Minister Steve Webb has obviously had a lot of time to think over the Christmas and with great enthusiasm he announced his latest brainwave in an interview with the Sunday Telegraph on the 5th January. Why, opined the minister, can’t people switch their annuities just like they switch their mortgages in order to get a better deal over time? The comparison sound reasonable enough on a theoretical level but turns out to be quite ludicrous when one comes to consider how it would work in practice.
In the first place, people understand mortgages. That doesn’t prevent them being ripped off occasionally but basically the majority of the people do understand what they are buying when they take out a mortgage. This situation contrasts significantly with the position on annuities, which most people only buy once in their lifetime and are not aware of the details of the product.
Secondly in the case of mortgages, people feel in control as they have the lump sum and are making the payments, which is the exact opposite of an annuity; in an annuity, control has gone over to the financial services provider who has the lump sum and is making the payments.
Finally, what about advice? Will any IFA risk advising a pensioner in his or her seventies to switch annuity? How much extra would they have to get from a new annuity in order to cover the cost of the advice and still come out ahead? One would imagine that a significant increase would be required for this to happen. Even then, the IFA would run the risk of being accused of ripping off the pensioner if they died before they had broken even on the change of annuity. The seeds of a future ‘mis-selling’ scandal seem to be buried in the detail of this proposal.
Of course, they could do an execution only switch, but this would lead to commission being paid to the business carrying out the switch, which would also have the papers in full cry. And it is already acknowledged that new retirees are vulnerable at annuity purchase time, given their poor knowledge of the product. How much worse would the situation be when they become older and have more health issues?
The whole annuity market is in urgent need of reform, but the minister needs to be more aware of his position and stop kite flying in the national newspapers. Annuity reform is a complex area that requires considered discussion in an informed arena, not a headline grabbing sound bite in the media, which only serves to worry the public even more about annuities. The minister would be well advised to have more research done before confusing an already turbulent pension’s landscape with new ideas that haven’t been fully formed yet.
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