BLOG: The pension minister and his ‘breathtaking ignorance’ about annuities
In one fell swoop, [pension minister] Steve Webb has displayed the breathtaking extent of his ignorance surrounding annuities.
The problem with his proposals is simple enough: just about everything he wants to see improved already exists.
Webb’s ‘shopping around’ facility, where investors can buy an annuity today but benefit from improving annuity rates further down the line, already exists in the form of fixed term annuities. Is the minister even aware that these exist?
Another suggestion is that people who suffer ill health should be given better deals. Guess what? People can already get better deals if they have health problems – through enhanced annuities.
Webb suggests that people should be able to run ‘mixed pension arrangements with some annual income through their annuity and the rest of their savings invested’. Yet again these features exist already in the form of fixed term annuities, income drawdown and phased retirement plans.
Staggeringly, the pensions minister also wants to curb ‘hidden charges’ on annuities. What ‘hidden charges’? Annuities are a risk product, a form of insurance, with unknown future outcomes for the annuity providers. Yes, they have charges built in, but these charges are not going to impact on the income levels to any meaningful degree. The biggest issue facing investors is the gilt yield which determines market prices.
It’s like saying he wants building societies to reveal their hidden charges because they don’t pay much interest to savers. What’s the difference?
Annuity rates are low because of interest rate policy, not because of hidden charges. Does Steve Webb understand this?
The minister is targeting a problem area with completely the wrong solutions, because he clearly does not realise that in the main the solutions are already in place.
The big issue is awareness and the process that people retiring go through. In the retail world, people know they can shop around and get the best deals and generally they know where to go to get them. When it comes to retirement products and options, the problem is not what is on offer, but that people don’t always know what is on offer.
We don’t need more reforms, we’ve had far too many already. We simply need concerted attempts to make sure that everyone who retires knows what their options are.
Craig Palfrey is director of the pensions resource for consumers at Increaseyourpension.co.uk