Experts have warned pensions minister Steve Webb’s proposal to allow savers to switch providers after buying an annuity could see rates plummet by 25 per cent.
In an interview with The Sunday Telegraph, Webb suggested people should be able to ditch their annuity provider if they are unhappy with their existing deal.
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’s comments come ahead of the publication of the FCA’s thematic review of the annuity market.
Annuity Direct non-executive chairman Alan Higham warns forcing insurers to offer switchable annuities would see rates drop by around 25 per cent.
He says: “There is no law stopping providers offering a guaranteed lifetime annuity with a transfer value option that someone can exercise. The reason providers don’t do this is they would have to price it in, so you would get very bad annuity prices.
“If the Government made this mandatory for every annuity contract it would wipe 25 per cent off rates overnight. I don’t think many people retiring would thank Steve Webb for that.
“Given there are real flaws in distribution, inviting people to make multiple bad annuity buying decisions doesn’t feel like the right way to solve the problem.
“We need to see reforms to the distribution side of the equation and we need the FCA to be honest and admit the FSA made a mistake in creating a bias towards non-advised annuity purchase.”
Syndaxi Chartered Financial Planners managing director Robert Reid says: “The problem here is certainty. If you make this mandatory you are forcing people to give up certainty for the possibility of getting a better deal.
“I think this signals that we are moving towards a world of individually underwritten annuities for everybody.”
One senior industry source suggests the frictional costs involved in an annuity transfer mean most people would lose out if they switched providers.
He says: “I do not think this idea is workable. Surrendering annuities is a zero-sum game minus the frictional costs of administration and underwriting.
“It would ultimately result in worse annuity rates than we have at the moment. The cost of calculating a transfer value and underwriting would be hundreds of pounds, which is significant if you consider a pension pot worth £30,000. That is effectively wasted money.”
A number of providers, including Just Retirement and LV=, already offer fixed-term annuity products which allow savers to secure a retirement income for a limited time without locking into a lifetime annuity.
However, take-up of fixed-term annuities has been limited, with MetLife pulling out of the market in September 2012.
Annuity Line head of business development Billy Burrows says: “Fixed-term annuities do offer greater flexibility but the client could lose out if annuity rates fall during the term of the contract.
“Furthermore, fixed-term annuities are in fact drawdown contracts, so people who take them out need to be aware of the investment risks involved.”
Labour shadow pensions minister Gregg McClymont has proposed a series of reforms to the annuity market, including forcing all pension schemes to offer an annuity brokerage service to their members and improving transparency of costs and charges.
He says: “This appears to be another ill-thought out idea direct from DWP. It reminds me of the pensions for property proposal announced in 2012 of which nothing has since been heard.
“The Government have not done their homework on annuities and this half-baked kite flying is the result. Only Labour has a serious policy to reform the annuities market.”