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?”
Annuity Direct non-executive chairman Alan Higham says: “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.”
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: “Surrendering annuities is a zero-sum game minus the frictional costs of administration and underwriting. This proposal would ultimately result in worse annuity rates than we have at the moment.”
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.
Labour shadow pensions minister Gregg McClymont says: “The Government have not done their homework on annuities and this half-baked kite flying is the result.”