Your comment (May p3) about the inadequacies of the annuity market for mass market pension savers is spot on. Most people do not understand annuities, do not know how to choose the right kind or how to shop around, and do not realise they pay 1%–2% “commission” whether or not they receive advice. Furthermore, once bought, the annuity can never be changed.
But, despite all these factors stacked against annuity purchasers, and even though required by law, government has failed to ensure people are helped to find the right annuity at a top rate. This is left to “market forces” and “informed choice’” It is just not working.
Pension policy has focused on reducing charges during accumulation – this is still the obsession with the proposed “low cost” Personal Accounts – but surely whether annual charges are 0.5% or 1% is not the most important determinant of retirement income if people lose 20% or 30% extra income by accepting their pension provider’s annuity, rather than obtaining an enhanced annuity or better rate elsewhere?
Disappointingly, Thoresen also failed to focus on this area. His “generic money guidance” would be ideal for annuity purchase. This could help pre-retirees through the few essential questions before buying their annuity. [In particular, considering enhanced rates, joint life, inflation protection, start date and guarantee period.] The “commission” deduction from pension savings on annuitisation could even help fund this. Requiring providers to ensure such guidance is received, before annuity purchase, together with standardised forms and penalties for non-compliance with reasonable practice on fund transfers, could make the open market option a reality, rather than an aspiration, for hundreds of thousands of people each year who might otherwise buy the wrong annuity.
Decumulation is vital for pension savers – it is the income on which they will live in retirement. By leaving such a once in a lifetime decision to people who are not equipped to make the right choices, government ensures that too many pensioners have a poorer retirement than they should.
Dr. Ros Altmann
ros@rosaltmann.com
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