New Government Will Address Annuitisation

by Dr. Ros Altmann

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AT long last we have a chance of a Government that will get to grips with some of the most pressing problems for our pension system. There are plenty of areas that need urgent attention and, at last, after 13 years of sustained damage, there are some hopeful signs coming from the new coalition.

One area which they have committed to address is annuities.

This cannot come soon enough. Over the past years, annuity costs have soared, and the cost of buying annuities is at a record high. See table below. The past few months have seen another sharp rise in annuity costs, as the credit crisis has forced interest rates down to record low levels, but even before this, annuity rates had been falling dramatically.

Annuity pension income for male aged 65, £100,000 pension fund

Year

  

Annual income

1990
1995
2000
2005
2010

£15,600
£11,100
£9,100
£7,100
£6,100

The requirement to buy an annuity is often unpopular and campaigners have been pressing for reform for many years. At last, it seems that meaningful change may be imminent.

The new Government has committed to scrapping the requirement to buy an annuity by age 75. This is great news.

Scrapping forced annuitisation will mean pension savers can choose what to do with their pension savings, instead of being forced into a particular type of product. However, we do not know any details on how the annuity requirement will be changed and, as always with policy, it is the detail that counts.

Will the Government just increase the age from 75 to, say, 80? I don't think so.

Will the Government only abolish the annuity requirement for those who can prove they have enough money to ensure they will not fall back on state means-tested benefits? If so, then this will still be welcomed by many high income pensioners, but it will not affect the vast majority of older people, who will still be forced to annuitise.

Ending the annuitisation requirement is good news for financial advisers, who will be able to help their clients plan more freely for their later life.

In fact, in my view, it was inevitable that the annuity requirement had to change, so the Government has finally woken up to reality. As we move to a world of defined contribution pensions and more defined benefit pension schemes try to buy out their liabilities, there will be a huge increase in the potential demand for annuities. This will put pressure on annuity volumes and, by removing the mandatory annuitisation requirement, the excess demand will be reduced, which should help pricing for those who do still want to annuitise.

At last, we may have a Government that does sensible things for pensions. Won't that be exciting!


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