Steve Webb on switching annuities for a better pension

The Telegraph reports that Liberal Democrat pensions minister Steve Webb is considering allowing pensioners to switch annuity providers bringing more competition and better value for pensioners.

The intervention comes before a report from regulators that is expected to accuse pension firms of making excessive profits from millions of people converting their lifetime savings into annuities.

Currently, most people are forced to use their pension savings to buy an annuity — paying an annual income for the rest of their lives. For many people, it is the biggest financial decision they will make. However, in recent years annuity rates have plunged, trapping many people in poor-value schemes that have destroyed the value of their lifetime savings.

The ability to switch annuities after retirement would trigger a revolution for savers and kick-start an industry catering for people who are shopping around to boost the value of their pension.

It is not yet clear how this would work. Annuities as they exist are one-off purchases made with the money built up in a pension fund, that pay out an income for the rest of a pensioner’s life. They are a form of insurance against living longer than your pension pot could fund your pension. An alternative is “income drawdown” – taking money out of your pension pot as income, and there is a hybrid of the two considered in the recent DWP consultation (pdf, page 33).

The world of private pensions has for decades been subject to high and hidden charges, hidden behind great complexity. As more people come to rely on these pensions, Steve has been on a mission to put this right, most recently with proposals to cap charges.

Other elements in the raft of reforms being considered by Mr Webb include:

  •  Pensioners with health conditions or who have worked in risky industries will be given help to get better deals;
  •  Fresh curbs on the “hidden charges” insurers levy on annuities;
  •  A new system of “collective pensions” in which millions of private pensioners would keep their savings invested in the same “mega fund” while they were working so their money grows with their investments;
  •  More people will have mixed pension arrangements, with some annual income through an annuity and the rest of their savings invested.

The proposals would represent the biggest overhaul of private pensions, paid out of individuals’ lifetime savings and separate from the state pension, for years. Mr Webb confirmed that his proposal would represent a massive change to the current system.

“But I think it would be well worth looking at,” he said. “If you think that if interest rates go up, then people retiring in a few years might be able to get better annuities than the people retiring today. Why shouldn’t the people retiring today be able to benefit?”

* Joe Otten was the candidate for Sheffield Heeley in June 2017 and Doncaster North in December 2019 and is a councillor in Sheffield.

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  • jenny barnes 6th Jan '14 - 11:30am

    why would it “kick-start” an industry? does it need a kick? or is there an analogy here to motor cycles – many of which have electric start, which is surely easier than a kick-start – especially if we’re talking about something sizeable, and I suggest the annuity/ pension/ saving industry is on the large side.

  • Interesting that Steve omits to mention the big (dubious) feature of the DWP consultation was granting employers the ‘flexibility’ to convert DB (ie. final salary pension) into a DC scheme, particularly for leavers, thereby transferring all the risk onto the leaver…

    Be interesting to see what the response and findings were for the now closed consultation…

    As for annuities, the need is to remove the need to wholly convert a single pension pot into an (ie. single) annuity within a fixed time period.

    As for charges, if they cannot be explained to across the table to a 16-year old with GCSE maths, so that person can, using a pen and paper and a pocket calculator make a reasonable calculation of their likely pension and it’s deductions then they should be deemed illegal.

  • Jeremy G Ritchie 6th Jan '14 - 3:54pm

    I’m extremely disappointed in Steve Webb who continues to show little understanding of the industry he is representing. An annuity is based on a pooled risk of individuals and prevailing interest rates. In essence those that die young subside the people who live the longest. By allowing people to exit the pool would drive rates down, not to mention the enormous costs of calculating transfer values. I pray this gets kicked into long grass or we’ll all be retiring on an even greater pittance.

  • Eddie Sammon 6th Jan '14 - 5:03pm

    If anyone wants to read long and slightly paranoid destructions of Steve Webb’s pension work then I would check out my rantings from this thread:

    When it comes to getting down prices I don’t really see any better solution than competition. Kicking the industry just seems to do the opposite. I think liberals should focus on taking money off the super rich and arguably the rich too, not hitting SMEs and centralising pensions management under a “mega fund”.

  • A proposal to ‘kick start’ a new industry is merely treating a symptom; it errs by asking the wrong question. We should rather ask just why rates are at record lows for a record long time with no early prospect of improving? The answer, I suggest, has everything to do with the abysmal stewardship of the economy over many years leading up to the financial crisis and the limp response to it subsequently.

    Policy remains centred on shoring up and defending the status quo even though it is irredeemably broken, drowning in an ocean of malinvestment and vested interests. Japan has been in a comparable hole for over 20 years with no end in sight. We need to redirect finance towards creating national wealth (e.g. providing affordable capital for growing businesses) rather than creating riches for insiders able to manipulate markets with no real fear of regulatory sanction.

  • Peter Davies 6th Jan '14 - 9:21pm

    I agree with Roland “As for annuities, the need is to remove the need to wholly convert a single pension pot into an (ie. single) annuity within a fixed time period.” As a self-employed person who expects to retire gradually, this would be very helpful. I can’t see who the current rule helps except the annuity industry.

  • Eddie Sammon 6th Jan '14 - 9:47pm

    Roland and Peter, the requirement to purchase an annuity by 75 was removed a few years ago. People can just stick their pension in drawdown for life now. It’s a much better system. Annuities are just single premium insurance products for those that don’t want to take the investment risk.

  • Eddie Sammon 6th Jan '14 - 9:55pm

    By the way, it wasn’t a legal requirement to purchase an annuity by 75 (what a money spinner that would have been), it was such that the death taxes used to be so high after 75 that most people bought an annuity with a spouse’s pension. I’m a bit rusty, but the jist of it was an “effective requirement”, which thankfully no longer exists.

  • Eddie Sammon 6th Jan '14 - 11:53pm

    Just seen this in the Guardian:

    I would like to tackle some things in the industry, such as receiving compound interest but only paying simple interest to the client, without them being aware the provider is creaming some off the top (most plans are not structured like this, but a significant minority are), but Steve Webb seems to have gone on a wide swinging anti business attack, even hitting fair practices.

  • Eddie Sammon 7th Jan '14 - 12:32am

    By the way, so people don’t become fearful of private pensions or fall victim to any of these questionable business practices, the golden rule is “if it sounds too good to be true it probably is”.

    When I was an IFA I was made to sit in front of a salesman branding an attractive hybrid annuity rate, I had to ask whether it was simple or compound interest and as soon as he said “simple” I pretty much kicked him out. The clients are told in writing it is simple interest, but unfortunately a lot of them don’t go through the fine print or simply get confused and it just gets used as a miss-selling strategy.

    Attacking practices like this could even get some big providers on board, improving economic credibility.

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