The pension industry has erupted in outrage amid recent government proposals aimed at allowing retired workers stuck in low-paying pensions to switch providers, claiming the elderly could be worse off.
Pensions minister Steve Webb has announced he would like pensioners to have the option of switching annuities much like homeowners are able to change mortgages.
The government’s proposals would put an end to the current “lottery” system imposed on workers who have built up a lifetime of savings only to be stuck with low-paying regular income payments, also known as annuities.
Annuity rates have taken a plunge in recent years. With today’s annuity rates, £100,000 in savings only translates to a yearly income of £5,000 to £6,000 for the life of a pensioner. Two decades ago, pensioners with the same amount of savings would receive £15,000, a substantial difference of approximately £10,000.
If the government allows pensioners to break their annuity contracts and change providers, pensioners would be able to potentially have access to better rates, especially those with rapidly deteriorating health conditions.
According to the Department for Work and Pensions, the recent government proposals were only part of a greater package of measures aimed at ensuring retiring workers receive more market choices and access to better deals.
However, Phil Loney, chief executive of London’s largest mutual pensions company, Royal London, said, “The pensions minister has clearly not thought this one through. Currently, when purchasing an annuity savers are buying a guaranteed income for life. If people are able to switch annuities mid-term, the guaranteed income becomes very difficult to price correctly.”
“The impact of switchable annuities would be to drive down the guaranteed income that savers are able to secure with an annuity. This presumably is not the outcome that the pensions minister is looking for,” Loney continued.
Tom McPhail, a financial advisor and pensions expert at Hargreaves Lansdown, agrees with Loney. “In today’s market, a 60-year-old buying a lifetime annuity with £100,000 would get £5,474 a year,” said McPhail.
He continued, “By comparison, if they bought the same level of income on a five-year fixed-term basis then unless annuity rates improved, at the end of the five-year term their income would fall to £4,981. This highlights the fact that switchable annuities are unlikely to offer such attractive terms in the first place.”