Steve Webb, the Government’s Pensions Minister, has continued to build up pressure on the Annuity industry, saying yesterday that “Annuities need a rethink.”
The latest intervention from Mr Webb comes on the back of comments he made earlier in the month promoting the idea of a switchable Annuity, which would allow pensioners to change their Annuity provider much like someone might do with their mortgage or credit card.
A Lifetime Annuity, often simply referred to as an Annuity, is used by over 400,000 each year to convert their pension pot into an income.
Whilst an Annuity is a relatively simple product and gives a guarantee that the income will continue for life, they are often criticised for providing poor returns, especially compared to those offered a number of years ago. Furthermore, Annuities are often accused of being inflexible, as they can’t be changed once bought and many people end up with the wrong product after failing to shop around or take advice.
Pressure has been building for some time on the Annuity industry, to reform both products and sales practices, to ultimately improve the outcomes for the consumer. Speaking last week Mr Webb proposed the idea of the switchable Annuity and yesterday he went further, saying: “If annuities were designed for a world where people retired and lived for ten years, but now they retire and live for 30 years, then we need a rethink.”
“We are moving from a world where Annuities lasted for a relatively short term to where they are supposed to cover a very long-term. A switchable annuity is perhaps one solution.”
Speaking about the Open Market Option (OMO), which allows would-be retirees to shop around for the best Annuity rate, Mr Webb went on to say: “The danger with default shopping around is that people might not ask the bigger question of whether annuitisation is the best thing.”
Experts have warned for some time that too many people default into buying an Annuity, perhaps under the misapprehension that they have no other choice.
Time will tell whether the retirement industry embrace Mr Webb’s idea of a switchable Annuity. Although some Annuity providers have warned that the income from a switchable Annuity would start at a lower level than a Lifetime Annuity.