially receive. Without that factor you would probably start at 4% and be lumbered with it.

    As has already been said, the three other linked points to flexibility of the type you envisage are:

    1. What withdrawal penalties would there be?
    2. What would adviser charges be? (No good just considering from your own informed point of view)
    3. As Tom McPhail has pointed out, it is difficult enough to get people to engage and seek advice initially when they come to buy an annuity, so what makes people think that they will magically now do it regularly?

    Currently the type of flexible annuities currently on the market have scant take up – mainly because (if you crunch the numbers) they are a rip off. Snoopy isn’t exactly filling his boots and the Hartford folded and went back to the US and was eventually taken over.
    As I said instead of concentrating on this – which is really just a blind by Government, why not instead campaign for the repeal of the tax on pensions, the abolition of limits and less tax on pension income up to certain limits – all of which are simpler and would enhance the attractiveness of pensions for everyone.

  18. So the Government keeps changing the state retirement age as it can’t keep up with changes to longevity and is also in the process of getting rid of earnings related retirement benefits and contracting out as it can’t get its sums righ.

    It then has the nerve to say that there are murky practices involved with annuities- are you having a laugh. No one complained back in the 80’s when annuity rates were double what they are now.

    Annuity rates have fallen mainly due to things beyond the ability of providers to influence – gilt yields, longevity and constantly changing capital adequacy requirements and someone in Government should be aware of this before coming out with the usual soundbites.

    Also he checks his facts he will you can change your annuity every 5 years by using fixed term annuities.

  19. Pretty much agree with Harry. Personally I think the solution would be tomkncrease the Trivial pension limit to 3% of the LTA or £50k whichever is the higher. The taxman still gets bi slice, but no small annuities then which simplifies the whole thing for the consumer.

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