Annuity Bandwagon: All Change

Annuity Bandwagon: All Change
Simons Town South African by Julian Cohen. Why?

An annuity is for life (not just Christmas), so being forced to make a decision you can’t change for 25 years or more must be wrong

Why Shouldn’t You Be Allowed To Switch Your Annuity?

With much publicity dedicated to the retirement rip-off surrounding annuities, Steve Webb, the minister responsible for pensions has opened up a new debate.  He’s considering a range of ideas to address the problem, including the ability for people to switch their annuity once it’s been bought.

Interviewed by the Sunday Telegraph, he suggested it should be possible for people to switch their annuity in a similar manner to the way that people switch their mortgage every few years.

He’s accused insurers of sharp practice by saying “‘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.”

He’s proposed a blue-print for retirement reform, which would also see an end to hidden charges and high commissions dramatically reducing the benefits available to the person who’s retiring.

He went on to say: “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?”

Thoughts From Annuity Providers

Responding to these proposals, not surprisingly, commentators from the annuity industry said it would make pensions even more expensive.  And that would mean less money for those in retirement.

We would have to look at the whole spectrum of possibilities. For example, where someone has bought a single life annuity and wants to make it a joint life policy that might be possible, but a case that involves extra underwriting, moving from a standard annuity to an ill-health annuity, we would have to look at that a lot harder.

Kate Smith, Regulatory Strategy Manager, Aegon
Currently we invest in long-dated bonds, to provide the annuity.  As interest rates go up, the value of long-dated bonds goes down, so the customer who has switched would see no benefit.  What we could do is add an interest rate option to the bond investments. But if we do that we would have to buy the option when we set up the annuity and that would make the annuity cost 25% extra.

Adrian Boulding, Pension Strategy Manager, Legal & General
Annuities are a pooled investment.  If someone wins, then another person loses. If we give someone more money, someone else loses out. If someone got ill and was able to change to a higher rate that would mean less mortality cross subsidy for the rest.

Andrew Tulley, Pensions Technical Director, MGM Advantage

It's obviously a major issue.  For the top man at Aviva has just launched a ferocious attack on some of his competitors who don't offer an enhanced annuity option.

There are providers that are exploiting inertia from customers because they do not offer annuities that are enhanced due to medical conditions, so the customer ends up with a really poor deal. We think that is not acceptable. 30 per cent of the market is about enhancing the annuity based on medical conditions and yet there are companies out there that find it OK just to let the customer buy an annuity from them even if they don’t offer an enhanced annuity. We think that is a complete and utter scandal.

David Barral, UK Life Chief Executive, Aviva

Don’t Hold Your Breath For A Quick Annuity Outcome

Annuity purchases worth billions occur each year.  With that much money at stake, and so many vested interests, it means the annuity issue is likely to rumble on for quite some time. 

In the meantime, whilst annuity rates are so low, those approaching retirement should also fully examine the benefits available from Income Drawdown as an alternative method of providing their retirement income.

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